Elizabeth Lokey
Renewable Energy Project Development Under the Clean
Development Mechanism
A Guide for Latin America
Renewable Energy Project Development under the Clean Development Mechanism A Guide for Latin America
Elizabeth Lokey
London • Sterling, VA
First published by Earthscan in the UK and USA in 2009 Copyright © Elizabeth Marie Lokey, 2009 All rights reserved ISBN: 978-1-84407-737-3 Typeset by MapSet Ltd, Gateshead, UK Cover design by Ruth Bateson For a full list of publications please contact: Earthscan Dunstan House 14a St Cross St London, EC1N 8XA, UK Tel: +44 (0)20 7841 1930 Fax: +44 (0)20 7242 1474 Email:
[email protected] Web: www.earthscan.co.uk 22883 Quicksilver Drive, Sterling, VA 20166-2012, USA Earthscan publishes in association with the International Institute for Environment and Development A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Lokey, Elizabeth. Renewable energy project development under the clean development mechanism : a guide for Latin America / Elizabeth Lokey. p. cm. Includes bibliographical references ad index. ISBN 978-1-84407-737-3 (hardback) 1. Renewable energy sources–Government policy–Latin America. I. Title. TJ807.9.L29 L65 2009 333.79'4098–dc22 2008044614 At Earthscan we strive to minimize our environmental impacts and carbon footprint through reducing waste, recycling and offsetting our CO2 emissions, including those created through publication of this book. For more details of our environmental policy, see www.earthscan.co.uk. This book was printed in the UK by Antony Rowe Ltd. The paper used is FSC certified and the inks are vegetable based.
Contents
List of Figures and Tables Acknowledgements Executive Summary List of Acronyms and Abbreviations
v vii ix xi
Section 1 CDM Market and this Guide Chapter 1 Background and Introduction
3
Section 2 Barriers Chapter 2 Technical Barriers
43
Chapter 3 Social Barriers
65
Chapter 4 Financial Barriers
75
Chapter 5 Informational Barriers
87
Chapter 6 Host Country Institutional Barriers
101
Chapter 7 UNFCCC Procedural and Methodological Barriers
109
Chapter 8 Small-Scale Barriers
127
Section 3 Country Market Intelligence for CDM Projects Chapter 9 Country-Specific Profiles Introduction
147
Chapter 10 Argentina
151
Chapter 11 Belize
159
Chapter 12 Bolivia
161
iv
RENEWABLE ENERGY PROJECT DEVELOPMENT
Chapter 13 Brazil
169
Chapter 14 Chile
177
Chapter 15 Colombia
187
Chapter 16 Costa Rica
197
Chapter 17 Dominican Republic
207
Chapter 18 Ecuador
213
Chapter 19 El Salvador
223
Chapter 20 Guatemala
231
Chapter 21 Honduras
241
Chapter 22 Mexico
251
Chapter 23 Nicaragua
265
Chapter 24 Panama
271
Chapter 25 Peru
279
Chapter 26 Uruguay
289
Chapter 27 Other Latin American Countries
297
Chapter 28 Regional Trends
303
Section 4 Future Development Chapter 29 Stimulating Investment and Overcoming CDM Barriers
319
Chapter 30 Summary of CDM Barriers
329
Index
337
List of Figures and Tables
Figures 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.1 2.2 7.1 10.1 12.1 13.1 14.1 15.1 16.1 17.1 18.1 19.1 20.1 21.1 22.1 23.1 24.1 25.1 26.1
CER distribution by project type CDM projects registered by type CDM project cycle Global distribution of CDM projects Global distribution of CERs Distribution of CERs by country in Latin America Distribution of CERs generated by 2012 by type in Latin America CERs derived from various renewable energy projects in Latin America CDM renewable energy project distribution in Latin America Hurricane damaged pipe for hydro electric La Joya site III biodigester in Puebla, Mexico CERs predicted without industrial gas inclusion Projects registered or in validation in Argentina Projects registered or in validation in Bolivia Projects registered or in validation in Brazil Projects registered or in validation in Chile Projects registered or in validation in Colombia Projects registered or in validation in Costa Rica Projects registered or in validation in the Dominican Republic Projects registered or in validation in Ecuador Projects registered or in validation in El Salvador Projects registered or in validation in Guatemala Projects registered or in validation in Honduras Projects registered or in validation in Mexico Projects registered or in validation in Nicaragua Projects registered or in validation in Panama Projects registered or in validation in Peru Projects registered or in validation in Uruguay
9 10 13 16 16 17 18 18 19 45 56 110 154 162 171 180 189 200 209 217 225 233 244 255 267 274 282 291
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Tables 1.1 4.1 4.2 5.1 6.1 6.2 13.1 18.1 28.1 28.2 28.3 28.4 30.1 30.2 30.3 30.4 30.5 30.6 30.7 30.8 30.9 30.10 30.11
Renewable energy CDM projects registered or in the process of validation Investment and average generation costs for various energy technologies Incremental impact of the CER price on the internal rate of return of the project (percentage per purchase period) Major renewable energy associations in region Point Carbon’s international CDM host country rating Latin America’s top rated countries for CDM investment rated by the German Office of Foreign Trade Summary of Brazilian renewable energy mandate (PROINFA) Feed-in tariff prices Non-technical electrical losses before and after privatization Privatization schemes in select countries Summary of renewable energy legislation The role and participation of DNA Offices in Latin American countries Technical barriers Social barriers Financial barriers Informational barriers Host country institutional barriers UNFCCC procedural and methodological barriers Small scale barriers Country comparisons: Summary Solutions for project developers Solutions for host country governments / DNA offices Solutions for the UNFCCC
24 76 79 94 101 102 171 216 303 304 305 313 330 331 331 331 331 332 332 333 334 334 335
Acknowledgements
I could not have completed this research without the cooperation, time and hospitality of the hundreds of people in the 12 Latin American countries that I visited. Their willingness to share insights, anecdotes, contacts and documents made the content in this book come alive for me and, hopefully, for the readers too. I would like to thank a few people in particular. Thank you to Frank Barnes, my primary PhD adviser, whose intellectual curiosity and constant willingness to rise to a new challenge inspired me, and whose practical guidance led me on a weekly basis to always contemplate the larger impacts of my research. I appreciate my dissertation committee for giving me the flexibility to complete this multidisciplinary research in the emerging field of carbon markets. Ilan Kelman of the Center for International Climate and Environmental Research in Norway was a tremendous help in reviewing this work. Debora Ley of Oxford University was instrumental in reviewing this book and providing me with contacts throughout Mexico and Central America
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that helped me have successful interviews. Manuel Estrada, a private CDM consultant in Mexico City, helped provide guidance on CDM-specific questions. Gerardo Salgado introduced me to the world of CDM in Honduras. A host of other friends including Victoria Frías, Eduardo Meléndez, José Maria Meléndez, Mark Feldman, Richard and Vivian Clinton, Sergio and Jessica Garcia, Camilo Garizábal Carmona and Carlos Andres Uribe were instrumental in the creation of this book as they hosted me during my field research. Finally, I must thank my parents for their huge investment in and support of my education from its start to finish. Without their sound advice and urging to follow my dreams, I would not have been able to complete my final chapter of learning and completion of this book.
Executive Summary
The Clean Development Mechanism (CDM) allows Annex I countries that have ratified the Kyoto Protocol and must meet greenhouse gas reduction targets to do so in part by purchasing emission reductions from projects registered with the United Nations Framework Convention on Climate Change (UNFCCC) in developing countries. These projects, in theory, result in additional emission reductions that would not have occurred otherwise because they rely on the CDM revenues for their existence. The goals of the CDM are to reduce greenhouse gas emissions in the most economical way possible and promote sustainable development. Thus far, the bulk of these emission reductions come from industrial gas mitigation projects. For successful renewable energy CDM project registration and emission reduction issuance into the future, the project must overcome a variety of political, economic, social and technical barriers. This guide seeks to make these barriers to renewable energy projects in Latin America more well known as a first step towards better achieving the CDM goal of promoting sustainable development. Some solutions are presented, but this section is limited as a full discussion of these solutions merits another book altogether. The two most important barriers to project development are politically and bureaucratically related. The first major barrier to CDM project entry in a given country is related to the openness of its electrical sector. Fully privatized electrical sectors are more receptive to Independent Power Producer (IPP) participation. This IPP involvement is necessary because state-run utilities have little incentive to and in some cases cannot by law implement CDM projects. State-run utilities are bound to develop the least-cost project, which, by definition, cannot be a CDM project since it must rely on the emission reduction revenues for its existence. These emission reduction revenues are so new and risky since they must be successfully registered with the UNFCCC that they are not incorporated in state utility least-cost planning processes. Therefore, countries with open electrical sectors that allow IPPs to develop CDM projects typically have the most CDM renewable energy development. The second major CDM barrier is that countries with strong renewable energy incentives or mandates are at a disadvantage since, for CDM registration, projects must be additional to what would have occurred otherwise. If a project that is applying for CDM registration helps fill a renewable energy
x
RENEWABLE ENERGY PROJECT DEVELOPMENT
mandate, then its regulatory additionality is put in question. Likewise, if a feed-in tariff for renewable energy makes a project financially viable, then its financial additionality is negated. The CDM Executive Board’s silence on this important issue of additionality has created a perverse incentive for developing countries to do nothing to address climate change. These and a host of other types of barriers are explained in this book.
List of Acronyms and Abbreviations
AAU AM CAF CD4CDM CDM CER CERUPT CFE CIF DNA DNV DOE EB EIS EPM ERPA ERU ETS EU EUA GEF HFC ICE IPP JI kW kWh MW MWh NGO NREL ODA
Assigned Amount Unit Approved Methodology Corporación Andina de Fomento Capacity Development for the CDM Clean Development Mechanism Certified Emission Reduction Certified Emission Reduction Unit Procurement Tender Comisión Federal de Electricidad Climate Investment Fund Designated National Authority Det Norske Veritas Designated Operational Entity Executive Board Environmental Impact Statement Empresas Públicas de Medillín Emission Reduction Purchase Agreement Emission Reduction Unit European Trading Scheme European Union European Union Allowance Global Environment Fund hydrofluorocarbon Instituto Costarricense de Electricidad independent power producer Joint Implementation kilowatt kilowatt hour megawatt megawatt hour non-governmental organization National Renewable Energy Laboratory Official Development Assistance
xii
RENEWABLE ENERGY PROJECT DEVELOPMENT
OECD PCF PDD PIN PoA PPA PTC PV SEECI UN UNDP UNEP UNFCCC VER
Organisation for Economic Co-operation and Development Prototype Carbon Fund Project Design Document Project Idea Note Programme of Activities Power Purchase Agreement production tax credit photovoltaic Sustainable Energy and Climate Change Initiative United Nations United Nations Development Programme United Nations Environment Programme United Nations Framework Convention on Climate Change Verified Voluntary Emission Reduction
Section 1 CDM Market and this Guide
1 Background and Introduction
Background In order to address climate change, the United Nations formed the Framework Convention on Climate Change (UNFCCC) in the early 1990s. Most countries signed this treaty and pledged to consider reducing climate change and its impacts. The 1997 Kyoto Protocol, which calls for binding emission reduction targets for most developed countries – termed Annex I countries by the Protocol – was created as an extension of this treaty. The Protocol was to go into effect when 55 countries representing 55 per cent of the world’s greenhouse gas emissions had ratified it. The 55-country clause was met by 2002, but it was not until February of 2005, three months after Russia signed the Protocol, that the 55 per cent of the world’s emissions stipulation was met. The Protocol’s time frame is 2008–2012 for the 175 countries that had ratified it by April of 2008 [1]. Flexible mechanisms within the Kyoto Protocol allow countries to fulfil a portion of their carbon obligations by trading emission allowances known as Assigned Amount Units (AAUs) among Annex I countries, purchasing emission reductions from carbon offset projects in other developed countries or economies-in-transition like the former Soviet republics or purchasing Certified Emission Reductions (CERs) from carbon offset projects in developing countries. The latter of these options, known as the Clean Development Mechanism (CDM), defined in Article 12 of the Kyoto Protocol, and overseen by the UNFCCC, is intended to allow countries that ratified the Kyoto Protocol to meet their carbon obligations in the cheapest way possible, achieve the objectives of the Protocol and promote sustainable development, which is contentious because it has not been defined by the UNFCCC [2]. Providing an alternative path to development for non-Annex I or developing countries is essential to curbing global warming since 59 per cent of energy-related carbon dioxide (CO2) emissions will come from developing countries in 2030 [3]. CDM projects absorb CO2 from the atmosphere or decrease CO2 emissions by improving the efficiency of a process, fuel switching
4
CDM MARKET AND THIS GUIDE
or substituting fossil fuel-based energy with renewable energy. If the CDM project is successfully registered and the emission reductions verified, the emissions reduced or absorbed can be sold internationally to the Annex I countries and provide additional revenues for the project owner. The more emissions are reduced, the larger the profits from the project. The process by which projects are registered is essentially the same for both large and small projects and quite costly at between $58,400 and $500,000 [4 and 5].1 Therefore, most emission reductions are derived from large projects such as industrial gas emission mitigation in urban areas. These projects have potentially large revenue streams and can attract foreign investment and interest from project developers and carbon brokers, who buy reductions from project owners and sell them to Annex I countries. Renewable energy projects tend to result in fewer emission reductions per project and therefore only account for 12 per cent of CERs produced worldwide, while industrial gas mitigation projects account for 72 per cent [6]. In order to allow developers to have greater success in implementing these projects, this book seeks to make these barriers to renewable energy CDM projects better known. This geographic area was chosen because it has been overshadowed by Asia, and there is no major study that assesses the region’s barriers. Some recommendations for how to overcome these barriers will also be offered, but less emphasis is placed on these suggestions since a full elaboration of the potentials and pitfalls of each would constitute another book. The author researched these barriers not only by reviewing the current literature available, electrical background for each country and renewable energy legislation in each country, but also by visiting 12 Latin American countries and conducting interviews with project developers, governmental and non-governmental organization (NGO) representatives, and investors. She also visited 15 project sites during her travels to observe first-hand the barriers to project implementation. See Appendices A and B for a complete list of interviewed persons and project sites visited. It is important to assess the project-specific barriers, as well as the host country environment for implementing CDM projects, since the process for registering and continually earning CERs is interdisciplinary and includes all of these factors. The document used for registration of these projects with the UNFCCC, known as the Project Design Document (PDD), must discuss the technical aspects of the project, the renewable energy legislation and energy situation in the country, provide an argument of why the project would not have occurred in a business-as-usual situation based on a financial or barriers analysis, show the baseline emissions that would have occurred without the project, emission reductions as a result of the project, the environmental impacts of the project and a stakeholder analysis of the project with community members. The process of UNFCCC registration is interdisciplinary because the success of renewable energy projects depends on social, political, economic and technical aspects of the project being well aligned. Therefore, this book is also interdisciplinary and seeks to address each of these compo-
BACKGROUND AND INTRODUCTION
5
nents in order to provide a thorough analysis of the barriers to CDM project success. The appeal of this book is wider than may first appear since virtually all new renewable energy projects in developing countries are now considering the CDM for their project. In a few rare cases, a project developer will not complete the CDM project cycle because it seems too costly or burdensome. However, as the price of CO2 pollution permits has increased in the second phase of the European Union Emission Trading Scheme (EU ETS), there is increasing interest in how to capture these revenues. This book is an essential contribution to the literature since it is the first on-the-ground analysis of CDM barriers in the region and the most up-to-date and comprehensive work of its type. This analysis has the potential not only to help current Kyoto Annex I countries meet their reduction targets through better utilization of the CDM in Latin America, but also to highlight lessons learned that will help guide US negotiations for offset inclusion in future greenhouse gas legislation. The US will most likely incorporate offsets in its future legislation in some way since they have the potential to greatly reduce compliance costs; by the year 2050, the price of carbon mitigation per tonne would be $220 without offsets and $50 per tonne with the use of unlimited offsets [7].
