World Bank Experience with Power Sector Baselines

Workshop on CDM Methodologies for Grid-Connected Power Projects

Buenos Aires, 8 December 2004Fernando Cubillos – World Bank, Carbon Finance Business

Financial Impact of CO2 Revenues

Investment CostUS$ / KW

@400t/GWh @1000t/GWhHydropower-Small 1,300 6.4% 15.9%Wind Turbines - kW Size 1,350 3.3% 8.2%Wind Turbines - MW Size 900 4.9% 12.4%Large Scale Biomass 1,250 8.7% 21.6%Small Scale Biomass 800 13.5% 33.8%

as % of Investment CostCO2e Revenues

Carbon Revenues make a difference, but not a big difference

Power Sector Projects

System capacity

Base load capacity replacement

Major capacity addition

Micro capacity addition

Base load

Dispatchmargin

Coal Renewable Wind

Thermal

HydroDispatch

additional?

WB-CFB Experience

• 2001, Chile - Chacabuquito, hydro r-o-r, 26 MW

• 2001, Costa Rica – Umbrella, wind and hydro, 10 MW

• 2002, Guatemala – El Canada, hydor r-o-r, 53 MW

• 2002, Colombia – Jepirachi, wind, 19 MW

• 2003, Mexico – El Gallo, hydro r-o-r, 30 MW

All of them well before CDM rules and methodologies were developed

Guessing CDM rules development

• How we developed the ERPAs/MP to buy VERs

• Baseline Studies to asses– if the project is part of the most likely course of action

(additionality)– ERs projections using different scenarios– the best method to calculate verifiable ERs

Least cost baseline methods for power projects

1. Run expansion planning model with project: is project not being picked up by the model? (Chile, Colombia)

2. Use expansion planning model to determine long-run marginal cost (LRMC): (Costa Rica, Chile, Colombia)

is project cost (per kWh) higher than LRMC?3. Determine low/least cost project to represent expansion

option (Guatemala, Chile): is project cost higher than cost of comparable expansion option?

4. Barrier analysis / additionality tools (Mexico): is project impeded by barriers other than costs

If yes: the baseline is the power system without the proposed project => project additionality

Chile – Chacabuquito Experience

• Comparison of the project with the Least Cost Option for the Expansion – Possible alternatives:

Discount Rate

Combined Cycle plant factor

Coal plant factor Gas Turbine plant factor

(%) 40% 60% 80% 40% 60% 80% 40% 60% 80% 10 32.7 27.4 24.8 55.8 44.3 38.5 38.6 34.4 32.3 12 36.0 29.6 26.4 63.1 49.1 42.2 41.1 36.0 33.5 14 39.4 31.9 28.1 70.7 54.2 45.9 43.6 37.7 34.8

Chacabuquito (Annual Cost)

Discount rate Capital cost

(US$ million ) O & M Cost

(US$ million ) Total

(US$ million )

Chacabuquito generation cost

(US$/MWh)

Natural gas CC plant alternative generation cost

(US$/MWh)

10% 3.92 0.30 4.22 26.4 24.8 12% 4.59 0.30 4.89 30.6 26.4 14% 5.28 0.30 5.58 34.9 28.1

Chile – Chacabuquito (cont.)

• ERs Projection– Will the project postpone new capacity?, or– Will the project impact the actual operation?

• Size comparison of the project with the Least cost option for the expansion:– 110 GWh of firm energy vs. 3,000 GWh– Theorical/modelling postponing less than 1 months!

• Will that change in the grid affect the investment decision for the next capacity addition?

Chile: Central Grid Generation and Dispatch to Meet Future Demand (to scale)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Chacabuquito Existing Hydro Combined Cycle Dispatched Coal

GWh

Yea

r

New 300 MW CC plants

Calculating the impact in the actual operation

• Ex ante Emission Factor– Coal is the most likely fuel of displacement (60% - 80%)– CCGT Natural Gas fired (15% - 35%)– Only other renewable Hydro (<5%)

• How to weight them for an ex-ante EF?– 100/00/00; 80/20/0; 60/35/5; etc.

• Proposal: Ex-post monitoring based on Dispatch Analysis No need to weight!

Some characteristics of Chile Power Sector

• Efficient regulation for more than 20 years

• Grid operation run by an independent agency (Dispatch Center)

• Detailed and public data available to calculate in a very accurate way the marginal plant and the emission factor associated

Monitoring ERs with Dispatch Analysis

Hourly net generation from CDM Power Plants

X

Emission factor for the Marginal Plant not dispatched by CDM

Power Plants(MWh) (TCO2/MWh)

Net Hourly Generator output from the CDM Power Plants(MWh)

Analysis of hourly dispatch from all units of the grid to Marginal Plant not dispatched due to dispatch of CDM

(CDEC-SIC hourly data)

=Calculation of emission factor for of all operational thermal (National Data and IPCC manual)

(tonnes CO2e/MWh)

(Tonnes CO2 equivalent)

Determination of plants and energy being displaced due to (MWh and tonnes CO2e/MWh)

Net daily CO2 emissions avoided at grid from CDM Power

Step 1: Hourly Net Generation from CDM Power Plant

Step 1- Energy Generation of Chacabuquito

Day 1 2 3 .. 241 Energy Generation (MWh)2 Energy Generation (MWh)3 Energy Generation (MWh)

Energy Generation (MWh)31 Energy Generation (MWh)

Hour

Step 2 – Hourly Generation from all power plants in the Grid

Day 1Power Units 1 2 3 .. 24

Run-of-the-River 769 729 729 729 729

Los Molles 5 5 5 5 5Sauce Andes 1 1 1 1 1Aconcagua 79 78 78 78 78Los Quilos 38 38 38 38 38Chacabuquito 26 26 26 26 26....

