PROJECT INFORMATION DOCUMENT (PID) - World Bank



PROJECT INFORMATION DOCUMENT (PID)

APPRAISAL STAGE

Report No.:42938

|Project Name |Baotou Iron and Steel Energy Efficiency Project |

|Region |EAST ASIA AND PACIFIC |

|Sector |Energy |

|Project ID |P102568 |

|Borrower(s) |Not Applicable |

|Implementing Agency |Baotou Iron and Steel Group Co. Ltd (BISCO), China |

|Environment Category |[ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) |

|Date PID Prepared |January 21, 2008 |

|Date of Appraisal Authorization |TBD |

|Date of Approval |TBD |

1. Country and Sector Background

China is the world’s second largest energy user and emitter of greenhouse gases (GHGs). Annual energy consumption in the country, on average, has increased at 5.8 percent annually since 1990—a rate more than three times faster than that of the rest of the world—rising from 990 million tons of coal equivalent (Mtce) in 1990 to 2,442 Mtce in 2006. Despite the unprecedented growth, China’s per capita energy consumption is still less than one fifth of the OECD average, with significant room to grow as the economy continues to expand rapidly. Improving energy efficiency holds one of the keys to sustaining China’s economic growth with reduced energy needs and lessened environmental impacts.

The Energy-intensive Iron and Steel Industry. Since 1996, China’s iron and steel production has been the largest in the world, and in 2006 it produced 422 million tons of crude steel, about 34 percent of the world total production[1]. The Iron and steel industry is one of the country’s most energy-intensive sectors and largest GHG emitters. It consumes around 16 percent of the country’s primary energy supply and emits over 10 percent of the country’s total GHG emissions. Energy efficiency of China’s iron and steel industry is on average around 20 percent lower than the world best practice and a major cause of concern among policy makers. Furthermore, in the past six years, the growth in crude steel production has been extraordinarily rapid, at an average annual rate of about 20 percent, GHG emissions from iron and steel production more than doubled between 2000 and 2006, rising from around 395 million ton of CO2 in 2000 to around 972 million tons of CO2e[2] in 2006. Without significant improvements in energy efficiency, China’s iron and steel industry will continue to be a fast-growing major contributor to global GHG emissions associated with climate change.

Barriers to Improvement Energy Efficiency in Iron and Steel Industry. There are many technologies available in the global market for energy efficiency improvements in the iron and steel industry. Coke dry quenching (CDQ) is one of the technologies widely used in Japan and other developed countries. Adoption of the technology can significantly improve the energy efficiency of coke making processes in China’s iron and steel industry in which the traditional coke wet quenching (CWQ) is still the main stream technology[3].

Unattractive financial returns, large initial investments, and perceived high technical risks of CDQ operation are the major barriers to impede Chinese iron and steel makers to adopt the CDQ technology. Though the technology can recover most energy wasted by CWQ process and significantly reduce air and water pollution, the initial investment of CDQ is significantly higher than that of CWQ. On technical side, CDQ is still not perceived as a domestically proven technology for large scale coke making facilities in China, with limited operation and maintenance experience and thus increased technical risks. On the other hand, there is no official requirement or incentives for the adoption of CDQ technology in the iron and steel industry. The adoption of CDQ technology is voluntary and depends on a company’s individual cost/benefit trade-off.

Government Strategy. The Government of China (GOC) has declared its commitment to the development of a resource-conscious society. In November 2004, the National Development and Reform Commission (NDRC) issued the nation’s first Medium and Long Term Energy Conservation Plan (2005 to 2010 and 2020), which highlighted 10 energy conservation programs targeting the country’s major energy-consuming sectors. Waste energy recovery in energy intensive industries, such as iron and steel, is recommended as one of the 10 programs.