Clean Development Mechanism market In order to understand the barriers to renewable energy project implementation, it is essential to understand the CDM market. Since its inception in 2001, when the rules were finalized at the seventh Conference of Parties in the Marrakesh Accords, until May of 2008, the CDM market has matured, with exponential growth from 2006 to 2008 [8]; there were just 181 registered projects in May 2006 and by April 2008 over 1000 existed [9]. In 2007, the CDM generated $12.8 billion of the estimated $64 billion in the overall global carbon market [10]. This market could grow six to eight times by the end of the 2012 commitment period [11]. CDM projects have generated 45 million CERs, which each represent the mitigation of one metric tonne of CO2 [12]. The value of CERs varies widely. The primary reason for this fluctuation is the nature of the nascent carbon market, which is most developed in Europe. Within the Kyoto Protocol, groups of countries were allowed to create regional markets to make reductions. The European Union (EU) chose to do this and created the European Trading Scheme (ETS), which is a cap-and-trade system whereby polluters can trade allowances with other EU countries to reach overall Kyoto country-based emission targets. The ETS has two compliance periods, 2005–2007 and 2008–2012. At the end of each, the entities that the ETS regulates, power and heat generators and selected industrial sectors, must fulfil their carbon reduction goals [13].2 Governmental officials known as the Designated National Authority (DNA) within each country decide how to divvy up the total allowances of the country [14]. In the EU 45 per cent of reductions are made within capped sectors and the ETS, 55 per cent are made from activities outside of the cap. Allowance prices started at close to €18 per
6
CDM MARKET AND THIS GUIDE
tonne of CO2 and then soared to €30 per tonne of CO2 in May of 2006 [15]. However, EU Allowances (EUA) prices for the 2005–2007 period dropped to just €0.1 per tonne of CO2 towards the end of 2006 and 2007 because of an over-allocation of allowances. Allowances were given before country baseline studies were completed and not appropriately distributed [16 and 17]. A linking directive set up through the EU allows CERs to count as EUAs for compliance purposes [18]. In addition to being accepted in the EU, CERs are accepted in Japan and Canada as emission reduction units for obligated parties. Japanese buyers tend to be conservative in that they do not wait to see what the carbon market will do, but instead want to make sure they have enough CERs to cover demand and lock in prices for forward streams of CERs. Canada has been slow to be involved in the CDM even though the country’s rules permit CERs to make up 10 per cent of the country’s reductions [19]. CER prices are generally about one-third lower than EUAs because of the project risk involved [20]. Prior to the EU ETS coming online and the Kyoto Protocol being operational, few CDM projects were established, and CERs were bought and sold for speculative future compliance purposes. In 2004, before the Kyoto Protocol had come into effect, CERs were worth much less than they are now; renewable energy projects earned €5.5 per tonne of CO2, while the CERs from fuel switching and methane recovery only earned €3.3 per tonne of CO2 since they were questionable in their support of sustainable development [20]. In the spring of 2007, registered projects that were not yet running could earn €8–11, and CERs issued for existing projects were earning €10–12 per tonne of CO2 [21]. In April of 2008, CERs went up in value because the EUA of the second compliance period of the ETS commanded a higher price. As of March 2008, CERs from registered projects were being sold for close to €16 per tonne of CO2 [22]. Project owners can decide when to sell the CERs, choosing to sell them early as a future stream of offsets that will be generated or holding onto them in hopes that the market price for them will increase [23]. The amount of risk associated with projects and how far advanced the project is in the CDM project cycle determines the exact CER price that buyers and sellers negotiate. Forward-purchased CERs for medium-risk projects earned, in the spring of 2007, €5–6 per tonne of CO2 while forward-purchased, low-risk projects earned €7–8. Each CER transaction fetches a unique price that is determined by the amount of project risk, the degree to which the project fulfils the goal of sustainable development, and the current price of European Union Allowances (EUAs), which are tradable within the EU boundaries [3]. Often renewable energy project owners do not understand how and why CER prices for distinct projects and different compliance periods vary. It is therefore difficult for them to predict how CERs will affect their project profits. They also do not have the connections to sell the CERs on the international market to those generators that need them for compliance purposes. For these reasons, project owners usually contract carbon brokers to handle these transactions. Because the carbon broker tries to make money on the
BACKGROUND AND INTRODUCTION
7
spread between the purchase and sale price of the CER, the carbon broker does not pay the project owner the full market value of the CER [21]. This type of transaction of CERs through a carbon broker is known as the secondary CER market. The secondary CER market grew rapidly in 2006. This market consists of a third party carbon consultant such as Ecosecurities or Evolution Markets buying CERs from project owners and then reselling them to buyers. The third party takes on all of the risk for not delivering the CERs. Usually, this entity has a contract for delivery of CERs and buys extra CERs just in case those CERs are not all delivered. The price that the project owner can obtain is usually less than what he would receive if he were to negotiate directly with a buyer. The third party can then sometimes sell the CERs for more than the average CER price. Secondary CER prices were $10.75–$27 for 2005–2006 [24]. Since CDM projects last for either two ten-year periods or three seven-year periods, brokers negotiate prices now that will last well into the next Kyoto compliance period and beyond 2012 when the Protocol ends and future carbon regulations have not yet been set [25 and 21]. Just as CER prices are linked to the EUA price, the EUA can also be affected by the number of CERs on the market. Chinese CER owners tend to sell CERs as a forward stream for seven to ten years and can flood the market with the creation of large projects, lowering the price of CERs [26]. The future CDM market is difficult to predict for several reasons. In 2005, emission reductions needed annually for all Annex I countries to fulfil their carbon obligations by 2012 were 1.3 Giga tonnes of CO2. However, estimates predicted that this number could grow threefold if the US and Australia joined the Protocol, and Australia has begun to fulfil this demand prediction since it ratified the Protocol in December of 2007. Also, several countries with economies in transition in Eastern Europe were given AAUs based on a baseline year of emissions that was extraordinarily high. Therefore, these countries have extra allowances (known as ‘hot air’). Flooding the market with these allowances would cause the price of CERs to fall dramatically [27]. Adding to the uncertainty for CER demand is the fact that the amount of CERs that can be purchased to fulfil a country’s obligations, known as the supplementary amount, averages 13.5 per cent in the EU. Each country has its own supplementary clause, which ranges from a very low percentage up to 20 per cent in Spain [28]. Canada has set its supplementary clause at 10 per cent of overall reductions. All of these percentages are low compared to the initial EU linking directive that allowed CERs to be counted, as EUAs called for 50 per cent [29 and 30]. A careful analysis of CER future gluts or shortages would need to consider each supplementary amount. The uncertainty in the post-2012 Kyoto rules has caused the future demand and price for CERs to be difficult to predict. The 13th Conference of Parties in Bali in December of 2007, where current and future climate change legislation was discussed by those who ratified the protocol and official observers, set forth a ‘Bali Road Map’ with a ‘Bali Action Plan’, which provided the framework for
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creating a new negotiation process to address climate change [31]. This process should be finished in 2009. Regardless of what happens with international negotiations, the EU recently announced that it will value allowances and CERs from 2013 to 2020 in Phase III of its trading scheme, but the Phase III draft rules limit the ability of CERs to fulfil reduction targets if the host country for the project-based emission offsets does not have binding target reductions. This provision essentially prevents CDM from growing post-2012 since few developing countries have taken on binding reduction targets. Despite this negative forecast, market participants are optimistically vying for the ability to cover more reduction obligations through CERs during this time frame [32]. The global community has not yet decided if Kyoto or another carbon market will exist [33]. The World Bank and a few carbon brokers like Ecoinvest are buying CERs from projects generated after 2012 for the low price of $4/tonne of CO2 [34 and 21]. Given this uncertainty, there could be a decrease in CDM projects in the coming years since CDM projects create revenues for between 7 and 30 years in the future.3
Industrial gas project impact In general, emission reductions derived from renewable energy projects are overshadowed by the large, industrial gas mitigation projects that now dominate the market. (See Figure 1.1 for the distribution of CERs by Project Type.) In May of 2007, 40 per cent of CERs generated came from just 10 of the 633 registered CDM projects, while the 384 renewable energy projects make up only 18 per cent of the overall emissions reductions produced [12]. These ten projects are all large, industrial emission mitigation from factories, which are mostly located in Asia [2]. The greenhouse gases mitigated from these factories, that create refrigerants, nylon and PTFE or Teflon, include hydrofluorocarbon-23 (HFC-23) and nitrous oxide (N2O) [2]. These gases are potent and generate a large number of CERs since the reductions are distributed on a CO2-equivalence basis; one tonne of HFC-23 equals 14,800 tonnes of CO2 and one tonne of N2O has the warming potential of 310 tonnes of CO2 [35 and 36]. Also, these reductions can be made cheaply since the pollution occurs at a limited number of factories and can be reduced through the utilization of technology already in use in developed countries [2]. At the July 2006 market price for CERs of €9/tonne CO2, refrigerant factories that emit HFC-23 earned twice as much per kilogram for their pollution mitigation as they did per kilogram of product they produced [2]. This high price for the pollution mitigated means that the Annex I nations will annually pay between €250 and €750 per tonne to abate 67 per cent of the HFC-23 emissions; installing the equipment to eliminate 100 per cent of these emissions in developing countries would only cost $31 million per year [2]. Because few projects can dominate the CDM market at this juncture, it makes sense to analyse project distribution by both CERs produced and by project type. Global CER distribution by project type in Figure 1.1 clearly shows how the industrial gas mitigation projects dominate the CDM market.
BACKGROUND AND INTRODUCTION
6%
1%
9
0% 0% 0% HFCs and N2O reduction
9%
Renewables CH4 reduction and cement and coal mine/bed Supply-side EE Fuel switch Demand-side EE
12%
Afforestation and reforestation Transport
72%
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and database, 1 April.
Figure 1.1 CER distribution by project type Perhaps because of the questionable sustainable development benefits of these projects, this reality is not highlighted on the UNFCCC website; instead the CDM statistics portion of the site boasts the number and distribution of CDM projects by type. Considering just project type distribution without any regard to the number of emission reductions the project yields can be misleading since renewables made up 62 per cent of the projects registered and N2O and HFC-23 projects made up only 2 per cent of the projects in April of 2008 [6]. Taking into account projects registered can give one an understanding of the amount of technology transfer that is occurring, but this indicator alone is not enough to get an accurate picture of the overall market. See Figure 1.2 for a global distribution of CDM projects by type. While more is being paid for emissions reductions from industrial gas mitigation projects than would have been necessary to simply install abatement equipment, the reductions from these projects are additional as they were not controlled under developing countries’ pollution regulations prior to the implementation of CDM. Also, these projects are able to make reductions at the cheapest price. However, they do not, according to many critics, fulfil the Kyoto goal of promoting economically and culturally sustainable development since they support factories that would exist without these carbon revenues [37]. Critics like the Gold Standard, a CDM certification body, argue that these projects do not promote sustainable development since they support existing industries that rely on non-renewable fuels and raw materials. The Gold Standard recognizes only energy efficiency and renewable energy projects as valid offset projects. An NGO called CDM Watch urges the rule makers to ban
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5%
2% 1%
0% Renewables
3%
CH4 reduction and cement and coal mine/bed Supply-side EE
10%
Fuel switch Demand-side EE HFCs and N2O reduction Afforestation and reforestation Transport
17% 62%
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and database, 1 April
Figure 1.2 CDM projects registered by type these types of projects from the post-2012 Kyoto rules [38 and 39]. However, because the UNFCCC has not clearly defined sustainable development, these projects qualify under the current rules. The allocation of CERs for industrial projects has raised such controversy that it made the front page of the New York Times on 21 December 2006 [40]. The current definition of sustainable development is ‘development which meets the needs of current generations without compromising the ability of future generations to meet their own needs’ and was published by the Brundtland Commission in 1987 and proposed at the United Nations Conference on Environment and Development in Rio de Janeiro in 1992. This definition is vague as it does not provide guidance on how many cultural, economic or environmental factors should be considered in order for future generations to meet their needs [41]. As a result, each non-Annex I CDM host country makes its own determination on what qualifies as sustainable. The Chinese government has begun to show preference for energy efficiency and renewable energy projects that fulfil sustainable development goals by taking 65 per cent of the CERs generated from HFC projects and 35 per cent of those from N2O projects [42]. The tax on renewable energy and energy efficiency projects is only 2 per cent of the CERs generated [14]. As critics of the industrial gas emission projects influence the UNFCCC’s future rules of what qualifies as an offset, and most of the industrial gas mitigation projects have already been completed, renewable energy and energy efficiency CDM projects may become an increasingly important way for Annex I countries to fulfil their carbon obligations.
BACKGROUND AND INTRODUCTION
11
After the low-hanging fruit of industrial gas mitigation projects has been seized and no more factories exist for retrofitting, the price of CERs will be driven up, making renewable energy projects more financially viable. Even after the obvious large-scale renewable energy sites have been developed, the number of small-scale renewable energy CDM projects that could be implemented is virtually limitless since there are 1.6 billion people without electricity that would be served by biomass and fossil fuel sources in the future if project support from aid organizations and finance options like the CDM did not exist [43]. Furthermore, European CER buyers are increasingly choosing to invest in offset projects to hedge their risk against volatile ETS allowance prices [44 and 16]. This increased interest could pave the way for additional renewable energy CDM development. However, numerous barriers are currently preventing this development from occurring.
Overview of CDM project cycle Many of the barriers to CDM project development exist because of bureaucratic obstacles in the project cycle of CER issuance. Therefore, it is essential to understand the current process by which a project earns CERs. This section will provide a broad overview of the CER issuance for all project sizes and the following section will outline the differences between small- and large-scale project cycles. An overview of the process, its prices and timing are provided in Figure 1.3. The CDM project cycle is usually completed by the project developer or a carbon broker who is typically from an international energy or carbon consulting firm. For simplicity, the author will refer to this entity as the carbon broker in this section. The carbon broker may choose to receive a flat rate for the services or deduct a portion of the project’s future emission reductions as payment. The carbon broker has the option to first submit a Project Idea Note (PIN) to the host country’s Designated National Authority (DNA), which reviews the project and makes a determination of whether or not the project contributes to sustainable development. The DNA then issues a ‘Letter of No Objection’ to the project’s activities and the CDM project cycle continues to the next step. Then, the carbon broker creates a Project Design Document (PDD) outlining the project in detail, the expected emission offsets, a monitoring plan, an environmental analysis and stakeholder comments. If the project is deemed appropriate by the DNA, then a contracted Designated Operational Entity (DOE) that has been certified by the UNFCCC to validate the methodology selected for the project is tasked with inspecting the PDD and ensuring that it meets the CDM project guidelines and is accurate. One of the key pieces of the PDD is an additionality argument that explains how the project generates additional offsets that would not otherwise occur. In other words, the project must exist independently of financial incentives or environmental regulations that would promote the construction of the project in a business-as-usual scenario [45]. This requirement is known as additionality. Additionality can
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either be proven on financial grounds or through a barrier analysis, which shows how this project deviates from standard practices and overcomes hurdles because of its first-of-a-kind nature. After the PDD and project inspection, the DOE prepares a validation report of his findings. Usually, several revisions of the PDD are necessary based on the validation report findings. The PDD and often this validation report are required for the national approval process. Therefore, these reports and any ancillary required documents are sent to the host country’s DNA for review. This entity decides, based on the country’s own definition, whether or not the project fulfils sustainable development and approves or denies the project accordingly. Then the carbon broker and DOE submit the revised PDD and validation report to the CDM Registration and Issuance Team, which is run by the UNFCCC and formed in 2007 by the CDM Executive Board. The CDM Executive Board oversees all CDM project activities and methodologies. If accepted by the Registration and Issuance Team, the proposed activity commences as a ‘registered’ project. After one year of operation, another DOE from a different firm is contracted to assess the baseline emissions and emission reduction calculations to determine the amount of emissions that the construction of the project avoids. The CERs generated for renewable energy projects are typically calculated by multiplying the capacity factor of the project by the emission factor of the regional grid times the hours in a year. The performance of the project is measured in terms of gases mitigated. Once the second DOE has verified the emission reductions, he or she issues a request for certification to the Executive Board. The Executive Board reviews the data gathered and then makes a determination about issuing CERs to the project [46]. This process is known as verification and must occur annually for CER issuance to take place each year. Both the PDD and validation reports are posted on the UNFCCC’s CDM website and available for the public to view. Some projects that failed registration are also on this site with explanations for why the project failed. Because of the complexity of the overall project cycle, most projects use carbon brokers or project developers to navigate this process. See Figure 1.3 for a graphical overview of the CDM project cycle, its timing and costs. The overall process of getting CERs issued and verified annually costs anywhere between $58,000 for a very simplified small-scale project and $500,000 for a complex larger project [4 and 5]. CDM project costs include project identification, PDD creation and validation, project monitoring, DNA approval, registration, legal fees and carbon brokerage fees [27]. These costs are higher if a new methodology must be written for a project. Carbon funds like the Prototype Carbon Fund, which is organized by the World Bank and funded by public and private investors, pick CDM projects to invest in and sometimes have reduced transaction costs because they specialize in certain project types and have a rubric of standard contracts and practices [27].
BACKGROUND AND INTRODUCTION
Step in cycle Project idea note
Project design document
$2–8000 1–2 months (optional step)
Responsible entity
$25–38,000 2–4 months
Project developer or carbon broker
Designated national authority
Approval
Validation
$15–30,000 2–3 months
After the first crediting period (7 or 10 years), project owner must go
Registration
13
$6000 and up 2–3 months
Designated operational entity
Registration and issuance team
through project cycle again to earn revenues for next period
Implementation and monitoring
Verification
Project owner
$7000 annually 1–2 months Designated operational entity
Certification
Registration and issuance team
Issuance of CER Legal fees $23–38,000
Source: United Nations Environment Programme and Risø Centre (2004) CDM Information and Guidebook, 2nd Edition, UNEP/Capacity Development for CDM, April 2008.
Figure 1.3 CDM project cycle Small-scale renewable energy projects, defined by the UNFCCC as those under 15MW, have a streamlined methodology that is meant to reduce transaction costs, which constitute the biggest barrier to their implementation. However, even with this streamlined methodology, these projects suffer from having to complete almost all of the same steps as large-scale projects. The overall process is almost as expensive while the number of CERs that can be earned is limited. Therefore, carbon brokers are generally not interested in these types of projects, and small-scale projects had only generated 6.4 per cent of the overall CERs created from registered projects by April of 2008 [6]. The details of the small-scale methodology, and challenges developers of this project size face, will be described in more detail in Chapter 8, ‘Small-Scale Barriers’.