Thermal Plants 781 781 781 781 781

Taltal 2 0 0 0 0 0Taltal 1 119 119 119 119 119Nehuenco 357 358 358 358 358Guacolda 1 152 152 152 152 152Guacolda 2 153 152 152 152 152Huasco TV 0 0 0 0 0Huasco TG 0 0 0 0 0El Indio 0 0 0 0 0...

Reservoir 189 198 198 198 198

El Toro 38 42 42 42 42Antuco 109 115 115 115 115Abanico 42 41 41 41 41....

Total Generación SIC 1.739 1.708 1.708 1.708 1.708

Step 3 – Dispatch Priority List

PriorityVariable Cost

USD/MWhUnit

1 0 ACONSTITUCION Arauco2 0 CONSTITUCION Gener3 0 HORCONES TG4 0 LAJA5 0 LICANTEN6 0 P.VALDIVIA7 0 PETROPOWER8 2,4 ARAUCO9 9,9 CHOLGUAN

10 12,5 NUEVA RENCA11 16,6 NEHUENCO 212 16,7 NEHUENCO13 17,3 CENTRAL SAN ISIDRO14 20,4 GUACOLDA 115 20,4 GUACOLDA 216 21,3 TALTAL 117 21,3 TALTAL 218 27,4 VENTANAS219 29,4 BOCAMINATV… … …

Step 4 – Determination of the marginal generation displaced

Chacabuquito Generation MW/hMarginal Plant Capacity MW/h

Generation MW/hIncremental Generation MW/h

Next Marginal Plant Incremental Generation MW/h

Every HourCAB

If (C < A - B then C, else A-B) = DC - D = E

Every HourMarginal Plant Inc. Generation MWh A

Emission Factor tCO2/GWh BEmission Reduction tCO2 ER1 = A x B / 1000

Next Marginal Plant Inc. Generation MWh CEmission Factor tCO2/GWh DEmission Reduction tCO2 ER2 = C x D / 1000Total ER tCO2 ER1 + ER2

Dispatch Analysis for the Chacabuquito Project: Emission Reductions Factor

0

200

400

600

800

1,000

1,2007 8 9

10

11

12 1 2 3 4 5 6 7 8 9

10

11

12

2002 2003

To

ns C

O2 /

GW

h

Emission Factor100% Coal100% CCGT (Natural Gas)100% OCGT (Natural Gas)

Dispatch Analysis for the Chacabuquito Project: EF and Generation

0

200

400

600

800

1,000

1,200

7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

2002 2003

Ton

s C

O2

/ GW

h

0

5

10

15

20

25Emission Factor100% Coal100% CCGT (Natural Gas)100% OCGT (Natural Gas)Generation (GWh)

Issues with dispatch marginal calculations

• Double Counting: – Central coordination may be needed to prevent double counting of displaced

marginal generation– Calculate ERs for all CDM projects jointly or sequentially on a seniority

basis?• Capacity replacement:

– How does CDM system expansion modify baseline system expansion?– What is the impact of one CDM project vs. the accumulated impact of many

CDM projects?– Include emission factor of delayed capacity for time of delay

• Storage hydro: – Can operate at the margin to follow load. – Is not being replaced, but shifted in time.– Impact on CO2 emissions difficult to analyze.

• System bottlenecks and “political” decisions setting system boundaries

Mexico – El Gallo 30 MW hydro

• Mexico’s grid mainly stated owned and operated centralized

• Thermal based energy matrix

• There are no public data available to calculate dispatch margin

Step 1: Analyze barriers to proposed project

Sub-step 1:

• Analyze barriers to the proposed project:

• The following barriers identified: – (i) access to financing; – (ii) perceived technology risk; – (iii) transaction costs.

El Gallo: Methodology for additionality test

Step 2: Discussion of similar projects

It is demonstrated that the project differs in important dimensions from similar projects:

1. Comparable projects are less capital intensive

2. Most comparable projects had access to sufficient equity capital

3. Comparable projects are structured as auto-generators

El Gallo: Methodology for additionality test

El Gallo (cont’d…)

Baseline emission rate

The emission rate is calculated as the sum of the emission rates of (1) the operating margin and (2) the build margin divided by 2:

ER (tCO2/MWh) = WOM x OM + WBM x BM

Default weights are set equal to 0.5.

El Gallo (cont’d…)

n

i

i

n

ii

G

GeMWhtCOOM

i

1

12 )/(

where

Gi = the generation (MWh) from unit i,

ei = the emission rate (in tons CO2/MWh) for unit i, andi = individual units, excluding low running cost or must-run plants

(i.e. hydro, geothermal, wind, low-cost biomass, nuclear and solar generation)

El Gallo (cont’d…)

m

jj

m

jj

G

Ge

MWhtCOBMj

1

12 )/(

where

Gj = the generation (MWh) from unit j,

ej = the emission rate (in tons CO2/MWh) for unit j, andj = individual plants included among the lesser (in MW) of the

most recent 20% or the 5 most recent (over 15 MW) units built

Lessons learned

• Complexity:– Baselines / ER calculation for projects in integrated technical or

economic systems (e.g. power grids) can be highly complex– May require regional/country standardization as the number of

projects grows.

• Meth Panel:– Prefers a combination of additionality tools and simple to calculate,

predetermined, and conservative baseline emission factors. – Simplification / generalization is at the expense of accuracy and

leads to more conservatively calculated ERs.

• Policies:– The problems of national and sectoral policies, supply shortage

situations, transmission bottlenecks and “perverse” incentives needs.