Performance People’s Republic of China: Evaluation Report Gansu Clean Energy Development Project Independent Evaluation Performance Evaluation Report December 2013 People's Republic of China: Gansu Clean Energy Development Project Reference Number: PPE:PRC 2013-15 Project Number: 34476 Loan No.: 2032 Independent Evaluation: PE-765 NOTES (i) In this report, “$” refers to US dollars. (ii) For an explanation of rating descriptions used in Asian Development Bank evaluation reports, see Asian Development Bank. 2006. Guidelines for Preparing Performance Evaluation Reports for Public Sector Operations. Manila. Director General V. Thomas, Independent Evaluation Department (IED) Officer-in-Charge H. Hettige, Independent Evaluation Division 2, IED Team leader K. Hewitt, Evaluation Specialist, IED Team members M.O. Nuestro, Evaluation Officer, IED E. Li-Mancenido, Associate Evaluation Analyst, IED In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, the Independent Evaluation Department (IED) does not intend to make any judgment as to the legal or other status of any territory or area. The guidelines formally adopted by IED on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of the management of IED, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. Abbreviations ADB – Asian Development Bank CER – certified emission reduction ICB – international competitive bidding IED – Independent Evaluation Department km – kilometer kV – kilovolt kWh – kilowatt-hour MW – megawatt PCR – project completion report PPER – project performance evaluation report PRC – People's Republic of China XHC – Xiaogushan Hydropower Company XHP – Xiaogushan hydropower plant Currency Equivalents Currency Unit – yuan (CNY) At Appraisal At Project Completion At Independent Evaluation (10 November 2003) (15 May 2009) (31 October 2013) CNY1.00 = $0.12 $0.15 $0.16 $1.00 = CNY8.3 CNY6.8 CNY6.2 Contents Acknowledgments vii Basic Data ix Executive Summary xi Map xv Chapter 1: Introduction 1 A. Evaluation Purpose and Process 1 B. Expected Results 2 Chapter 2: Design and Implementation 3 A. Formulation 3 B. Rationale 3 C. Cost and Financing 4 D. Implementing Arrangements, Procurement, Construction, and Scheduling 5 E. Design Changes 6 F. Outputs 6 G. Consultants 6 H. Loan Covenants 7 I. Policy and Sector Context 7 Chapter 3: Performance Assessment 8 A. Overall Assessment 8 B. Relevance 8 C. Effectiveness 9 D. Efficiency 10 E. Sustainability 10 Chapter 4: Other Assessments 12 A. Impact 12 B. ADB Performance 13 C. Borrower Performance 14 Chapter 5: Lessons 15 Appendixes 1. Appraisal and Actual Project Cost 18 2. Planned and Actual Implementation Schedule 19 3. Xiagushan Hydropower Plan Annual Generation Data, 2006–2010 20 4. Summary of Air Quality in Zhangye City, 2011 21 5. Economic Reevaluation 22 6. Financial Reevaluation 26 7. Environmental Impact Evaluation 30 8. Resettlement and Social Impact Evaluation 32 9. Status of Compliance with Loan Covenants 33 Acknowledgments This project performance evaluation report for the Gansu Clean Energy Development Project in the People's Republic of China was prepared by a team of staff and consultant from the Independent Evaluation Department. The team consists of Kelly Hewitt (team leader), Ma. Olivia Nuestro, and Elizabeth Li-Mancenido. Eugene McCarthy was the consultant, with overall guidance from Hemamala Hettige, Senior Advisor and Officer-in-Charge, Division 2; and Vinod Thomas, Director General, Independent Evaluation Department. Valuable inputs and comments at various stages were received from Kapil Thukral (peer reviewer). Basic Data Loan 2032-PRC: Gansu Clean Energy Development Project Project Preparatory and Institution Building Person- Amount Approval TA No. Technical Assistance Name Type Months ($) Date 3730 Gansu Hydropower PP 45 950,000 27 Sep 2001 Key Project Data ($ million) Appraisal Estimate Actual Total project cost 87.0 93.4 Foreign exchange cost 35.0 34.0 Local currency cost 52.0 59.3 ADB loan amount/utilization 35.0 35.0 Key Dates Fact-finding 15–24 January 2003 Loan negotiations 27–30 October 2003 Board approval 5 December 2003 Loan signing 27 April 2004 Loan effectiveness 4 August 2004 First disbursement 4 August 2004 Loan closing 2 September 2008 Borrower People’s Republic of China Executing Agency Gansu Provincial Government Implementing Agency Xiaogushan Hydropower Company Mission Data Type of Mission No. of Missions No. of Person-Days Fact-finding 1 48 Appraisal Waived Inception mission 1 12 Loan review 5 157 Project completion 1 31 Independent evaluation 1 9 ADB = Asian Development Bank, PP = project preparatory, PRC = People's Republic of China, TA = technical assistance. Source: Asian