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Step-by-step guide The complex CDM process can also be understood as a series of steps that various entities must undertake. The section below describes the process in this way. Investors’ and project developer’s steps 1 Identify project opportunity. 2 Do initial financial analysis of project. 3 Contract carbon consultant or someone in-house to complete CDM paperwork. 4 Work with carbon consultant to provide needed information. 5 Ensure that CDM registration is completed in tandem with project construction so that project is registered before it begins generation. 6 Contract a Designated Operational Entity (DOE) to validate project after Project Design Document (PDD) has been completed by carbon consultant. The carbon consultant will contract the DOE if requested. Payment for DOE services is decided in contract between carbon consultant and project developer. 7 Assign someone to implement the monitoring plan to verify emission reductions created. 8 Contract a separate Designated Operational Entity (DOE) (if large-scale project) to complete annual verification of emission reductions. 9 If contracted to market and sell the CERs, then find a buyer and complete transaction. 10 If three seven-year crediting periods are selected, begin the process of contracting a carbon broker to complete new PDD after about five years of operation. Consultants’ steps 1 Conduct a feasibility study and/or PIN to assess project’s CDM potential. 2 Work closely with project developer to glean necessary system operating information. 3 Make host country contacts with DNA office to determine if project fulfils the goal of sustainable development. If the DNA believes that it fulfils this criterion, then a Letter of Approval will be issued. 4 Make host country contact with grid information managers to get emission data for baseline calculation. 5 Create additionality argument, baseline calculation, environmental impact assessment, stakeholder analysis with community members and monitoring plan for PDD. 6 Submit PDD to DOE for validation. 7 Work with DOE to complete revisions necessary to PDD. 8 Stay in close contact with UNFCCC Registration and Issuance Team to follow the progress of the project and make any necessary revisions.
BACKGROUND AND INTRODUCTION
15
9
Be in contact with DOE that verifies emission reductions to be aware of actual emission reductions generated. 10 If contracted for sale of CERs, sell them after they have been issued. DNA steps 1 Assess PIN if submitted and issue Letter of No Objection if appropriate. 2 Consider project for fulfilment of sustainable development (based on fixed or variable criteria) and issue Letter of Approval if appropriate. UNFCCC steps 1 Registration and Issuance Team reviews PDD and validation report for accuracy. 2 If a new methodology is proposed, the Methodology Panel and Executive Board consider this new methodology for acceptance. 3 After project has operated for a year and created emission reductions, the Registration and Issuance Team analyses the verification report and issues CERs if deserved.
Current CDM landscape General analysis CDM projects are only successful in countries that already have financial and political stability [47]. This stability can attract foreign investment and allows locals to develop projects. Many of the project types that generate CERs for the cheapest price, such as the aforementioned industrial gas emission mitigation, methane capture from coal exploration, landfill gas capture and energy efficiency upgrades are only suitable for countries that have large cities and have achieved a high level of development. Countries like Colombia or sub-Saharan Africa that are deemed undesirable for CDM development because of political instability, inadequate domestic bureaucratic structures or a lack of low-cost projects benefit from fewer CDM revenues [14]. Some countries’ innate ability to be more suitable for projects than others, and low levels of governmental corruption because of their level of development, skew the development funds and benefits. This unequal distribution of projects has recently raised concerns by CDM watch-groups. They contend that sustainable development is not being shared equitably [48]. Even the UNFCCC has solicited comments on how to improve the regional distribution of projects [49]. Latin America was slated to lead the CDM market because of its early aggressive investment solicitation for CDM projects [50] and lead in setting up DNA offices [33]. In 2003, Latin America dominated the CDM market with 66 per cent of the projects [51]. However, by May of 2007, Asia led the CDM market, generating 84 per cent of total CER volumes. China alone captures 60 per cent of the world’s CDM activity [52]. This current distribution of the market will most likely shift again towards Latin America since most of the polluting factories in Asia have already been retrofitted with emission reduc-
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Source: UNFCCC CDM (2008) Project’s Location: Interactive Map, 20 April, available from http://cdm.unfccc.int/Projects/MapApp/index.html
Figure 1.4 Global distribution of CDM projects tion equipment. See Figure 1.4 for a worldwide distribution of projects and Figure 1.5 for the global distribution of CERs. Within Latin America, project development follows the worldwide patterns. Most of the projects have been implemented in urban areas and the countries that have received more project development are those that are more politically and economically stable. See Figure 1.6 for a distribution of projects by country in Latin America. Latin America, like the rest of the world, has a CER market that is dominated by industrial gas emission reduction projects. However, these types 400,000 350,000
CERs issued
300,000 250,000 200,000 150,000 100,000 50,000 0
Latin America
Asia and Pacific
Europe and Central Asia
Sub-Saharan Africa
North Africa and Middle East
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and database, 1 April
Figure 1.5 Global distribution of CERs
BACKGROUND AND INTRODUCTION
1% 1% 2% 3%
17
7% Brazil Mexico Chile
6%
Argentina Colombia Peru
8%
Guatemala Honduras Ecuador Others
10% 45%
17% Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and database, 1 April
Figure 1.6 Distribution of CERs by country in Latin America of HFC and N2O emission reduction projects are less prevalent in Latin America because there are fewer factories that release these emissions and therefore fewer opportunities for reductions. Renewable energy, landfill gas and agriculture projects make up the remaining large CER market opportunities. See Figure 1.7 for a distribution of CERs by project type in Latin America. As of February 2008, most of the CERs in the region were derived from landfill gas, biomass and hydro projects. A handful of wind and no solar projects exist in the region. See Figure 1.8 for a graphical representation of the CERs derived from various renewable energy projects and Figure 1.9 for the renewable energy project distribution in Latin America. A lack of project type diversity points to another failure in the CDM as a wide variety of technology transfer is not achieved. Technology transfer is an implicit, rather than a stated goal of the CDM. It was highlighted as a deficiency in current CDM activities at the Seminar of Governmental Experts in the tenth Conference of Parties [53]. Also, PDD authors are required to ‘include a description of how environmentally safe, sound technology, and know-how to be used is transferred to the host Party(ies)’ in section A.4.3 [54]. According to a report prepared for the UNFCCC in December of 2007, technology transfer was more likely to occur in large projects that occurred in industrialized countries with international partnerships for project development [55]. Clearly, these criteria can only occur in specific instances and will not lead to an equitable distribution of technology transfer.
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CDM MARKET AND THIS GUIDE
1% 0%
2% 2%
HFCs and N2O reduction
12%
Renewables
36%
Landfill, etc. Agriculture Fuel switch Supply-side EE Demand-side EE Afforestation and reforestation
19%
28% Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and database, 1 April
Figure 1.7 Distribution of CERs generated by 2012 by type in Latin America
1% 0%
2% 2%
HFCs and N2O reduction
12%
Renewables
36%
Landfill, etc. Agriculture Fuel switch Supply-side EE Demand-side EE Afforestation and reforestation
19%
28% Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and database, 1 April
Figure 1.8 CERs derived from various renewable energy projects in Latin America
BACKGROUND AND INTRODUCTION
28
19
4 Hydro Biomass
65
134
Landfill gas Non-landfill methane capture (with the option for electrical production) Wind Geothermal
87
131 Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and database, 1 April
Figure 1.9 CDM renewable energy project distribution in Latin America
Project type analysis It is important for the reader to have a brief knowledge of the landscape and history of renewable energy in the region prior to analysing the distribution of clean energy CDM projects. This background is key for consideration of project additionality and barriers analysis. The clean energy mix of the region was 72.8 per cent of overall generation in 2005. This generation is almost exclusively hydro, which the region as a whole can support with its heavy rainfall and diverse topography. However, many of the countries that rely heavily on hydro generation, such as Costa Rica and Brazil, are growing to fulfil demand with fossil fuel-intensive additions because of the high cost of new hydro capacity additions [56]. Overall in the region, hydro is expected to grow at 2.2 per cent annually while natural gas annual growth is predicted to be 4.4 per cent [57]. The rest of this section briefly mentions the renewable energy CDM projects that exist by type in the region to give the reader an idea of where the CDM has had relative success. The current renewable energy projects in Latin America that have received CDM revenues or are in the process of doing so include generation from hydro, wind, geothermal, landfills, and biomass from sugarcane production. Hydro The hydro industry dominates generation because this industry was already well developed with both public and private sector generation facilities before CDM revenues were available. Firms from around the world, like Enel of Italy, owned hydro applications because of the ability to make a profit from this type
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of generation. Estimated potential hydro resources are enormous because of the abundant rainfall and mountains that traverse the region of both Central and South America; Honduras alone estimates that there is 5000MW of developable potential in the country [58]. The prevalence of these projects before CDM revenues were available puts into question the additionality of the projects. As each successive project is developed, it becomes progressively more difficult to prove this additionality since ensuring that the project is not financially feasible without CDM revenues is necessary for qualification. Twenty per cent of the projects, accounting for 15 per cent of the CERs that will be produced by 2012, in the region are hydroelectrics, making them hard to prove additionality [59]. Additionality can be easier to show for a small hydro project. The smaller a hydro project is, in general, the more difficult it is to make a profit since the work necessary to procure generation and environmental permits, as well as the CDM paperwork, is the same for all projects regardless of their size. For that reason, some countries like Guatemala have laws that help promote small hydro applications that are under 5MW. And, although these projects are profitable, they are not without technical challenges that will be detailed in Chapter 2, ‘Technical Barriers’. Wind Only one commercial wind farm in Costa Rica existed prior to the CDM. Now, a handful of them have achieved registration in the region and more are on the books. This rapid increase in development can be attributed to the rise in importance of the CDM for project finances and/or the growth in the wind industry. Mexico has much activity in the wind sector. Its initial CDM project was Bii Nee Stipa developed with Gamesa of Spain in December 2005 and February 2007. CEMEX and ACCIONA Energía have a bid for a 250MW wind farm called EURUS. The state-run utility called CFE registered La Venta II in June 2007 and plans on developing La Venta III, IV, V and VI, which will each be close to 100MW. Iberdrola got involved with La Ventosa in December 2007 [9]. A small Mexican independent power producer called Fuerza Eolica plans to develop a 10MW farm on Baja California Norte y Sur [60]. The prospects for wind generation in Central America are limited. Only one project in the region has successfully achieved CDM registration to this point; the state-run utility of Costa Rica has registered La Tejona, a 19.8MW farm [61]. There is also movement from Mesoamerica Energy to expand their 23MW Plantas Eólicas SRL site in Costa Rica and develop a 60MW site in Honduras [62]. Jamaica and the Dominican Republic each have one CDMregistered wind farm that is approximately 20MW. Panama has prospective sites that have 12 months of wind, and interest from a few groups like Santa Fe Energy with a bid for an 81MW farm [63]. Guatemala has limited excellent sites for development, but Ecomino is aggressively moving towards developing a 33MW project that they hope to expand to 120MW called Piedras Blancas in
BACKGROUND AND INTRODUCTION
21
the southwest of Guatemala [64]. Nicaragua has huge potential, but few developers are pursuing this market because of the country’s difficult climate for investors. Central America is most hindered by participation in the current market for wind generation because a global shortage of turbines has led to the requirement of an order of several hundred MW in order to attract the attention of turbine manufacturers [65]. In South America, a small cooperative in the Patagonia region of Argentina called Antonio Moran was the first to register a 10MW farm, in December 2005. Empresas Públicas de Medellín followed with the registration of a 19.5MW farm in Colombia in April 2006. Gamesa of Spain is interested in developing a wind farm of 10MW in Uruguay for CDM. Now, Endesa has an 18MW farm that is under construction in Chile. Brazil has nine registered projects and several more under construction because of its renewable energy legislation, which will be discussed in more detail in the chapter on Brazil. Geothermal Within the geothermal sector, there are just two projects that have achieved registration. San Jacinto in Nicaragua is registered for 66MW of generation. With 10MW of this capacity installed and running and tests underway for the 34MW expansion, it is a success story thus far. The failed governmental application of Momotombo gave this type of generation a bad reputation in Nicaragua. Momotombo was overextracted in the late 1980s in a time of capacity shortage, and water was not reinjected properly due to a poor understanding of aquifer currents. (A more detailed explanation of Momotombo is described in Chapter 2.) San Jacinto’s success, however, could be an anomaly instead of a trend setter in geothermal development because interested Russian parties drilled several perforations, some of which the plant is now using for steam extraction. These holes, which average $2 million each, are the largest capital cost of the plant. Polaris, which developed San Jacinto, is currently planning on developing another geothermal application in Nicaragua called La Casita that will be 130MW [66]. There is also a CDM-registered project in El Salvador called Berlin Geothermal Power Plant, which will expand a 66MW plant by 44MW. This application, along with the 95MW Ahuachapan plant, makes El Salvador the country with the most geothermal generation in the region; however, Costa Rica and Guatemala have huge potential. In Costa Rica, the 162.5MW Miravalles plants have been developed with the support of the state-run energy company, but these plants did not earn CDM credit because most of them were built before CDM came into effect in 2001. Another 35MW geothermal plant called Las Pailas is scheduled to open in 2011 in Costa Rica [67]. The state-run Costa Rican utility is studying a new deposit called Diquís for extraction [68]. In Mexico, the state-run utility has a tender to develop a geothermal site called Cerro Prieto [69]. In South America, there is much interest in geothermal development even though there is not yet one commercialized plant. Isagen is
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studying geothermal prospects in Colombia [70] and the Ministry of Energy and Mines in Peru is planning a geothermal project [71]. Landfill gas Within the landfill gas sector, few plants produce electricity; instead, they simply flare the methane to create the less potent greenhouse gas of CO2. Also, the relatively small size of the electrical applications that can be supported by landfill gas makes them less appealing. Some entities, such as the University of Antioquia and German Green Gas in Medellín, Colombia, have chosen to simply flare emissions instead of attempt to produce electricity because of the reduced complexity and lower capital costs [72]. Landfill gas projects have had the most success in the more developed countries of the region such as Brazil, Chile, Argentina and Mexico that have high concentrations of people. These countries have landfills that are not only of a critical mass that is large enough to justify the project development costs, but they also have landfills that are lined, have water extraction methods and sorted trash. Projects in areas that do not have these specifications have been less successful. Río Azul Landfill in San José, Costa Rica, was planned for CDM revenues from methane destruction in a turbogenerator for electrical production and has completed the initial steps of the paperwork necessary with a PDD. However, there are a variety of problems with its operation (that will be described in detail in Chapter 2) [73]. Other sites like La Chureca in Managua, Nicaragua, seem to have potential with 52 acres of 20 metres of trash, but would be difficult to develop. Most dumps in Latin America like La Chureca are unlined holes or piles where trash is not sorted before it is deposited. Therefore, the organic matter available for methane production is unpredictable. Also, approximately 1000 people live by scavenging the remains of this landfill. Although it would seem as though these poor people who live in shacks near the trash and cook by sticking a pipe directly into the garbage to collect the methane would not carry much political weight, a similar community blocked development of a site in Baranquilla, Colombia [74]. Despite these challenges, two exploratory methane wells exist on site at La Chureca in Managua [75]. Other methane capture Brazil and Mexico dominate the landscape for these types of projects since they both have agricultural industries that are large enough to produce a significant amount of methane that can be flared for emission reductions and justify the development costs for digesters. Brazil has 12 of these projects and Mexico boasts 37, while no other country in the region has more than five. Other than generating methane from farm animals, it can be created and mitigated from industrial processes to produce liquor and beer. A few factories have begun taking advantage of this source of reductions.
BACKGROUND AND INTRODUCTION
23
The future of these projects is uncertain since they have had a relatively poor performance in Mexico. The details of the failures of these projects are described in Chapter 2. Biomass The last area of renewable energy development for CDM revenues is the conversion of biomass residue from the sugarcane plant into electricity. Therefore, the countries like Brazil with large sugarcane crops are those that have registered the most projects. Other industries that can capture this type of energy include palm plantations, sawmills and other types of biomass. Most sugarcane plants already auto supply by burning their crop residues to heat water, produce steam and spin a turbine in a Rankine cycle plant. However, many mill owners are earning CDM revenues by making these processes more efficient and/or providing generation that can be sold back to the grid. Currently these plants are just operational during the harvest when the residue is available. Owners have creatively begun to consider using the plant’s facilities and already purchased equipment to supply electricity throughout the year by purchasing biomass residue from nearby plantations of other crops. The transport costs of accessing this other biomass and the higher cost of purchasing a boiler that can accept other fuels are preventing the rapid development of this type of CDM project from being immediately implemented [76]. Because of these obstacles to generating power year-round with other biomass residues, most plants that have achieved registration for this type of project have done so by increasing plant efficiency without additional biomass inputs [61]. The large number of coffee farms in the region suggests that there are opportunities within this sector for development of CDM activities. Coffee farms can capture methane from the pulp and wastewater discarded. In Costa Rica, the Dutch government sponsored nine of these projects as Activities Implemented Jointly, the precursor of CDM [77]. However, the cost of the systems was prohibitively expensive without a grant [78], and technical problems led to project failures [79]. See Table 1.1 for a complete list of the CDM projects undergoing validation or already registered in the region as of 1 April 2008.
Introduction Book organization This book is divided into four sections: (1) introduction to the CDM market and this guide; (2) barriers to project implementation; (3) country-specific challenges and opportunities; and (4) solutions to CDM barriers and recommendations for future work. This chapter (with this ‘Introduction’) constitutes the first section and therefore does not need further explanation. The other three sections are described below. Following a description of these sections, a few key concepts used in this book are described.