In the nation’s Eleventh Five-Year Plan for Economic and Social Development, endorsed by the People’s Congress in March 2006, the GOC has pledged to reduce the energy intensity of gross domestic product (GDP) by 20 percent from 2005 to 2010, with implicit energy savings of about 560 Mtce by 2010. The NDRC also launched the “1000 Large Industrial Enterprises Energy Conservation Action Plan” in April 2006, targeting the top 1,008 largest industrial energy consumers, which consume approximately 30 percent of China’s total primary energy production. Most of the iron and steel producers in China are on the list of the Action Plan.

The CDQ project in the Baotou Iron and Steel Group Co. Ltd. was intended to improve energy efficiency in its iron and steel production by the recovery of waste heat from red-hot coke for electricity generation.

2. Objectives

The development objective of the proposed project is to mitigate global environmental impacts of carbon dioxide (CO2) emissions through purchase of CO2 emissions avoided by the operation of the BISCO CDQ project under the clean development mechanism (CDM).

The key project performance indicator is the annual delivery of CERs verified by the DOE according to annual measurements of actual emission reductions relative to an agreed baseline.

3. Rationale for Bank Involvement

The proposed project directly supports a key pillar of the Bank’s new Country Partnership Strategy (CPS) for China (2006–10) approved on May 23, 2006, namely managing resource scarcity and environmental challenges (Pillar 3).

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

Bank Role in Energy Efficiency Improvement in China. The Bank’s involvement in the proposed project is strongly supported by a comprehensive strategy of the Bank to promote energy efficiency improvements in China. Under this strategy, the Bank is working with the GoC in three major areas. First, the Bank is assisting GoC in strengthening its institutional and technical capability for energy efficiency improvement through a series of GEF funded technical assistance. Second, the Bank is preparing a lending program promoting financing by domestic financial institutions to energy efficiency investments. Finally, the Bank is directly working with Chinese energy producers and consumers to promote energy efficiency through CDM transactions in line with the provisions of the Kyoto Protocol.

The Bank approved the Project Idea Note (PIN) for the proposed project and signed a Letter of Intent to purchase Certified Emission Reductions (CERs). The carbon finance revenue will be used to overcome the financial and technical barriers to the operation of CDQ systems for power generation in the coke plant of the China Baotou Iron and Steel Group Co. Ltd. (BISCO). BISCO provided evidence that its investment decision of the project was based on the expected carbon revenues from selling of carbon emission reduction from the CDQ project.

4. Description

The Bank is not providing lending to the project. As a trustee of the Danish Carbon Fund (DCF), it intends to purchase part of certified emission reductions (CERs) resulting from the operation of the CDQ system for power generation in the coke plant of BISCO from 2008 to 2012. The exact amounts of CERs eligible for purchase and the price of CERs will be defined in an Emission Reduction Purchase Agreement (ERPA) reached through negotiation between BISCO and the Bank on behalf of DCF. ERPA payments will be made annually based on verification of actual CERs by a Designated Operational Entity (DOE), an independent technical expert, accredited by the Executive Board which supervises the CDM for UNFCCC Parties.

The CERs will be generated by the operation of the CDQ project. The proposed project was approved as a CDM project by NDRC in 2007. It consists of three sets of CDQ heat recovery boilers (No. 1, 2, 3) and steam turbine generators at the back of six coke ovens (No. 5 to 10)[4] to utilize the heat from red-hot coke for power generation. The total installed capacity of the three sets of power generators operating on recovered waste heat is 45 MW (3X15MW) with an expected net electricity generation of around 250 GWh per year. The investment cost of the CDQ project was US$ 67.5m.

CO2 Emission Reduction Estimation. Electricity generated by these generators would replace the same amount of electricity that BISCO otherwise would have to purchase from the coal-fired power plants of the power grid, thus resulting in reduced GHG emissions. The DCF intends to purchase an annual amount of 214,000 tCO2e emission reductions, with a total purchased amount of 1,070,000 tCO2e during the five-year transaction period (2008-12) (Table 1).