Development Bank database. Executive Summary During the 2001 country programming mission, the People's Republic of China (PRC) requested Asian Development Bank (ADB) assistance for a clean energy development project in Gansu province. This request reflected the evolving priorities of the government’s own strategy in the energy sector, which emphasized improved efficiency, development of renewable energy sources such as hydropower to reduce a heavy dependence on coal-fired power plants, and the need to address severe air pollution in the country’s urban centers. The investment chosen for ADB support was a 98-megawatt (MW), later upgraded to 102 MW, run-of-the-river hydropower development that formed part of a larger, cascade, hydropower development scheme (700 MW) along the Heihe River in the northwest PRC. The main project objective was to contribute to environmental improvement in Zhangye City in Gansu province by improving access to clean energy. The environmental classification of the hydropower development was category A. The expected benefits were the supply of a clean, low-cost, source of electricity that would reduce load shedding; improve air quality; and provide a secure electricity supply to small, local townships in the project area. A special feature of the project was its potential to receive significant financial benefits from the Clean Development Mechanism administered under the United Nations Framework Convention on Climate Change. Project preparatory technical assistance of $0.95 million helped prepare the inputs needed to appraise the project for ADB financing. ADB provided a loan of $35.00 million toward an estimated project cost of $87.00 million. The government asked ADB to approve advance action to expedite the recruitment of consultants and procurement for civil works and critical equipment. ADB Management approved this request in May 2003, and on 11 September 2003 approved the government’s request for up to $3.50 million in retroactive financing for equipment and civil works for the period from 1 October 2003 until the time the loan would take effect. The ADB loan was approved in December 2003. By then, implementation was under way; it was later completed more than 6 months ahead of schedule, which enabled the plant to start generating electricity in June 2006. Overall, implementation arrangements were very successful. The project is rated highly successful. It was completed ahead of schedule, within budget, and the main goals were met. A low-cost, clean source of energy has been developed, which has helped improve the dependability of electricity supply in Gansu province. It has also made an important contribution to improving air quality in nearby urban centers by developing a new, clean energy source, which enabled the closure of two heavily polluting, coal-fired generating units. Finally, it provided significant socioeconomic benefits to the small townships affected by the hydro development. Based on the operational performance and related benefits during the first 6 years of operation, the sustainability of the project is rated most likely. In terms of the specific evaluation criteria, the ratings are as follows: xii People's Republic of China: Gansu Clean Energy Development Project (i) Relevance: highly relevant, based on a close alignment of the project objectives and design with the government’s own development objectives in Gansu province as well as with ADB’s country strategy in the PRC, which gave priority to regional development in poorer provinces, development of clean energy sources, and improved sector efficiency. The project design was sound and took into account lessons learned in past projects. A comprehensive feasibility study was also prepared during the study process, and project implementation issues were given special emphasis. Technical aspects were carefully reviewed and project alternatives were examined prudently. Project design has carefully considered environmental and social aspects, including resettlement, and has ensured that the project is consistent with ADB’s energy, safeguards, and environment policies. (ii) Effectiveness: highly effective, based on (a) much improved electricity supply to nearby consumption centers, reflected in the absence of blackouts or load shedding; (b) a sharp reduction in air pollution in urban areas, reflected in the 2011 indices of key pollutants, which are now within grade II air quality standards; and (c) the provision of a reliable electricity supply to small, poor communities in the vicinity of the plant, enabling improvements in their health and education facilities. (iii) Efficiency: highly efficient, based on a higher