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Table 1.1 Renewable energy CDM projects registered or in the process of validation Country
Argentina Bolivia Brazil Chile Colombia Costa Rica Cuba Dominican Republic Ecuador El Salvador Guatemala Guyana Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Uruguay Total
Hydro
Wind
Geothermal
Landfill Non-landfill Biomass methane methane capture capture (with option for electrical generation)
Total
1 3 57 10 6 2 0
1 0 7 1 1 1 0
0 0 0 0 0 0 0
9 1 31 15 6 1 3
1 1 12 2 2 0 0
6 0 89 9 2 2 0
18 5 196 37 17 6 3
0 9 1 9 0 9 0 4 0 7 1 15 0 134
3 1 0 0 0 0 1 10 1 1 0 0 0 28
0 0 2 1 0 0 0 0 1 0 0 0 0 4
0 1 1 1 0 0 0 14 0 0 0 2 1 86
0 1 0 2 0 5 0 37 1 0 0 1 0 65
0 4 2 2 1 6 0 2 1 0 1 0 2 129
3 16 6 15 1 20 1 67 4 8 2 18 3 446
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and database, 1 April
Barriers section The barriers section topically addresses technical, social, financial, informational, host country institutional, UNFCCC procedural and methodological and small-scale project-specific challenges in individual chapters. Some of these barriers are CDM-specific, and others are common to all renewable energy projects. A short description of each of the types of barriers that are encountered and a description of what is covered in the chapter are listed below. Technical In this section, general technical barriers to project implementation, as well as technology-specific challenges, are addressed. Social Using concrete experience from projects in Latin America, this chapter addresses the social barriers that have prevented development or are currently facing developers.
BACKGROUND AND INTRODUCTION
25
Financial Receiving pre-investment funds, educating the bank about the value of CERs, and gaining loans for the long-term renewable energy project investment are obstacles that face project developers. Specific examples of financial struggles and success stories will be presented in this chapter. Informational The lack of knowledge about or specific understanding of CDM opportunities and Emission Reduction Purchase Agreements (ERPAs) can create insurmountable barriers for developers. The various agencies that have provided capacity development, including the host country’s DNA office, are discussed. Institutional The degree to which the host country supports project development through its laws and practices can create an environment that either promotes or hinders these projects. Examples of how development is both facilitated and hindered are presented. UNFCCC procedural and methodological The rules dictating how project developers earn CERs are complex and everchanging as methodologies evolve and are proposed. Barriers due to renewable energy-specific methodologies are addressed. Small scale Projects less than 15MW face special challenges given the high transaction costs in comparison to the number of CERs that can be generated. This section explains the special streamlined methodology that exists for these projects and points out examples of where small-scale projects are supported by Latin governments and where they are indirectly discouraged because of existing laws.
Country-specific section The country-specific section addresses each country in Latin America, presenting its vital statistics for CDM development including the portfolio mix of the grid, the country’s emission factor, the average price of electricity, whether or not the market is privatized, if the country has capacity payments and a spot market, and the names of the pertinent electricity-coordinating institutions to provide a rough idea of the country’s suitability for CDM projects. Then in each country-specific chapter, there is a discussion of the transition to a privately operated electrical sector. Following this background information, a description of current and pending renewable energy legislation and a CDM portfolio of projects for each country are presented. Finally, country-specific challenges and opportunities are addressed. This section systematically addresses the quality of the DNA office, other domestic institutional support or barriers that may exist, carbon broker offices and activity in the country,
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renewable energy potential (if known), unique experiences that are pertinent to only that country, and a summary of the country’s suitability for CDM renewable energy projects. Some project-specific anecdotes will be found twice – in both the ‘Barriers’ chapters and the country-specific chapters. The information will be elaborated in the area that it best fits. The point of mentioning the information twice is to alert readers who use this book topically and others who search for countryspecific barriers.
Future developments The third section of this book addresses solutions to overcoming each of these CDM barriers. This section consists of a compilation and short discussion of solutions proposed by the author and other analysts. Finally, a concluding discussion will follow.
Definitional notes Throughout this book, the author will refer to various players and markets in the electrical sector. It is essential to define these entities now so as to prevent confusion. The most common definitions of players and markets that exist are defined here. If there is a country with a unique situation that deviates from these definitions, it will be noted in the section in which it appears. Market players The entities most often mentioned will be industrial and residential customers and those who control generation, transmission, distribution and retail sales. In some countries discussed, these categories blend and can be owned by the same company. However, these cases are rare as most Latin American countries have privatized the electrical sector and now prevent vertical integration or the ability of one company to own all stages of electrical generation, delivery and sale to a customer. When vertical integration is permitted, it will be mentioned as an exception to the rule. When referring to generators, the author means those companies responsible for literally producing the electrons fed into the grid. By transmitters, the author is referring to the company that handles long-distance transmission. In most Latin American countries, the transmission grid has remained under state control since it is a natural monopoly that does not lend itself well to competition. Sometimes these transmission companies are actually regionally based organizations that cross country borders. By distribution company, the author is describing the company that is responsible for operating and maintaining the lower voltage system of electrical lines that serves customers after the electricity has been sent over large distances through transmission. These distribution companies often also sell the electricity to the end user. Confusion arises because sometimes a separate retailer, instead of the distributor, handles the advertising, branding, contract bundling and billing of the electricity to the customer even though this entity does not physically deliver it to them [80 and 81].
BACKGROUND AND INTRODUCTION
27
Customers that are non-residential and consume more energy than the residential designation are considered industrial consumers. The definition of a ‘large consumer’ is one that by law can negotiate directly with a generator to structure a Power Purchase Agreement (PPA) or purchase wholesale electricity through the spot market. The size of these customers varies by country. Electrical markets The electrical markets discussed throughout this book should also be briefly defined to avoid confusion. Throughout the region of Latin America, a trend of restructuring the electrical sector has occurred. This phenomenon also occurred in the late 1990s in the US, but has now stopped after some states like California suffered the ill effects of this change. For the purposes of this book, the terms restructure, deregulate and privatize all refer to the same occurrence: the shift from state-owned and operated utilities to privately owned ones as a result of energy legislation. The reader will learn that the degree to which Latin American countries choose to privatize their sectors varies and has profound consequences for the country’s suitability to host renewable energy CDM projects. Variations on three models of market restructuring have been utilized in Latin America. The first represents a high level of private sector integration and consists of a competitive wholesale power market. A wholesale market consists of generators, distributors, marketers and large consumers trading electricity in spot transactions and long-term contracts. Both spot markets and long-term contracts will be discussed in more detail below. Guatemala and Chile are examples of highly privatized energy markets. The second model is that of a single buyer of electricity in long-term contracts. Sixty-five per cent of the countries in Latin America have implemented this type of wholesale market. Honduras, Nicaragua and the large island countries of the Caribbean are examples of this model, in which the former state-run utility acts as a single buyer for long-term contracts. Finally, a vertically integrated monopoly model entails the sale of electricity by independent power producers to the state-run monopoly at avoided cost or a price determined by competitive bidding. Costa Rica and Mexico have reformed their electrical sectors according to this hybrid state–private model [82].
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Appendix A: Interviewed persons Country
Company
Contact Name
Mexico
COMEX HYDRO DNV Terracarbon/Private Consultant Ecosecurities Ecosecurities Ecosecurities DNA AgCert AgCert AgCert CEPAL CEPAL Granjas Carroll Mexico Granjas Carroll Mexico Geosistemas Fuerza Eólica Fuerza Eólica Sumitomo CO2 Solutions Fondo Mexicano de Carbono – Bancomext Fondo Mexicano de Carbono – Bancomext ETEISA Comision Regulatoria de Energía CESPEDES representative
Jacobo Mekler Gustavo Godínez Manuel Estrada Porrua Gabriel Quadri Mathieu Dumas Joaquin Pereyra Miguel Cervantes Anon Martinez Ignacio Castillo Hector Galvadon Fernando Cuevas Debora Ley Victor Ochoa Leon Velario Jorge Landa Pablo Gottfried Mario Gottfried Hiroshi Ueda Adrian Magaña Cervantes Eugenio MacGregor Marian Aguirre Nienau Francisco Marquez Francisco Barnes Rosa Maria Jímenez
Dominican Republic
Instituto Dominicano de Desarrollo Integral Inc
Mathilde Laval
El Salvador
AEA – Alianza de Energía y Ambiente Universidad Centro Americana Simeon Cañas
Otto Garcia Ismael Sanchez
Guatemala
Centro Guatemalteco de Producción más Limpia Fundación Solar Fundación Solar Fundación Solar Guatemala Renewable Energy Generators National Rural Electric Cooperative Association (NRECA) MARN INDESA Ingenio Trinidad Madre Selva Grupo Riviera startup wind Empacador Toledo Ministerio de Energía
Maria Amalia Porta Marta Rivera Iván Azurdia Mario Hernandez Christhian Escobar
Former director of AHPPER+B20 Assessor of Special Projects Former DNA, now project developer Director of Energía, SERNA DNA Assistant Former DNA office employee AHPPER, INVERSA
Eda Zapata Cardona Moises Starkman Gerardo Salgado Marcos Flores Olga Aleman Reinario Zepeda Elsia Paz
Honduras
Hugo Arriaza Raul Casteñeda Rodrigo Erales Victor Unda Oscar Conde Arturo Riviera Lloyd Joongezon Julio de la Parra Otto Ruiz
BACKGROUND AND INTRODUCTION
INCOMERH and ENERGIZA ENEE - Head of Sustainable Development 3 Valles
Carlos Bueso Glenda Castillo Sr Ramirez
Nicaragua
Centro de Producción más Limpia Director of Grupo Fenix Polaris Polaris Polaris Polaris Ministerio de Energía y Minas Ramacafe UPANIC DNA housed in MARENA DNA housed in MARENA ENEL former DNA UNDP Ministerio de Energía y Minas Ministerio de Energía y Minas Ministerio de Energía y Minas EMCAMI ECAMI Technosol
Cesar Barahona Susan Kinne Adriana Romero Javier Dias Manual Callejas Jim Randle Miguel Barrios Henry Hueck Manual Alvarez Carlos Rivas Ing Manual Madriz Mario Torres Marina Sthagtagen Leoni Arguello Herminia Martinez Elieneth Lara Harold Sommerriba Luis Lecayo Max Lecayo Vladimir Delagneau
Costa Rica
Biomass Users Network (BUN-CA) E+CO/CAREC ACOPE ICE ICE Ecosecurities Plantas Eólicas Energía Global International Mesoamerica Energy DNA located in Instituto Meteorologico Nacional DNA located in Instituto Meteorologico Nacional Companía Nacional de Fuerza y Luz Ministerio de Ambiente y Energía SARET SARET FEDEMUR SARET Private CDM Consultant
Jose Maria Blanco Fernando Alvarado Mario Alvarado Francisco Cordero Gravin Mayorga Mauricio Castro Jay Gallegos Jorge Dengo Allan Broide Paulo Manzo William Alpizar Walter Delgado Gloria Villa Ramon Samora Francisco Delgado Ileana Rojas Javier Sandoval Oscar Coto
Panama
DNA – ANAM – Office of Cambio Climatico DNA – ANAM – Office of Cambio Climatico ASEP – Asociación de Servicios Públicos Sicmar International Panama Santa Fe Energy Comisión de Pólitica Energetica B77 ASEP – Asociación de Servicios Públicos
Zarati Cartin Cheril Hernandez Rafael de Gracia David Shaw Roberto Moreno Fernando Dias Claudia Candanedo
Colombia
Antioquia University
Carlos Hildebrando Fonseca Zarate Carlos Andres Uribe Edigson Pérez Marta Patricia Castillo Thomas Black Alonzo Cardonas
Antioquia University Institución de Planificación de Zonas Aisladas CAF CAEMA Ministerio de Minas y Energía
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UPME Comisión Regulatoria de Energía DNA – Unidad de Cambio Climatico DNA – Unidad de Cambio Climatico DNA – Unidad de Cambio Climatico DNA – Unidad de Cambio Climatico Fedepalma Interaseo Empresas Públicas de Medellín Empresas Públicas de Medellín Empresas Públicas de Medellín Empresas Públicas de Medellín Empresas Públicas de Medellín Empresas Públicas de Medellín Empresas Públicas de Medellín MGM International MGM International MGM International
Henry Josue Zapata Gerson Castaneda Soto Paola Bettelli Andrea Garcia Sandra Graviator Roberto Esmeral Laura Patricia Mantilla Soto Juan Gonzalez Ana Sandoval Fernando Colorado Jaime Aramburo Camilo Garizabal Carmona Carlos Enrique Velez Restrepo Olga Velez Arango Jorge Alonso Arboleda Gonzalez Adriana Montoya Mauricio Gonzalez Margarita Cabrera
Ecuador
Climate Focus former CENACE Hidalgo e Hidalgo Equigener Unidad del Cambio Climatico Alquimiatec Cordelim Accion Ecológica Hidrovictoria Unidad de Gestion Ambiental Unidad de Gestion Ambiental CONELEC CENACE Ecoelectric ERD Consultants (former Minister of Energy) Las Iguanas Landfill Guayaquil San Carlos Ingenio San Carlos Ingenio
Ines Manzano Dias Eduardo Melendez Sixto Durán-Ballén V. Leonardo Duran Julio Cornejo Richard Zeller Ana Maria Núñez David Reyes Fernando Muñoz Patricio Oliva Alonso Romero Moreno Roberto Carrión Max Molina Bustamente Jorge Chang Gomez Donald Castillo Andres Intriago Almario Puga Julio Hidalgo
Peru
Visiting Professor CU Law School Redes Electricas Peruanas Kennedy School of Public Policy Sociedad Peruana de Derecho Ambiental Unidad de Cambio Climático y Calidad del Aire Ministerio de Energía Ministerio de Energía Ministerio de Energía FONAM CONAM NorWind Paramonga Santa Rosa OSINERG former CONAM Intermediate Technology Group (Practical Action)
Armando Guevara Vanessa Meza Jorge Gastalumendi Bruno Monteferri Siles María Pilar Zevallos Maria Melindo Humberto Armas Juan Olazábal Reyes David Garcia Ricardo Gieseke Jaime Barco-Roda Hugo Ayon Guillermo Cox Harmon Daniel Cámac Gutiérrez Patricia Iturregui Javier Coello
Bolivia
CINER CINER Natsource
Alba Gamarra Sra Marikely Aguilar Sr Ramiro Trujillo
BACKGROUND AND INTRODUCTION
Chile
UN ECLAC UN ECLAC UN ECLAC CEPAL FIA Hidromaule SolFocus SolFocus SolFocus SolFocus Andes Energy ICEP International Ecoingenieros Info Carbon Furniture chile 3C 3C Sec of Energy Servicios Eólicos PFAN World Bank – Carbon Finance Unit Laja Hydropower Pacific Hydro UTEC Colbun CORFO
Daniela Simioni Jose Javier Gomez Jose Luis Samaniego Eduardo Sanhueza Aquiles Neusadlfjwander Jose Manuel Zack Bongiovanni Ty Jagerson Kelly Desy Nelson Stevens Juan Guillermo Walker Manuel Madrid-Aris Pablo Faundez Estevez David Vargas Nunez Francisco Torres Francisco Avendano Arturo Brandt Patricia Chotzen Juan Walker Patrick D’Addario Pedro Huarte-Mendicoa Pedro Matthei Janine Hoey Hector Miranda Carlos Alberto Frias Javier Garcia
Argentina
Abo Wind MGM International Ecoinvest Fondo Argentino de Carbono DNA INTA IMPSA
Alejandro Tubal Garcia Eduardo Piquero Alejandra Camara Sebastian Galbusera Eugenia Magnasco Ignacio Huerga Eduardo Guerra
Uruguay
DNA MIEM Ministerio de Energía UTE Dirección Nacional de Energía
Mariana Kasprzyk Jorge Lepra Gerardo Triunfo Daniel Tasende Daniel Larissa
Whole Region
Organization of American States A2G Inter-American Development Bank Ecosecurities World Bank World Bank World Bank Ecoinvest Ecoinvest The Gold Standard AgCert AgCert SouthSouthNorth MSc Oxford/Japanese consultant Hamburg Institute of International Economics UN Consultant
Mark Lambrides Francisco Avendano Juan Pablo Bonilla Eron Bloomgarden Chandra Shekhar Sinha Edward Anderson Fernando Cubillos Karla Canavan Christopher Salgado Jasmine Hyman Dan Linsky Hernan Mateus Alexandre d’Avignon Eisuke Kawano Axel Michaelowa Debora Ley
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Appendix B: Renewable energy sites visited Country
Company
Project Name
Project Type
Mexico Mexico Mexico Mexico Mexico Mexico
AgCert AgCert AgCert AgCert AgCert Granjas Carroll Mexico/Ecosecurities Granjas Carroll Mexico/Ecosecurities ENERGIZA INCOMERH Municipality of Managua SARET Green Gas/ University of Antioquia Alquimiatec Valdez/ Ecoelectric San Carlos
Rancho Grande Sitio III La Joya Sitio III El Angelito/La Gloria La Cruz Sitio III Rastro Vargas Sites 15 and 6
La Coronado La Babylonia La Chureca
Methane capture Methane capture Methane capture Methane capture Methane capture Methane capture and electrical generation Methane capture and electrical generation Hydro Hydro Landfill gas
Río Azul Curva de Rodas
Landfill gas Landfill gas
Zambizá Valdez San Carlos
Landfill gas Sugarmill Sugarmill
Mexico Honduras Honduras Nicaragua Costa Rica Colombia Ecuador Ecuador Ecuador
Site 11-3A
Appendix C: Sample interview guide and questions Guide for project developers 1 2 3 4
Please tell me the story of how you developed this project. Why did you choose to develop this project? Who are your clients for CERs? What type of preference, if any, do your clients have for the type of CER generated? 5 Do you require an upfront payment for the installation of equipment and/or CDM project cycle work? Or, do you deduct these costs from future CER revenues? 6 How is the validator chosen for your projects? 7 Who communicates with the CDM Executive Board during the CDM project cycle? 8 When are the CERs delivered for this project? 9 How was the ERPA structured? (Did you engage in an ERPA for upfront purchase of a forward stream of CERs for this project or will the CERs be sold at a later date?) 10 How often do you do the PDD, project development and the purchase of CERs from the seller for a project? Which of these steps did you do for this project? 11 How do you entice project owners to stay with your company for all of these steps? (Do you offer a discount for those projects where you do the PDD and develop the project by installing the equipment?) 12 Who were your competitors for this project?