Table 1: Estimated Emission Reductions from the Proposed CDM Project

|Estimated Annual ER |Year |CO2 Emission Reduction (tCO2e) |

|Estimated Annual ER form 2008 to 2012 |2008 |214,000 |

| |2009 |214,000 |

| |2010 |214,000 |

| |2011 |214,000 |

| |2012 |214,000 |

|Total |1,070,000 |

|Annual average over period |214,000 |

5. Financing

|Source: |($m.) |

|BORROWER/RECIPIENT |67.50 |

|International Bank for Reconstruction and Development |0.00 |

| Total |67.50 |

6. Implementation

The proposed CDM project will be implemented as per the ERPA to be signed between BISCO and the World Bank, as trustee of the DCF. The draft legal agreement is circulated with the PAD and would be signed as soon as the proposed CDM project is approved by Bank management. A Monitoring Plan (MP) will be agreed between parties to the ERPA. The ERPA and MP define the quantity, price and other delivery conditions for ER to be purchased by the Bank as well as monitoring and verification systems and methods. The ERPA will be a performance-based contract, under which the transaction of CERs is contingent on compliance with the Bank’s safeguard polices and delivery.

Eligibility of emission reductions for purchase by the DCF will be verified and certified by the DOE, the independent third party verifier. Annual verification and certification of emission reductions generated annually by the CDQ project will be coordinated by the Bank which will ultimately purchase the CERs according to the agreed ERPA. As per the requirement of the Kyoto Protocol, the GOC will operate a registry that will manage the transfer of CERs generated by the project.

The Project Sponsor is BISCO. BISCO establishes an internal working team led by its Production Department for the preparation and implementation of the proposed project. The working team consists of staff from the Production Department, the Planning Department, the Financial Department, and the Coking Plant. The Coking Plant will be the major project implementation unit under the supervision of the Production Department for CDQ operation. Additionally, a separate financial account will be established for allocating related expenses and receiving carbon revenues. The BISCO will be responsible for implementation of the CDM project. It will also:

• Maintain and operate the project in accordance with sound business practice and with due diligence and efficiency;

• Undertake all reasonable efforts, including project documentation, to ensure eligibility of ER under Art. 12 of the Kyoto Protocol;

• Undertake, satisfactory to the Bank, actions agreed to comply with the Bank’s safeguard policies; and

• Notify the Bank of anything that may have an impact on the project or its capacity to deliver any ER, including delays, any material adverse change, and events of force majeure.

Specifically, in relation to CERs, BISCO will:

• Monitor the emissions and other relevant parameters;

• Organize periodic auditing of the project and verification that emission reductions have been achieved in compliance with relevant project criteria, including the preparation of required reports;

• Prepare a brief annual or biannual report that should include: information on overall project performance, emission reductions generated and verified and comparison with targets, observations regarding MP baseline scenario indicators, information on adjustment of Key MP assumptions concepts, and calculation methods and other amendments of the MP; and

• Ensure certification of verified emission reductions.

21. Payment and Flow of Funds: The expected flow of funds will be confirmed in the ERPA. After the ERPA becomes effective, the DCF will only disburse against delivery of certified ERs. The involvement of the DCF with the project will expire after CERs up to the total contract amount have been delivered, unless the parties agree to extend the ERPA. In the event that the project sponsors fail to deliver the quantity of CERs for any given calendar year as set forth in the ERPA, they will be required to make-up the shortfall over the course of the following calendar year or another period agreed upon.

22. Carbon finance projects are initially evaluated on the basis of an ex-ante analysis of the emissions baseline (conventional generation and emissions that would have occurred in the absence of the project) and determination of project additionality. Project performance - and payment for CERs – is then monitored in accordance with the requirements of the MP incorporated in the schedule of the ERPA and evaluated on the basis of achieving the expected CERs.