BACKGROUND AND INTRODUCTION
33
13 What are the biggest challenges you think you will tackle in this project? 14 How has your interaction with the DNA been? Has it provided you with help or added delays to the project cycle?
Guide for project owners 1 2 3
4 5 6 7 8 9 10 11 12 13 14 15 16
17 18 19 20 21
Please tell me the story of how this project was developed. How did you hear of CDM revenues? Can you tell me about someone who has earned revenues? Do you know someone who tried, but failed to earn the revenues? What was their project? Did you hire a carbon broker to help you through the project cycle? Why or why not? Did you consider doing the PDD yourself? Why or why not? What are the predicted annual CDM revenues for this project? Did you choose to do the ten-year crediting or seven-year crediting periods? Why? Will you plan on renewing the project by completing a new PDD after the first crediting period? Why or why not? Would you do the process yourself for the second period? Or, would you hire the same firm to complete the project cycle for you? Have you noticed that there are more projects like your own since the CDM began? Was the project begun before knowledge of CDM revenues? Will you hire a lawyer to complete the ERPA if there is one for this project? Are you relying on CDM revenues for any upfront project costs? How much will CDM revenues add to your profit margin? If the CDM revenues were not enough to make the project cycle worthwhile, how much more would they have to provide to make it so? Did you have to pay any more to complete the CDM project cycle than expected? In other words, did you have to pay any bribes to make the project move along in the CDM cycle? What are the biggest challenges to earning CDM revenues? How will you ensure that the project performs each year? Do you have someone on site who will be the technical support person for the project? How will new parts be ordered? Do the local people benefit at all from the project? If so, how do they benefit? How is this benefit measured? What do you use to determine the amount of sustainable development provided?
Guide for Designated National Authorities 1 2 3
Please tell me how you became interested in the CDM and came to work in this office. How many people work in the office full time? Part time? When was the office established?
34
4 5 6 7 8 9 10 11 12 13 14 15 16 17
18
19 20 21
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How many applications has it handled? How many successful projects have been approved? How many projects have been turned down by this office? Why? What does this office do (if anything) to promote projects? Does the office have a website? What does it include? Who maintains it? What type of financial or institutional support has the government provided you thus far? What do you wish that you had in terms of financial/institutional support? What are the criteria used to establish sustainable development? Does the country’s government take a percentage of CER revenues? Why or why not? Does the percentage taken differ for project types? Do you prefer to work with established foreign project developers or local project developers? Do you do site visits? Why or why not? Do you provide feedback to the UNFCCC? Are you audited to ensure that your definition of sustainable development is applied consistently? What kind of coordination is there within the governmental offices between one ministry and the other on CDM projects? Do you receive help and funding from other ministries? To what degree does the work of the DNA fall in line with national development plans? How many existing CDM projects are counted towards or fulfil existing domestic energy programmes? What is your definition of sustainable development? How strictly is this definition enforced when deciding if a project will be accepted or not? What are your thoughts on the whole CDM process? Is it too troublesome? How could the CDM project cycle be made easier for the DNA?
Guide for Designated Operational Entities (DOEs) 1 2 3 4 5 6 7 8
Please tell me the story of how you came to be a DOE. Describe the typical project site visit. Do project owners understand why you are there? Have you been offered a bribe to validate a project that was not additional? How do you advertise your services? How do you compete with local and international entities? What response have you gotten from the developers? What barriers have you encountered as a DOE? What would make the project cycle easier for you?
Questions for village residents, village owners, and NGOs involved in programmatic CDM 1 2 3
Describe how this project came to be implemented in your village. Do you like having the project? Does it make your life easier? How? How do other villagers perceive the project?
BACKGROUND AND INTRODUCTION
4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
35
Has the project created any difficulties for village residents? Who is responsible for the maintenance of the project? How will replacement parts be ordered? Do you pay for your use of the energy? Is the rate for energy flat or do you pay based on the amount you use? Is the project owned by the town, a municipality or a private company? Is the project paid for by a loan or grant? Will this loan be repaid in a timely manner? How are fees collected? Who manages the fees? How was the governance system for the management of the system created? Do you think it works well? How could it be improved? Has this new governance for the system caused tension in the village? Was an outside project developer involved with the installation of the project? Did that person or his colleagues provide technical training for the system? Was there a feasibility study for the project? Did community members help in the installation of the system? Did village members pay a portion of the first costs of the system? What is the geography of the area around the system? Do you think the system is at risk of being destroyed by a hurricane, mudslide, guerilla activity, a fire or other outside forces? What measures were taken to protect the project from these risks? Does the system contribute to the sustainable development of the community? How is this measured?
Notes 1 In this book, the author used both euros and US dollars because she quoted prices from reports that were written during the past seven years. Because the precise date when the price was found was not always available, the author chose to keep the price in its original currency rather than use an arbitrary conversion rate in the year of publication. 2 The industrial sectors included in the first ETS compliance period are combustion plants, oil refineries, coke ovens, and iron and steel, cement, glass, lime brick, ceramics, and pulp and paper plants [13]. 3 Forestry CDM projects can last for one crediting period of 30 years, or 20 years with two renewal periods [48].
References 1 2
UNFCCC (2008) ‘Essential background’, available from http://unfccc.int/essential_background/items/2877.php Wara, M. (2006) ‘Measuring the Clean Development Mechanism’s performance and potential’, Program on Energy and Sustainable Development Working Paper no 56, July, Stanford University, Stanford, CA
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5
6 7
8
9 10 11 12 13 14
15
16 17 18
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Ellis, J., Winker, H., Corfee-Morlot, J. and Gagnon-Lebrun, F. (2007) ‘CDM: Taking stock and looking forward’, Energy Policy, vol 37, pp15–28 Bhardwaj, N., Parthan, B., de Coninck, H. C., Roos, C., van der Linden, N. H., Green, J. and Mariyappan, J. (2004) ‘Realising the potential of small-scale CDM projects in India’, November, IT Power and IT Power India, Puducherry OECD Environment Directorate and International Energy Agency (2001) ‘Fasttracking small scale CDM projects: Implications for the electricity sector’, OECD, Paris CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and database, 1 April Ramseur, J. L. (2008) ‘The role of offsets in a greenhouse gas emissions cap-andtrade program: Potential benefits and concerns’, Congressional Research Service, 4 April Krupa, P. (2008) ‘Central America and the carbon market: The region’s role in the $30 billion carbon market’, World Business Council for Sustainable Development, 29 February CDM UNFCCC Project Search, 1 May 2008, available from http://cdm.unfccc.int/Projects/projsearch.html Capoor, K. and Ambroisi, P. (2008) State and Trends of the Carbon Market 2008, World Bank, Washington, DC Ellis, J. (2006) ‘Issues related to implementing “programmatic CDM”’, OECD, Annex I Expert Group, UNFCCC, 27 March UNFCCC (2007) ‘CDM statistics’, January, available from http://cdm.unfccc.int/Statistics European Commission (2005) ‘EU emissions trading: An open scheme promoting global innovation to combat climate change’, January United Nations (2006) ‘ECLAC study for the 4th meeting of the Economic and Society Working Group of Forum for East Asia–Latin America Cooperation’, 7–8 June, Tokyo, Japan Burke, M. (2006) ‘Carbon prices drop in the EU, putting pressure on climatechange policy’, Business & Education News, Environmental Science and Technology Online, 5 July Point Carbon ‘EUA price last 30 days’, available from www.pointcarbon.com/ Connor, Dr P. (2007) Email correspondence with Dr P. Connor, 9 March, Camborne School of Mines, Cornwall Campus, University of Exeter European Parliament (2004) Directive 2004/101/EC of the European Parliament and of the Council, amending Directive 2003/87/EC, establishing a scheme for greenhouse gas emission allowance trading within the Community, in respect of the Kyoto Protocol’s project mechanisms, 27 October European Commission (2006) ‘Emissions trading: Commission decides on first set of national allocation plans for the 2008–2012 trading period’, 29 November Zhang, Z. X. (2007) ‘Toward an effective implementation of clean development mechanism projects in China’, Energy Policy, vol 35, pp1088–1099 Salgado, C. (2007) Interview with C. Salgado, Carbon Broker, Ecoinvest, 20 March 20, Cartagena, Colombia Carbon Positive (2008) ‘Flat CER prices ignore EUA market’, Carbon News and Info, 30 April Liptow, H., Michaelowa, A., Raubenheimer, S. and Jahn, M. (2004) ‘Measuring the potential of unilateral CDM: A pilot study’, Discussion Paper 263, Hamburg Institute of International Economics, January
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24 Capoor, K. and Ambrosi, P. (2007) State and Trends of the Carbon Market 2007, World Bank, Washington, DC 25 Point Carbon (2007) ‘Historical EUA prices’, 1 March 26 Streck, C. and Manzano, I. (2007) ‘A new contracting model for ERPAs: Equity and efficiency in legal and contractual issues’, presentation at CDM Tech. Conference, 19–21 March, Cartagena, Colombia 27 Michaelowa, A. and Jotzo, F. (2005) ‘Transaction costs, institutional rigidities and the size of the clean development mechanism’, Energy Policy, vol 33, pp511–523 28 Diamont, A. (2008) ‘The key role of greenhouse gas emissions offsets in evolving GHG cap and trade programs’, RMEL Generation Conference, Carbon Issues and Strategies, 17 April, Denver, CO 29 Michaelowa, A. and Wucke, A. (2007) ‘CDM Highlights 44’, Gesellschaft für Technische Zammerarbeit (GTZ) Climate Protection Programme, January 30 Peters, R., Brunt, C. and Luce, C. (2004) ‘The Clean Development Mechanism (CDM): An international perspective and implications for the LAC region’, The Pembina Institute for the Latin American and Organización Latinoamerica de Energía 31 UNFCCC (2007) The United Nations Climate Change Conference, 3–14 December, Bali, http://unfccc.int/meetings/cop_13/items/4049.php 32 Point Carbon (2008) ‘Traders, green groups call for laxer CDM limit in EU ETS Phase Three’, Carbon Market News, 9 April 33 Michaelowa, A. (2007) Interview with A. Michaelowa, Head of the International Climate Policy Research Programme, 23 February, Hamburg Institute of International Economics 34 Sinha, C. S. (2007) Interview with C. S. Sinha, Portfolio Manager, Carbon Funds, World Bank, 6 March 35 Jiao, L. (2006) ‘World’s biggest greenhouse gas deal takes effect in win–win situation for China, industrialized nations’, Worldwatch Institute, 3 October 36 Forster, P. et al (2007) ‘Changes in atmospheric constituents and in radiative forcing’, in Climate Change 2007: The Physical Basis, Contribution of the Working Group I to the 4th Assessment Report of the IPCC, Cambridge University Press, Cambridge, New York 37 Olsen, K. H. (2007) ‘The Clean Development Mechanism’s contribution to sustainable development: A review of the literature’, Climatic Change, vol 84, pp59–73 38 Gold Standard ‘Rationale’, available from www.cdmgoldstandard.org/rationale.php 39 CDM Watch (2004) ‘CDM Scorecard’, February 40 Bradsher, K. (2006) ‘Outsize profits, and questions, in effort to cut warming gases’, New York Times, 21 December 41 Barland, K. (2006) Sustainable Development: Concept and Action, United Nations Economic Commission for Europe, Geneva 42 Resniera, M., Wang, C., Du, P. and Chen, J. (2007) ‘The promotion of sustainable development in China through the optimization of a tax/subsidy plan among HFC and power generation CDM projects’, Energy Policy, vol 35, no 9, pp4529–4544 43 Martinot, E. and Reiche, K. (2000) Regulatory Approaches to Rural Electrification and Renewable Energy: Case Studies from Six Developing Countries, World Bank, Washington, DC 44 Nicholls, M. (2006) ‘Trials and tribulations: Market survey GHG emissions’, Environmental Finance, December 45 CDM Watch (2003) ‘CDM Toolkit: A resource for stakeholders, activists, and NGOs’, November
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46 United Nations (2003) ‘Implementation of the Clean Development Mechanism in Asia and the Pacific: Issues, challenges, and opportunities’, ST/ESCAP/2292 47 Gastelumendi, J. (2007) Interview with J. Gastelumendi, Kennedy School of Government at Harvard University, Master’s of Public Policy student (Former Head of Environmental Division at Estudio Grau), 4 March 48 Turnbull, D. (2006) ‘Equitable distribution in the CDM’, Climate Action Network International Nairobi, ECO Newsletter, Issue 8, 13 November 49 UNFCCC Executive Board 27 (2006) ‘Annex 19: Regional distribution of clean development mechanism project activities’, 1 November, UNFCCC, Bonn, Germany 50 Wilder, M. (2005) ‘Implementing the Clean Development Mechanism and emissions trading beyond Europe’, in F. Yamin (ed) Climate Change and Carbon Markets: A Handbook of Emissions Reductions Mechanisms, Earthscan Publications, Sterling, VA, pp231–261 51 Zhang, Z. X. (2000) ‘Estimating the size of the potential market for the Kyoto flexibility mechanisms’, Faculty of Law and Faculty of Economics, University of Groningen 52 Gordon, A. and Schrader, K. (2007) ‘State of carbon market report update shows strong impact of Asia in market’, press release 2007/116/SDN, World Bank, 26 October 53 UNFCCC (2005) ‘Technology Transfer’, Proceedings of Seminar of Governmental Experts, Tenth Conference of Parties, 16–17 May, Bonn, Germany 54 CDM Executive Board, Guidelines for Completing the Project Design Document (CDM-PDD), the Proposed New Methodology: Baseline (CDM-NMB), and the Proposed New Methodology: Monitoring (CDM-NMM), Version 04, UNFCCC 55 Seres, S. (2007) ‘Analysis of technology transfer in CDM projects’, UNFCCC Registration & Issuance Unit CDM/SDM, December 56 UNFCCC CDM (2008) Project’s Location: Interactive Map, 20 April, available from http://cdm.unfccc.int/Projects/MapApp/index.html 57 International Energy Agency (2007) World Energy Outlook 2007, IEA, Paris 58 Salgado, G. (2007) Interview with G. Salgado, CDM Consultant, former Designated National Authority of Honduras, 11 September, Tegucigalpa, Honduras 59 CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, March 60 Gottfried, P. (2007) Interview with P. Gottfried, Project Manager for Fuerza Eólica of Mexico, 17 August, Mexico City, Mexico 61 UNFCCC (2007) ‘CDM project activities’, December, available from http://cdm.unfccc.int/Projects/projsearch.html 62 Broide, A. (2007) Interview with A. Broide, Development Manager for Mesoamerica Energy, 26 September, San José, Costa Rica 63 Moreno, R. (2007) Interview with R. Moreno, President of Santa Fe Energy, 4 October, Panama City, Panama 64 Jongezoon, L. (2007) Interview with L. Jongezoon, Developer of Renewable Energy Projects for Ecomina, SA, 6 September, Guatemala City, Guatemala 65 Holloway, B. (2008) ‘Turbine waiting list hits wind farm’, in Waikato Times, 22 November, Waikato, New Zealand 66 Dias, J. (2007) Interview with J. Dias, Site Engineer for Polaris, 19 September, San Jacinto, Nicaragua 67 Loy, D., Fütterer, H., Jüttemann, P. and Reiche, D. (2004) Energy-Policy Framework Conditions for Electricity Markets and Renewable Energy: 21 Country Analyses, Terna Wind Energy Programme, Deutsche Gesellschaft fur
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Technische Zusammenarbeit (GTZ) GMbH and Federal Ministry for Economic Cooperation and Development, June Business News Americas, ‘ICE launches Diquís geotechnical study bidding’, 16 March 2008 Business News Americas, ‘Cerro Prieto geothermal tender attracts 4’, 16 March 2008 Business News Americas, ‘Isagen seeks proposals for geothermal project study’, 20 December 2007 Business News Americas, ‘Ministry to complete renewables, geothermal plans mid-2008’, 20 December 2007 Uribe, C. (2007) Interview with C. Uribe, PDD Author of Curva de Rodas, 17 October, Medellín, Colombia Samora, R. (2007) Interview with R. Samora, Head of the Rio Azul Plant for SARET, 28 September, San José, Costa Rica Gonzalez, J. (2007) Interview with J. Gonzalez, Project Developer for Interaseo, 16 October, Medellín, Colombia Cinteno, M. (2007) Interview with M. Cinteno, La Chureca Site Manager for the City of Managua, 19 September, Managua, Nicaragua Gomez, J. C. (2007) Interview with J. C. Gomez, Plant Manager for Ecoelectric at Valdez Sugarmill, 28 October, El Milagro, Ecuador World Bank, UNDP and World Business Council for Sustainable Development (2004) ‘Case Studies: Costa Rica: Reducing the impact of agro-industry wastewater’, at Energy for Development Conference, 12–14 December, Noordwijk, The Netherlands Beuermann, C., Langrock, T. and Ott, H. (2000) Evaluation of (Non-Sink) AIJProjects in Developing Countries (Ensadec), Wuppertal Institute for Climate, Environment, and Energy, Wuppertal, pp1–48 Coto, O. (2007) Interview with O. Coto, CDM Consultant, 1 October, San José, Costa Rica Shiverly, B. and Ferrare, J. (2004) Understanding Today’s Electricity Business, Enerdynamics, San Francisco, CA Millán, J. and von der Fehr, N. (eds) (2003) Keeping the Lights On: Power Sector Reform in Latin America, Inter-American Development Bank, Washington, DC Energy Sector Management Assistance Program (2007) Latin America and the Caribbean Region (LCR): Energy Sector – Retrospective Review and Challenges, 15 June, World Bank, Washington, DC
Section 2 Barriers
2 Technical Barriers
Technical barriers result because of a poorly designed, sited, maintained or installed system. If a project fails a yearly monitoring and verification test for technical or other reasons, it does not generate Certified Emission Reductions (CERs) and earn the associated revenues. For example, in Mexico, three of the six methane capture projects the author visited were not functioning properly. Local farmers were not concerned with the malfunctioning because they did not realize that the flaring of the methane to create the less potent greenhouse gas of CO2 was how the CERs and associated revenue were generated. Furthermore, they most often worked on the farm but did not own it and most likely had little incentive to facilitate the generation of CERs as they would receive none of the CDM revenues. The technical barriers to project development tend to vary based on the type of technology utilized. However, there are some problems that apply to almost all areas of development. Therefore, this chapter first addresses general technical barriers to development and then discusses the individual challenges to each technology type one by one. This chapter also covers barriers that relate to the high cost of or lack of availability of certain technologies used for renewable energy generation.
General technology challenges Most technical challenges that face CDM project development in the region are technology-specific, but there are some problems that apply to almost all areas of development. Unreliable electrical grids, which stem from a lack of spinning reserves to back up peak demand, poor and overtaxed transmission lines, and rudimentary dispatch centres,1 lead to frequent grid outages and voltage fluctuations that can harm equipment. For example, in Colombia the average number of grid failures that affected one customer per year was 186 and the number of hours annually that customers went without electricity was 66 [1]. The gas turbines used at Río Azul landfill in Costa Rica are designed to withstand 12 outages per year. Plant managers contend that there are usually about seven outages per day due to the introduction of oxygen into the system,
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because the tubes that carry methane from the landfill to the generator are routinely stolen. The result is levels of gas that are too low to provide adequate fuel for the generator [2]. Turbines at La Babylonia hydro site in Honduras have a special device to divert water from the turbine when the grid fails and operators stand by to handle about three grid interruptions per day during peak demand. They must be ready to resynchronize the equipment to the grid manually when these failures occur [3]. More than being just a technical challenge, these grid interruptions cause plants to lose money since many markets in the region provide generators with a fixed price per kWh produced and energy is not produced when the plant has to stop operations [3]. For purposes of Clean Development Mechanism (CDM) revenues, emission reductions are also not produced during these times.
Hydro In general, renewable energy sites for development can be complex and expensive given their remote nature. However, renewable energy is often the most economical form of electricity for these isolated areas, since serving these areas by the grid would be even more expensive. Hydro facilities can be especially burdensome to access since areas where there is a large difference in elevation and a stream tend to be in mountainous regions with poor or no infrastructure. For some sites, such as La Babilonia and El Coronado in Honduras, construction workers had to carry equipment such as tubes, cement and compressors for tunnel construction on their backs and on mules 4km with 500 metres of elevation gain to the site in order to construct the run-of-river sites, which were under 5MW [3]. Replacing parts and having technicians service these remote areas is also complicated. Project owners are responsible for connecting their electricity to the closest three-phase point in a transmission line. The remote location of wind, geothermal and hydro sites can mean that this distance is very significant. Even cheap labour in the region cannot always compensate for the costs of this type of construction. Companies often must budget for the construction of a road, cable car or bridge in project costs in order to safely transport components. In this way, these new infrastructure improvements can help modernize communities, increasing commerce [3]. Frequent hurricanes hit this region during the months of August, September and October. Hurricane Felix of 2007 caused a landslide that smashed part of the tubing at El Coronado hydro site in Honduras and decimated photovoltaic (PV) panels that were installed on the eastern coast of Honduras. These storms also create hazards for hydro projects by causing trees to fall in the watershed that leads to the river. Deforesting of the area can impact stream flows and cause siltation and debris build-up that blocks dams. Although the equipment for hydro generation has been in use for over 100 years, some project developers are proving ‘first-of-a-kind’ additionality by
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Figure 2.1 Hurricane damaged pipe for hydro electric adding slightly new parts to the system, such as a tunnel-boring machine for an 8km pipe in a run-of-river application that tried to make minimal environmental impact by not displacing the vegetation on top of the tunnel area [4]. Overall, the common use and long history of hydro makes it difficult to prove technological barriers are broken. Hydro projects also face a new challenge in that the European Union (EU) will no longer accept CERs from projects larger than 20MW unless the dam complies with the World Commission on Dams guidelines. The exact guidelines for CER purchases above 20MW was unclear as of March 2008 and the rules to better define qualifying projects were being formulated [5]. The reasoning behind this size requirement is that it would help prevent the negative impacts of large dams, like having areas of land flooded, creating methane emissions. Run-of-river projects, which consist of turbines placed directly in the river and moved by the river’s flow or the diversion of water into a pipe that is run downhill through turbines, have no dam or smaller dams that hold water for just a few days of generation and therefore tend to displace or disturb fewer people and cause less evaporation from reservoirs [6]. The UNFCCC has a limit on the surface area of reservoirs within the existing Approved Consolidated Methodology 0002 [7]. Small-scale hydro projects in Chile also may be at an advantage as hydro projects must be under 30MW in order to be eligible to fulfil the country’s 10 per cent renewable
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energy mandate by 2024. These new guidelines may directly provide project support for small-scale projects as it is more difficult to get larger projects registered.
Wind Wind energy projects in Latin America can be challenging because the technology for this type of energy generation is still relatively new and unproven in many of the Latin American countries [8]. This unfamiliarity with projects makes investors and project developers alike hesitant to get involved. However, some areas with excellent resources, such as Oaxaca, Mexico, Chile and the northeast coast of Brazil, have been recognized by international companies like Gamesa, Pacific Hydro and Iberdrola [9]. With the backing of these large companies, wind farms of 100MW and larger are being installed in some of these areas. Countries like Uruguay and Peru that do not yet have a wind map are at a disadvantage. Even though the coast of Peru is not very well studied, it seems to have potential [10]. A combination of a lack of renewable energy incentives, resource information and investor confidence has not allowed sites in Peru to develop quickly [10]. Even when there is a wind map of the country showing areas suitable for development, there may not be an appropriate place to hook into the grid. In Uruguay, a team of German developers did studies and found that a site on the Uruguayan coast on the border with Brazil was a good wind resource. When they then went to see how they could connect with the Uruguayan grid, they found that the voltage in the area was low, and that they could not produce and transmit electricity in this area of the grid [11]. Some of the investor fear in this fairly new technology is merited since certain areas of the region have unusual wind regimes of Class 7, which is 8.8 metres per second (m/s) and higher, that have not been extensively tested by today’s large turbines [12]. Patagonia is a region with excellent average wind speeds of close to 10m/s that at first consideration seems like an ideal place for wind farms. However, the wind speeds there can be very strong, up to 16m/s, or non-existent. Therefore, turbines that are specially designed for this wind regime are necessary. The large, 1.5–2MW turbines that are currently being installed for most new wind farms in Europe work best with lower, steady wind speeds and may not survive the intermittent strong winds of Patagonia and Oaxaca. Industrias Metalúrgicas Pescarmona SA (IMPSA) of Argentina has designed a turbine without gears, able to handle variable wind speeds more efficiently. However, in a test situation, an IMPSA turbine was pulled out of the ground by the high wind of Patagonia and injured three people [13]. The newness of wind energy complicates the permit process for farms. Often, countries do not have a standardized procedure for wind farms, and hydro or other permit procedures have to be modified to fit the new technology. This modification process can be time-consuming and discourage developers since the bureaucratic process of facilitating a new permit
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procedure can involve long delays. Empresas Públicas de Medellín had to modify a hydro permit for use at a wind farm [14]. The permit process can be complicated by those who fear that the turbines could interfere with bird migration patterns and bat activities or create a noise disturbance. Project developers in Mexico found ornithologists wanted bribes in order to allow the development of a farm [15]. Physically installing the wind turbine equipment can be challenging in areas that do not have infrastructure that supports the installation of turbines. For example, developers of Nuevo Mantanial, a 4MW wind farm in Uruguay, had to rent cranes from out of the country to install the turbines. The process was very costly as the minimum rental time for this equipment is one month [11]. Another complication is that in countries with dispatch rules that do not prioritize wind energy, this resource could be incorporated into the grid’s system last, and for a limited amount of time, attracting few energy payments. Most wind advocates argue that wind is a ‘use it or lose it’ resource that must be put on the system when available and therefore should have dispatch priority above other resources. Improving storage capabilities with large-scale vanadium redox batteries, pumped hydro reservoirs or compressed air energy storage would make this resource more dispatchable and may be pursued more in the future. However, thus far, these storage techniques used in conjunction with wind energy are largely experimental and confined to developed countries. Therefore, some countries like Colombia have taken steps to make ‘use it or lose it’ resources under 20MW the first energy dispatched as a part of the national law [16]. But others that do not have this exception expect wind to compete in the least-cost bid process that requires wind energy to compete on a price basis with other technologies and only receive payments when it is selected by grid managers as one of the least-cost options. Other problems with integrating wind projects into the national grid include the complexity of putting an intermittent resource into a grid and ensuring that it will not cause instabilities in the system. The maximum amount of wind on the three US transmission grids that utilities predict can be utilized before it would produce grid instability is close to 25–30 per cent of the overall generation [17]. This estimate is based on the flexibility of the system’s dispatch centres as well as the current portfolio mix of resources, which includes many baseload sources. Grid managers in Latin America are less familiar with this resource and unsure of how much wind energy the grid can sustain. One way to remediate the problem of grid interconnectivity is by making the hydro and wind portions of the grid complementary. If there is a large portion of hydro on the system that is susceptible to drought conditions, wind could exacerbate the unpredictability of when energy would be available. However, some areas have wind regimes that are complementary to hydro availability [18].
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In Uruguay, a team of German developers did studies and found that a site on the Uruguayan coast on the border with Brazil was a good wind resource. When they then went to see how they could connect with the Uruguayan grid, they found that the voltage in the area was low, and that they could not produce and transmit electricity in this area of the grid [11]. A recent barrier to wind energy development in the region has been the inability to get the equipment needed for small applications because of a global wind turbine shortage. In many of these countries, a 15MW farm is a significant capacity addition. This size farm is all that can be financed and anything larger would flood the country’s grid with too much intermittent generation. This is especially the case in the small countries of Central America and has been the experience of developers in Honduras. Also, in Ecuador, a 15MW project called Salinas received all of the necessary permits and completed a Project Design Document (PDD) only to find that turbine manufacturers were not interested in an application that small. The current global shortage of turbines has created a significant barrier for small projects since little orders are not the priority of manufacturers. The wind developer for Cristelería Toro of Chile had to source turbines for its 3.45MW wind farm in part from a new Chinese manufacturer called ZheJiang Huayi and partially from used turbines from Germany [19].
Biomass Biomass can be a high-energy fuel that can be gasified or burnt in a boiler that operates a turbogenerator. The history of biomass utilization for power production in Latin America dates back to over 100 years ago as sugarcane producers burnt the stalk residues, known as bagasse, in order to get rid of the waste and produce electricity to sustain the sugarmill plant’s operations. These electrical applications are also used for process heating; the bagasse that is burnt heats water for electrical production in a Rankine cycle and is used to evaporate water in the process of isolating the sugar. The bagasse is generated when the sugarcane water is extracted at the factory by machines that flatten the stalk. Therefore, the stalk residues are already at the plant and would have to be trucked away if not utilized for energy production. Efficiency was not especially important to plant operators since there was typically more bagasse than the owner needed and selling electricity back to the grid was not an option. In some cases, these sugarmills were not even connected to the grid [20]. Now, sugarcane producers are more interested in efficiency since they can, in most cases, earn money for the excess electricity they produce through net metering.2 Some countries like Ecuador even provide incentives like lucrative feed-in tariffs for this type of generation. Sugarmill owners are now considering making their facilities more efficient by installing better boilers and generators in order to take advantage of the CDM and renewable energy incentives at the same time as lowering their electricity costs [21]. Typically, the baseline for these projects is the burning of the bagasse. So, no additional reductions for preventing the decomposition of the bagasse and associated
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methane emissions are earned. Emission credits are earned for the electricity on the grid that is displaced because of the generation. These upgraded sugarcane biomass projects have tended to succeed in countries like Ecuador and Central America that have a shortage of capacity. Companies in these countries may face expensive electrical outages if their complete electrical needs are not met. These countries are also the ones that offer aggressive incentives for the development of these projects as a means to take pressure off the national grid. Countries like Uruguay and Argentina are just now beginning to consider these projects since the availability of natural gas and associated affordable electricity has disappeared as a secondary result of the Argentine economic crisis of 2002 [22]. More information about the Argentine economic crisis and its ties to natural gas supply shortages can be found in Chapter 10, ‘Argentina’. Beyond using the bagasse, sugarmill operators have considered co-firing the other residue of leaves from sugarcane and husks from a variety of crops such as rice, water hyacinth and peanuts because it would provide a valuable 12-month, reliable power source. However, thus far, using this high volume, low energy waste has not been pursued. The primary reason for not using other crop residues is that the transportation costs of moving it from the fields to the factory costs more than purchasing other fuels, making it prohibitively expensive. The sugarcane leaves and other residue, which are not taken to the sugar mill and are left on the ground after the harvest, must be collected and transported for the expressed purpose of electricity generation. This process increases the cost of harvest by three times and necessitates the purchase of a mechanical harvester [20]. Most of this residue also has a lower energy content than bagasse [21]. An economic analysis of the prospects for co-firing different types of biomass with bagasse by Ecoelectric, which is running the cogeneration portion of the Valdez Sugarmill in Ecuador, showed that in order for biomass to be economical for power generation, it needs to cost about $2–3 per tonne to transport from the fields to the factory. At this site, eucalyptus from a plantation 50km away costs about $30 per tonne to purchase and transport to the factory. The company has begun prospecting on its own land for areas to plant fast-growing eucalyptus trees. Water hyacinth from 300km away was also considered as co-firing fuel, but transportation costs alone are $15 per tonne for this fuel because of its high moisture content. Ecoelectric has chosen to use the palm fruit for $15 per tonne for purchase and transport to co-fire in a 90 per cent bagasse, 10 per cent palm ratio at its plant [20]. Another reason why other types of residue have not been co-fired with bagasse at sugarmills is because boilers that can accept a variety of biomass products are more expensive than those that just burn bagasse. Also, the approximate moisture content of different residues would have to be matched for successful co-firing. In some cases, for the use of water hyacinth, commercial equipment and the electricity to run it would have to be purchased to dry this crop. Ecoelectric is unsure how their equipment will respond to palm fruit being burnt with bagasse and plan to do several months of testing [20].
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Taking the crop residues away from the fields would leave areas without organic residue to decompose and provide a natural fertilizer. Using this residue would have to be weighed against the cost of fertilizer to replace these nutrients. As previously mentioned, plant operators are interested in co-firing other biomass with bagasse because it would allow year-round electrical production. Only a few areas like Paramonga, Peru have year-round harvest. In all other places, sugarmill owners are fixing repairs and not producing electricity during three to four months of the year. During this time they suffer losses as they are not receiving money for electrical payments, purchasing electricity from the grid and not receiving CERs. The equipment used in the combined heat and power process of the sugarmill is designed to create low-pressure steam that evaporates the water off the syrup but does not provide optimal power production. Therefore, in the non-harvest season when this steam for evaporation was not needed, the plant would release this steam to the environment and could annoy neighbours. Shifting to year-round electrical production would necessitate different generation equipment that would not be optimal for the overall plant’s operations during sugarcane production [20]. Considering electrical production outside of a sugarmill with just crop residues has not yet been economical. The aforementioned problems of energy density and transportation costs prevent this practice from occurring. In Chile, there are a few projects that have been able to take advantage of the harvesting of wood biomass for generation. At Nueva Aldea biomass plant, wood will fire a 37MW cogeneration plant to sustain the operations of a paper mill [23]. At Trupan wood panel plant, excess biomass on land will partially sustain the plant’s operations and sell back to grid in a 30MW plant [24]. At Russfin sawmill, wood scraps like stumps and branches that would otherwise decay on the ground will be used in a 1.2MW plant [25]. These applications were successful because they existed near plants that were already in the business of harvesting wood and transporting it to a central facility, suggesting that a traditional biomass plant using wood that is harvested specifically for electrical production is not economically viable.