23. To satisfy the requirements of the UNFCCC and the Kyoto Protocol, fully independent third parties will be recruited to: a) provide validation of the baseline; b) provide validation of the project design, the project specific baseline study (test of additionality against the sector-wide baseline), and the monitoring plan. These independent third parties will also undertake periodic verification of the ERs generated by the project and issue a Verification Report. This will be forwarded to the Executive Board of CDM which is then expected to review the report and to issue the CER's. The verification report will cover following issues:

• The amount of verified CERs the projects have generated in the relevant period;

• Other matters as may be required by the UNFCCC or Kyoto Protocol; and

• Verification of compliance with Bank Safeguard Policies.

24. The validator will present a PDD, along with a description of the methodology chosen to measure the CERs and to demonstrate additionality, to the Executive Board of CDM, for its approval and registry under international rules. This approach ensures the creation of an environmental commodity that is recognized by existing laws of China and conforms in due course to the relevant international agreements.

7. Sustainability

25. The total investment of the CDQ project was financed by BISCO and all the project components have been commissioned. BISCO’s commitment to the CDM project is therefore institutionally well established. Technically, although associated operational and maintained experience is lack, the BISCO has implemented an extensive training plan to mitigate risks along the line.

8. Lessons Learned from Past Operations in the Country/Sector

Lessons learned in similar projects in the country and experience gained to date by the Bank in other countries are reflected in the project design and include:

• Applying approved methodology. The baseline identification of Project emission reductions of the proposed project is based on approved methodologies. This will reduce project credit risks; and

• Managing environmental and social risks. The Bank conducted detailed the environmental and social due diligence during the project preparation stage to make sure BISCO to (i) complete the environmental and social impact assessment process and obtain all relevant clearances for conversion/construction of the project and its operation, and (ii) strengthen the company’s environment management capacity.

9. Safeguard Policies (including public consultation)

|Safeguard Policies Triggered by the Project |Yes |No |

|Environmental Assessment (OP/BP/GP 4.01) |[X] |[ ] |

|Natural Habitats (OP/BP 4.04) |[ ] |[X] |

|Pest Management (OP 4.09) |[ ] |[X] |

|Cultural Property (OPN 11.03, being revised as OP 4.11) |[ ] |[X] |

|Involuntary Resettlement (OP/BP 4.12) |[ ] |[X] |

|Indigenous Peoples (OD 4.20, being revised as OP 4.10) |[ ] |[X] |

|Forests (OP/BP 4.36) |[ ] |[X] |

|Safety of Dams (OP/BP 4.37) |[ ] |[X] |

|Projects in Disputed Areas (OP/BP/GP 7.60) |[ ] |[X] |

|Projects on International Waterways (OP/BP/GP 7.50) |[ ] |[X] |

| |

10. List of Factual Technical Documents

1. Project Idea Note (PIN);

2. Project Design Document (PDD);

11. Contact point

Mr. Leiping Wang

Senior Energy Specialist

The World Bank

1818 H Street, NW

Washington, D.C. 20433

12. For more information contact:

The InfoShop

The World Bank

1818 H Street, NW

Washington, D.C. 20433

Telephone: (202) 458-4500

Fax: (202) 522-1500

Email: pic@

Web:

-----------------------

[1] International Iron and Steel Institute, 2007. .

[2] Assuming a carbon intensity of 2.3 ton CO2e/ton raw steel production based on the analysis in “China Sustainable Energy Scenarios in 2020” – Energy Research Institute of China, 2003

[3] In North China where the proposed project is located, there are altogether 1,311 registered iron and steel enterprises. Only two of them, Ji’nan Iron & Steel Group and Capital Steel Group, possessed CDQ facilities as of September 2005. Ji’nan’s CDQ project was supported by the central government as a national energy saving demonstration project. Capital Steel Group’s CDQ project benefited from the Japanese Green Aid Plan.

[4] Coke ovens numbered 1,2,3 and 4 have been shut down.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download