Geothermal Being located on the ‘ring of fire’ affords many Latin American countries excellent opportunities for geothermal electrical development. However, few countries have explored this potential because of the high capital costs of these plants. The first costs of drilling one hole for steam extraction average about $2 million. This high cost led developers of San Jacinto geothermal plant in Nicaragua to choose a site that had already been partially developed by Russians in the 1980s [26]. The depth of the hole for steam extraction can vary the first costs of geothermal development significantly. Alquimiatec developers in Ecuador are interested in a site near Quito for its potential as a shallow field. Precise feasibility studies that show a close approximation of the earth’s structure and how deep developers would need to drill are necessary to minimize costs [27].
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If the geothermal prospecting team is not experienced at returning the extracted steam into the hydrological deposit where it came from, this form of energy is not renewable. Poorly designed steam extraction and water reinsertion at Momotombo geothermal power plant in Nicaragua depleted this resource prematurely and necessitated a rehabilitation project to correct the mistakes made [28]. The equipment for drilling geothermal holes is the same as the equipment for extracting oil. Drills tend to be large and not always available. When considering where to develop these sites, it is important to keep in mind the accessibility of the site for this heavy, bulky machinery [26]. Economies of scale are also key when considering geothermal development. Because of the cost of prospecting a site in detail, renting the drills, buying the power generation equipment and running transmission lines to the closest point of interconnection, it makes more economic sense to develop several extraction wells for a large generation facility rather than to develop few holes for small-scale electrical production [26].
Landfills For landfill gas projects, emission reductions are derived from converting the methane that would have been released into the atmosphere from the decomposing garbage into CO2. Since CO2 is a 21 times less potent greenhouse gas (in a 100-year time scale), converting the methane to CO2 results in a reduction of overall warming potential [29]. This conversion can take several forms. It can be completed through burning the methane in flares. It could theoretically be liquefied and used as fuel, but this technique is still experimental [30]. Or, the methane can be burnt to produce CO2 in a turbo-generator and produce electricity. In the latter conversion method, emission reductions are derived not only from creating a less potent greenhouse gas out of the methane, but also from a displacement of fossil fuel, grid-based electricity. Gas is collected from landfills by a system of vertical and/or horizontal holes filled with perforated tubes. A negative pressure is applied to the tubes and the methane is transported to a central flaring or power generation facility. The large number of emission reductions from these projects with lucrative possibilities has led to the aggressive pursuit of landfill gas projects throughout the region with a total of 86 implemented by March of 2008 [31]. Developers like Green Gas and carbon brokers like Ecosecurities were immediately interested in these projects since they seem to offer a plethora of reductions with a minimal amount of infrastructure. Also, the additionality argument for these projects is solid since none of the countries require the bulk of the methane from landfills to be destroyed. However, some countries, such as Mexico, Colombia and Costa Rica, require off-gassing and flare from landfills for safety concerns. Because of this off-gassing requirement there are rudimentary chimneys that have been sporadically inserted in landfills in countries with the requirement. However, these
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chimneys are poorly maintained with flares that are rarely lit and moved infrequently, so the amount of landfill gas that they off-gas is estimated to be only 3–7 per cent of the total gas available in the landfill [32 and 33]. So, even landfills with off-gassing chimneys and flares have sparked the interest of developers. Landfill methane capture projects have to be implemented quickly since the gas in municipal solid waste peaks within a year of the site being covered, and then diminishing amounts of gas are produced over 30 to 50 years [34]. A study for a landfill gas capture project for Mexico City began, but difficulties coordinating with all of the municipalities, trash collectors and local stakeholders has delayed the project past the point when large amounts of methane can be extracted [33]. Therefore, these projects are most economical if implemented while trash is still accumulating or soon thereafter. Also, piping can be installed horizontally and vertically to capture the maximum amount of methane if the project is started while the landfill is still in operation. Methane capture works best when the site is a designated landfill and not a dump. In Latin America, landfills have a plastic liner below the trash, have a water drainage system, and sometimes have materials sorted before they enter. Sorting trash before it enters and having a plastic liner beneath the pile helps ensure that there will be a certain amount of organic waste content [2]. Also, when the landfill is constructed with a stepped design that is based on when the trash was dumped, it is easier for engineers to know where the most gas can be found based on the age of the trash [32]. Experience from landfill projects in the region points to some of the challenges with these projects. Río Azul is a dump (not a landfill) in San José that was retrofitted in 2003 for gas capture and electrical production. A technical closure to repair erosion and make space for new trash coincided with this methane capture project and led to the crushing of 40 per cent of the landfill wells drilled for methane extraction because of poor communication between the various entities that own the plant. Some other holes for methane extraction have been destroyed as the mound of trash has shifted. And, tubes used to transport the methane from the field to the site of generation are now frequently stolen since there is less activity after the technical closure and fewer guards on the site. All of these factors have led to the plant producing 25 per cent of the expected gas and associated emissions reductions [2]. The Zámbiza dump in Quito, Ecuador was retrofitted for flaring and future electrical production and is also under-producing gas by 50 per cent [27]. The lack of a liner on the top of the trash at the Zámbiza dump has not been problematic since the volcanic clay that existed naturally in the area and was used to cover the trash is impermeable and prevents rainwater from entering and methane from escaping so that it can be extracted through piping. However, a river runs under the landfill site and is allowing some methane from the trash to escape. Also, the river is compromising the structural integrity of the site by transferring pollutants from the site to the watershed below and allowing shifting that may one day cause the mountain of trash to move and destroy a highway that the city has constructed on top of the site [27].
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Another landfill in Ecuador, called Las Iguanas, near the city of Guayaquil, is in the process of being converted for methane capture. The project manager is hopeful that the fact that the site is a true landfill and has a stable support system will make the project a success [35]. In Medellín, Colombia, the University of Antioquia is working on how to improve the amount of methane that could be extracted from Curva de Rodas landfill by better covering the site with an impermeable material to allow less oxygen to enter [32]. Although most of the landfills or dumps that are retrofitted for methane capture hope to also generate electricity, few actually do. Often the electrical generation portion of the project is added on after the initial infrastructure to capture methane is put in place. The electrical portion is usually relatively small in comparison to the size of the landfill. For example, of the Ecomethane landfill to energy projects in Mexico, the sizes of electrical capacity will be as follows: Durango 2MW [36], Tultitlan 1.3MW [37], Aguascalientes 2–4MW [38] and Ecatepec 2–5MW [39]. However, because of the low volumes of gas that most of these sites are generating in comparison to the predicted amounts calculated during the feasibility studies, purchasing a generator and other power generation equipment and connecting to the grid is too costly to justify [27]. In some cases, not producing the predicted amount of gas can cost developers more than just the poor investment in equipment. Operators of Río Azul in Costa Rica are currently paying a penalty for not being able to provide the expected electricity because of the low volumes of gas reaching the generators. Developers who also entered a contract for sale of the CERs from this type of project may also be subject to a penalty [2].
Agro-industry and other methane capture possibilities There are other important methane capture possibilities for the region beyond landfills. There are several methane capture options within the agro-industry for farmers that produce methane from animals’ excrement, crops that have residues or wastewater used for processing of organic materials. Fedepalma of Colombia is an association of palm oil producers that has aggregated farmers to collectively undertake construction for methane capture and flaring and/or electrical production. Within the palm oil production, much water is used to extract and clean the palm fruit. This water is full of organic material and is usually treated by allowing it to sit in a series of artificial swamps before being released into the closest waterway. Fedepalma is a group of 32 palm producers collectively taking advantage of CERs by treating this wastewater in a biodigester that would be covered with a plastic liner. Fedepalma has contracted CAEMA of Colombia to create one PDD for all of the biodigesters under an umbrella project. Each palm owner will get a portion of the CERs derived [40]. Other palm producers in Central America are interested in CDM, but this project with Fedepalma is more developed and economically viable than these Central American interests because of this bundling technique.
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The Public Utility of Medellín (Empresas Públicas de Medellín (EPM)) has boldly pioneered methane capture in Latin America from human wastewater treatment plants. The first experiment with this technology began operating in 1999 and has been a huge success. Since this initial application was installed before CDM came into effect in 2001, EPM is hoping that their planned subsequent locations will earn CERs [41]. Japanese bank Sumitomo is also interested in developing methane capture for CDM credit in the wastewater treatment plants they have invested in near San Luis Potosi, Cuidad Juarez and Coyocan, Mexico [42]. Within farms that have a critical mass of animals that is large enough to support methane capture, there are possibilities for the capture of methane from excrement. There are few of these farms in the small Central American countries. Approximately 5000 hogs in full cycle (sows, gilts, boars, weaners and finishers) are needed in order to justify the costs of the biodigester. These animals also have to be in fairly close physical quarters since trying to consolidate wastes from many locations is complicated and expensive. Hog farms have been the ones to be most extensively developed, but there is also interest in dairy farms since the cows are kept in one facility instead of grazing in fields. Also, there could be potential within slaughterhouses to cover and capture methane from the discarded animal blood. Because of these size requirements, only countries with large farms and developed industries can support these projects. Mexico and Brazil dominate the landscape for these projects with 75 per cent of the total in the region as of March 2008. While these projects seem like a relatively easy way to earn reductions, they can be deceptively difficult. An in-depth description of the Mexican experience with these biodigesters follows.
Mexican methane capture case study 3 Introduction Mexico’s well-developed hog industry, which is composed of some 5 million farms and over 18 million pigs, has successfully capitalized on revenues from the Kyoto Protocol’s CDM [43]. Since most hog farms in Mexico used anaerobic lagoons where methane was created during decomposition, the industry in this country was ripe for development of credits from the destruction of this methane. These anaerobic lagoons consist of open pools where solid and liquid waste settles, allowing methane from the excrement to be released into the environment before the contents of the lagoon are eventually discharged into a local waterway, evaporated or sprayed on crops. These lagoons provide minimal remediation of the wastes before they enter waterways and only a rudimentary way of preventing water contamination. Other farms, usually of a smaller size, did not treat the waste at all and simply let it run into waterways and decompose aerobically as it was oxygenated in moving water. At these farms, small quantities of greenhouse gases are emitted as the excrement decomposes and no emission reduction projects can be developed. Therefore,
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only the hog farms with lagoons that produce methane are suitable for digester construction and generation of CERs since in the absence of these digesters, the lagoons would have released methane [44]. In addition to providing local farmers with a solution to the odour and water contamination problems that had begun to create tense relationships with neighbours, these projects are considered desirable from a financial perspective. Occasionally, farmers without biodigesters have to pay fines for the polluted water they discharge from the waste lagoons, which must be 90 per cent free of solid organic matter [44]. By November 2007, 56 per cent of the CDM projects in Mexico were methane capture from hog farms, and these projects constitute 49 per cent of the CERs that will be generated within the country by 2012. With a predicted 11,000 more CERs than will be derived from their closest competitor, Brazil, by 2012, Mexico has also benefited from more biogas capture projects than any other country in the region [45]. Mexico has enjoyed such success with these projects for several reasons. Unlike its neighbours to the south, Mexico has hog farms with a critical mass of animals that is enough to make a digester viable. Also, many of the hog farms belong to a group of farms all pertaining to the same owner, such as Granjas Carroll Mexico (GCM) and Soccoro Romero Sanchez. It is therefore easier in Mexico than other countries to bundle multiple farm sites in order to take advantage of the small-scale methodology, and it is less risky to bundle several biodigesters with the same owner because compliance and communication with farm veterinarians and operators is simplified. The small-scale methodology applies for projects that yield less than 60,000 tonnes of CO2 destroyed annually. These projects can be combined for the sake of lowering project costs by creating only one PDD and being evaluated by one auditor and verifier [46]. These farms have also been developed in Mexico more than any other country in the region because AgCert, the self-proclaimed ‘worldwide leader in agriculturally derived emission reductions’, set up operations in the country and aggressively developed and registered 58 projects by March 2008 with more than 120 staff serving the country [47]. Ecosecurities also took interest in these projects by doing the carbon qualification for 29 methane capture projects from hog farms in Perote, Mexico with Granjas Carroll Mexico. As some farmers began to take advantage of the opportunity to earn money from their hog waste, word spread, and more farms became interested. Despite Mexico’s important role in the market, technical problems with the operation of these farms have placed their future in jeopardy. Future methane capture opportunities in the country could be focused on other types of agroindustries or landfills. Digester functioning Understanding the technical barriers facing biodigesters in Mexico is enhanced by knowledge of how a digester operates. Hog farm or feedlot effluent in the form of excrement runs or is swept into pits and is then pumped or drained into
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Figure 2.2 La Joya Site III biodigester in Puebla, Mexico a large container. Here the excrement is collected and allowed to sit for approximately 30 days in a plastic-lined and capped container. Depending on the density of the excrement, plastic walls are sometimes placed inside the digester to slow the movement of the excrement through the process so that it produces sufficient methane. Sometimes Mexican digesters involve heating, mixing or a plug-flow process where the waste moves through the digester over time. The more simple systems without these features are termed ‘covered lagoons’. See Figure 2.2 for an image of a functioning pressure biodigester in Mexico. After methane is produced, it runs through pipes and a meter to a flare where it is burnt to produce CO2, a greenhouse gas that is 21 times less potent when considered in a 100-year time scale [49]. Sometimes, fans that blow the methane from the digester to the flare must be turned on to ensure that too much methane does not accumulate under the plastic cover. This seemingly simple system is a relatively new technology that has been implemented in several places throughout the world from India to the US. However, each digester is different because of the animals that contribute to its contents and its location; therefore, each system must be considered individually in order to ensure proper functioning [50]. Prerequisites There are certain prerequisites for healthy digester functioning that must be fulfilled in order for CERs to be created. The site of the digester is perhaps the most important factor in digester functioning since digesters that are located at high altitudes or in cool weather have a hard time maintaining the 25–30°
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Celsius temperatures needed. Hog farms at high altitudes in Mexico have had difficulty maintaining a constant temperature. To remediate this problem, operators of several hog farms at high altitude in Perote, Mexico are considering heating the contents of the biodigester with the excess heat from a microturbine that would burn methane from the digester [51]. Also, if located in a site with frequent rain, the digester can remain too cool as pools of water gather on the surface, deflating the methane bubble and lowering the temperature of the excrement. In Mexico, AgCert hog farms in the state of Veracruz often have pooling of water because of the frequent storms during the rainy season. If the project has no full-time grounds keeper and relies on weekly visits from an engineer who lives remotely, then there is sometimes not a pump on site to move the water off the top of the digester surface. And, even if the local farmer has a pump, he does not always cooperate and use it in a timely fashion [44]. The diet of the pigs can cause fluctuations in the pH, which needs to remain close to 7. Adding ingredients to the excrement to make it more acidic or alkaline can cause large pH swings that overcompensate for the original problem. However, one project developer from Granjas Carroll Mexico has found that their excrement is too alkaline at an average of 7.9. This project developer is planning on adding buffer tanks that will neutralize the excrement before it enters the main repository [51]. If the animals suffer from a disease and are prescribed antibiotics or given vaccinations, the medicine can harm the bacteria living in the digester. A close relationship with the farm veterinarian can help prevent the overprescription of antibiotics, and use of medicine on a rotating group of animals to decrease the impact of medicine on the digester. Likewise, non-biodegradable chemicals used to clean animal stalls can also limit the productivity of the digester by killing the micro-organisms that anaerobically decompose the excrement. Empacador Toledo hog farms in Guatemala found that using too much water to clean stalls made the waste too dilute. Toledo managers cut back on their water use from 20 litres per pound of excrement to 5 by manually sweeping waste into pits instead of hosing it and so resolved the digester problems [51]. The most essential part of the system for carbon credits is the actual burning of methane from a flare after it has been captured. Often the pilot light that flares the methane will get blown out by the wind, rain or a piece of the flare that falls on top of it. Many flares have begun to install a solar-powered backup pilot light since failure is so common [51]. However, three of the six digesters the author visited had not properly insulated the cables from the solar pilot light to the flare. The cables were therefore burnt. If the methane does not burn clearly, there is a problem with the gas content. Often an orange flame is indicative of too much CO2 in the digester. Lime is mixed in to reduce the CO2 content. If there is too much hydrogen sulfide in the gas, it can damage the flare over time. To reduce the amount of hydrogen sulfide in the gas, the methane is sometimes passed through a pipe with a piece of iron that attracts the harmful gas. Water is also condensed out of the gas in another filter [44].
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Communication breakdowns Communication between the farmer and the engineer is a critical component of the success of digester projects. If the farmer or grounds keeper cannot pass messages directly to the engineer, critical components of the system like fans, pumps and pipes cannot be repaired in a timely fashion. Often parts for systems have to be transported from the capital or even ordered from abroad. Relying on a remotely located engineer to service a region of farms proves problematic since engineers and farmers often do not have a direct line of communication and messages do not always get relayed successfully [44]. Contacting a project developer that is located abroad is even more complicated if the company does not have permanent operations and staff in the host country. Granjas Carroll Mexico had the experience of paying high project costs for a foreign company called UEM Group, a Kuala Lumpur-based company, to develop a project that used sophisticated technology that replicated a design used on dairy cows. The tubes used have a diameter that is larger than needed and better suited for cows instead of pigs. The plastic cover is susceptible to tears from the mechanical devices that tighten it. The open flare for the system worked for 24 hours before it burnt the pilot light cables and threatened power lines that were sited too close to the flare. Since the project developer is based abroad, they did not have a local engineer who could frequently visit the project and offer technical assistance. As a result of this experience, the project owner hired the locally based and more economical Geosistemas to handle the rest of their digester development [51]. Electrical generation Some of the digester project developers intended to have the system generate electricity from the methane and wrote the PDD to include displacement of carbon-intensive fuels from the electrical grid. While the use of methane to produce electricity is a proven technology, several concerns about this aspect of the project’s operations suggest that the first few years of electrical generation could be a period of trial and error. Too much hydrogen sulfide not only damages the flare, but can also cause malfunctioning of a generator or microturbine. Doubts about the amount of gas that will be produced and the most appropriate form of equipment make it difficult to size the system precisely [52]. AgCert has decided not to incorporate electrical generation in its projects in Mexico because of the high capital costs of electrical equipment and uncertainty about how to use some gas in the generator and then switch the stream of gas to the flare. This project developer points out that for utilization of gas in both a generator and flare, when excess gas builds up, the pilot light must be ready to fire and the switch controlling the flow of gas streams must be synchronized well to prevent the release of unburned gas into the atmosphere. According to one of AgCert’s engineers, the gas cannot be sent to both the flare and generator simultaneously [44]. Despite these doubts about electrical generation, the farmers at many of this project developer’s farms are planning on
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buying generators themselves to make use of the methane and reduce or eliminate their electricity bills, as they have heard can be done [53]. Excess electricity that is not used by the farm could theoretically be fed into the grid as is being proposed by Ecoinvest in Empacador Toledo’s hog farms in Guatemala. However, the structure of the Mexican market is such that it is complicated to sell excess electricity back to the grid. Generators can either earn 85 per cent of the state-run companies’ avoided cost or apply to be a selfsupplier and structure a Power Purchase Agreement (PPA) with a large consumer who must own part of the generation project. Under both schemes, the generator must pay high transmission tariffs. Also, the project owner is responsible for setting up electricity lines from the point of generation to the load [54]. Thus far, no hog farms have chosen to invest in a generator that can produce more electricity and feed it into the grid with the hope of earning money from the excess generation. Therefore, electrical generation only serves the farmer’s needs and earns carbon credits equal to the emissions that would have been burnt if the farm was served by energy from the national grid or used in a diesel generator on site. Regulatory hurdles Several upcoming regulations will make it more difficult to demonstrate additionality for biodigester projects in Mexico. Additionality is a prerequisite for CDM projects that attempts to ensure that all projects that receive credit would not have occurred in a business-as-usual scenario. If regulations or financial incentives exist that mandate or encourage the creation of a project, then it is more difficult to earn CDM revenues.4 The benefits of biodigesters and new law that requires their existence may jeopardize the additionality of these projects. Farmers were in some cases paying fines for the water they emitted as effluent because their remediation ponds did not eliminate 90 per cent of solids and qualify as acceptable according to the Secretary of the Environment and Natural Resources (1996) Standard [55]. Digesters improve the quality of the water, avoiding the payment of fines, which for some farms amounted to $1000 per year. The digester also negates the purchase of expensive equipment like solids separators to improve the quality of the water [53]. For these reasons, a 2007 regulation mandates that new hog farms install biodigesters. This law will probably limit future development for CER production to only those currently existing farms that do not have digesters and use lagoons to process waste [50]. The only way that new digesters could be additional with this regulation is if this regulation is routinely not followed for a few years and the PDD author can prove that the regulation is not enforced [56]. Hog farms often have strained relationships with neighbours not only because of the quality of water emitted from their operations, but also because of the odour of the farms. There is no formal odour ordinance, but resolution of these issues through the creation of biodigesters could be seen in the future as necessary to maintaining cordial relations with those surrounding the
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project. About ten years ago, the state of Colorado in the US passed a law requiring the state to regulate odours from hog farms [57]. An incentive for farmers to buy generators and use the methane produced from their hogs to produce electricity exists in the state of Puebla. This incentive supposedly pays half of the first costs of a generator, but there are doubts as to whether there will be enough money in the budget to cover all farmers that may be interested in this incentive. Socorro Romero Sanchez’s farmers have begun taking advantage of this law; the government purchased the first of three generators this company began using on its farms [50 and 53]. If the use of this incentive became widespread, then financial additionality would become difficult to prove. Future development of methane capture projects Given the aforementioned problems of methane digesters in Mexico, AgCert has not been able to earn the emission reductions it expected from these projects, which make up a large part of the company’s portfolio, and has defaulted in forward-sale CER contracts. As a result, the AgCert stock has dropped and in May of 2008, AES was in the process of buying AgCert [58]. Ecosecurities had similar problems when it guaranteed CER delivery and was left with a quarter fewer CERs than it predicted in November of 2007 [59]. However, by the third quarter of 2008, both of these companies’ stocks had begun to recover, and the problems initially encountered with the biodigesters began to be resolved and gas started to be produced in more significant quantities [44]. Hog farms were the first biodigesters to be developed in Mexico, but opportunities for methane capture exist within several other industries. AgCert was doing tests on slaughterhouses in September 2007 to see if blood that currently pools in artificial lagoons before being discharged into waterways is viscous enough to produce significant amounts of methane. While AgCert had dropped this effort by the end of 2008, Geosistemas had successfully constructed a slaughterhouse biodigester in the Mexican state of Veracruz. High density dairy farms and chicken coops are future areas being considered for methane capture [44]. As of March 2008, 14 landfill gas projects had been registered in Mexico [60]. All of these landfills plan on having small amounts of electrical generation like the first three projects in the country, which had capacities of 1–7MW [61]. The future potential within landfills in Mexico for methane capture is immense, but riddled with the challenges that were discussed previously in this chapter. Mexican methane capture conclusion Given the questionable impact of future regulation that could negate digester additionality, plus technical difficulties and communication barriers, the future of methane capture for hog farms in Mexico is uncertain. The presence of large hog farms with one owner has contributed to the success of these projects thus
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far, but Mexico’s portfolio of projects may be diversified significantly to include other types of CDM projects in the coming years as the challenges of these projects become better known. Or, the period of digester trial and error may be less onerous than expected and push development in new areas of industry such as slaughterhouses, dairy farms, coffee farms, palm oil plantations and landfills. Of these fledgling industries, landfills seem to be the most promising in terms of emission reductions and investor interest. However, experience from landfill gas capture projects throughout the region suggests that these projects may be as difficult to operate as hog farm gas capture, as a different set of technical, regulatory and social problems plague them.
Conclusion The experience of CDM project developers shows that no type of renewable energy project is immune to technical and technology problems. Even hydroelectric projects that have been implemented for hundreds of years are not without challenges, because of the remote nature of sites and the instability of the grid. Less familiar projects, such as methane capture and wind, which necessitate different equipment and conditions that locals are not familiar with, have created more difficulties. Developed countries are still refining the technologies for these systems and studying them as intermittent resources that will impact the grid dynamics. As familiarity with these renewable energy technologies and their maintenance increases in developed countries, increased expertise, training and knowledge should be transferred to Latin America.
Notes 1 Spinning reserves are extra generating capacity that is synchronized to the grid system and runs constantly in order to provide power backup and can be quickly utilized by increasing the amount of torque on the turbine’s rotor [62]. 2 Net metering allows electrical customers who generate their own electricity to sell it back to the electrical company. 3 A revised version of the content in this section was published as an article entitled ‘The Status and Future of Methane Destruction Projects in Mexico’ in Elsevier’s Renewable Energy in June of 2008. 4 Even though these regulations could make it more difficult to prove additionality, small-scale projects have the benefit of only having to demonstrate additionality in one of the several additionality categories, which include technological, financial, prevailing practice and other categories. Large projects must show additionality in all of these categories [46].
References 1
2
World Bank (2005) ‘Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005’, available from http://info.worldbank.org/etools/lacelectricity/ Samora, R. (2007) Interview with R. Samora, Head of the Rio Azul Plant for SARET, 28 September, San José, Costa Rica
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Bueso, C. (2007) Interview with C Bueso, Coronado Hydro Site Engineer for ENERGIZA, 13 September, San Esteban, Olancho, Honduras Union Fenosa International (2006) La Joya Hydroelectric Project Project Design Document, UNFCCC, 28 July Point Carbon (2008) ‘EU member states draw closer to common guidelines on “large” hydro’, Carbon Market News, 5 March Climate Focus (2008) ‘Trading secondary CERs from hydropower projects above 20MW’, Carbon Market Background Paper, January Coviello, M. F. (2007) Renewable Energy Sources in Latin America and the Caribbean: Two Years after Bonn, Economic Commission for Latin America and the Caribbean (ECLAC), GTZ, and One World, p20 Garizabal, C. (2007) Interview with C. Garizabal, Departamento de Planificación Empresas Publicas Medellín, 15 October, Medellín, Colombia Iberdrola (2007) La Ventosa Project Design Document, UNFCCC, 14 June Barco-Roda, J. (2007) Interview with J. Barco-Roda, NorWind Project Developer, 7 November, Lima, Peru Tasende, D. (2007) Interview with D. Tasende, Director of Renewables, UTE, 27 November, Montevideo, Uruguay National Renewable Energy Laboratory (2005) ‘Advancing clean energy use in Mexico’, Innovation for Our Energy Future (Fact Sheet), September Nuestromar Foundation (2006) ‘Se desmoronó el primer molino eólico fabricado en el país: 3 heridos’ (Comodoro Rivadavia, Chubut), newsbrief, 18 July, available at www.nuestromar.org/noticias/destacados072006_se_desmorono_el_primer_ molino_eolico_fabricado_en_el_pais_3_heri Vélez, O. L. (2007) Interview with O. L. Vélez, Empresas Públicas de Medellín, Subdirección Medio Ambiente, 18 October, Medellín, Colombia Gottfried, P. (2007) Interview with P. Gottfried, Project Developer for Fuerza Eólica, 27 August, Mexico City, Mexico Sandoval, A., Colorado, F. and Aramburo, J. (2007) Interviews with A. Sandoval, F. Colorado and J. Aramburo, Empresas Públicas de Medellín, 18 October, Medellín, Colombia Randall, G., Vilhauer, R. and Thompson, C. (2001) ‘Characterizing the effects of high wind penetration on a small isolated grid in Arctic Alaska’, NREL/CP-50030668, September, National Renewable Energy Laboratory, Golden, CO Feitosa, E. A. and Carla, A. (2006) ‘Brazilian Wind Energy Programme: Status and perspectives’, presentation at Fifth World Wind Energy Conference, New Delhi, 6–8 November Faundez, P. (2007) Interview with P. Faundez, Engineer for Ecoingenieros, 14 November, Santiago, Chile Gomez, J. C. (2007) Interview with J. C. Gomez, Plant Manager for Ecoelectric at Valdez Sugarmill, 28 October, El Milagro, Ecuador Puga, A. (2007) Interview with A. Puga, San Carlos Sugarmill Engineer, 5 November, Guayas, Ecuador Camara, A. (2007) Interview with A. Camara, Ecoinvest Carbon Consultant, 22 November, Buenos Aires, Argentina Celulosa Aruco y Constitución SA (2006) Nueva Aldea Biomass Power Plant Phase 2 Project Design Document, UNFCCC, 5 January Celulosa Aruco y Constitución SA (2006) Trupan Biomass Power Plant in Chile Project Design Document, UNFCCC, 24 May Forestal Russfin Limited (2006) Russfin Biomass CHP Plant Project Project Design Document, UNFCCC, 4 October
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26 Dias, J. (2007) Interview with J. Dias, Site Engineer for Polaris, 19 September, San Jacinto, Nicaragua 27 Zeller, R. (2007) Interview with R. Zeller, President of Alquimiatec, 24 October, Quito, Ecuador 28 Romero, A. (2007) Interview with A. Romero, Project Developer for Polaris’ San Jacinto Geothermal project, 18 September, Managua, Nicaragua 29 US Environmental Protection Agency (2006), ‘Methane: Greenhouse gas properties’, http://epa.gov/methane/scientific.html, 19 October 30 Energy Bulletin (2005) ‘“Stranded” natural gas to liquid fuel: Is it time?’, 15 January, available from www.energybulletin.net/4057.html 31 CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April 32 Uribe, C. (2007) Interview with C. Uribe, PDD Author of Curva de Rodas, 17 October, Medellín, Colombia 33 Márquez, F. (2007) Interview with F. Márquez, Estudios y Técnicas Especializadas en Ingeniera, 29 August, Mexico City, Mexico 34 Falzon, J. (1997) ‘Landfill gas: An Australian perspective’, in Proceedings from the Sixth International Landfill Symposium, 13–17 October, Cagliari, Italy 35 Intriago, A. (2007) Interview with A. Intriago, Site Manager of Las Iguanas, 2 November, Guayaquil, Ecuador 36 Ecosecurities, Durango (2007) EcoMethane Landfill Gas to Energy Project Project Design Document, UNFCCC, 10 November 37 Ecosecurities, Tultitlan (2007) EcoMethane Landfill Gas to Energy Project Project Design Document, UNFCCC, 10 August 38 Ecosecurities, Aguascalientes (2007) EcoMethane Landfill Gas to Energy Project Project Design Document, UNFCCC, 5 February 39 Ecosecurities, Ecatepec (2007) EcoMethane Landfill Gas to Energy Project Project Design Document, UNFCCC, 7 April 40 Mantilla Soto, L. P. (2007) Interview with L. P. Mantilla Soto, Project Developer for Fedepalma, 12 October, Medellín, Colombia 41 Carmona, C. (2007) Interview with C. Carmona, Departamento de Planificación Empresas Publicas Medellín, 15 October, Medellín, Colombia 42 Ueda, H. (2007) Interview with H. Ueda, Sumitomo Corporation, 27 August, Mexico City, Mexico 43 Ecosecurities (2007) Granjas Carroll Mexico (GCM) I Project Design Document, UNFCCC, 18 September, p10 44 Gavaldon, H. (2007) Interview with H. Gavaldon, AgCert Field Engineer, Mexico, 20 August, Veracruz, Mexico 45 CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April. 46 United Nations Development Programme (2006) ‘Simplified procedures for smallscale projects in CDM’, 1 August 47 AgCert, ‘Welcome to AgCert’, www.agcert.com/, accessed 3 November 2007 48 Castillo, I. (2007) Interview with I. Castillo, AgCert Engineer, 17 August, Mexico City, Mexico 49 US Environmental Protection Agency (2006) ‘Methane’, www.epa.gov/methane/ scientific.html, updated 19 October 50 Ochoa, V. (2007) Interview with V. Ochoa, General Manager of Granjas Carroll Mexico, 22 August, Perote, Mexico 51 Landa, J. (2007) Interview with J. Landa, Granjas Carroll Engineer and Construction Supervisor, 22 August, Perote, Mexico
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52 Landa Herrera, J. L. (2007) Interview with J. L. Landa Herrera, Director de Construcción, Medio Ambiente, y Mantenimiento of Granjas Carroll Mexico, 24 August, Perote, Mexico 53 Perez, J. (2007) Interview with J. Perez, Farm Veterinarian for Soccoro Romero Sanchez farms, 20 August, Teohuacan, Mexico 54 Secretaria de Energía de Mexico (1992) ‘Ley del Servicio Público de Energía Eléctrica’, in Articulo 3º, 23 December 55 Secretary of the Environment and Natural Resources of Mexico (1996) Standard NOM-002, p8 56 CDM Executive Board 36, ‘Methodological Tool: Tool for the demonstration and assessment of additionality’, Version 04, UNFCCC, p4 57 Legislative Council of Colorado (1998) Amendment 14: Regulation of Commercial Hog Facilities, State of Colorado 58 Point Carbon (2008) ‘U.S. power company AES proposes AgCert rescue package’, Carbon Market News, 13 May 59 Carbon Finance (2007) ‘EcoSecurities’ woes prompt CER rethink’, 20 November 60 CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, March 61 CDM UNFCCC, Project Search, 30 October 2007 available from http://cdm.unfccc.int/Projects/projsearch.html 62 California Independent System Operator (2006) ‘Settlements guide: Spinning reserve due ISO’, 1 January
3 Social Barriers
Social barriers to project development fall into a variety of categories. The most issues arise when there is resistance to a project by the country’s citizens. Sometimes these conflicts arise because locals want revenues or other benefits from the project owners in exchange for permission to develop. Other times, problems result when the project is not incorporated into the community in a way that is equitable and sustainable. These issues in general, as well as examples from two of the most controversial projects, landfill gas capture and hydro development, will be described. Other types of social problems that jeopardize Clean Development Mechanism (CDM) project success include stolen electricity, maintaining the security of sites, legal issues of acquiring land ownership, and difficulty facilitating productive relationships among foreign developers.
Stealing electricity A culture of not paying for electricity and hooking into the grid illegally has led to black losses of 42 per cent in the Dominican Republic, 31 per cent in Paraguay, 28 per cent in Nicaragua and 24 per cent in Ecuador [1]. Typical transmission and distribution losses due to natural causes average about 7–8 per cent. (This topic is covered in more detail in Chapter 18, ‘Ecuador’) These huge losses affect a project’s ability to exist. The distributor that pays the generator measures the kilowatt-hours produced on site and sent into the grid. Therefore, the distributor is responsible for paying the wholesale price for all of the electricity produced, even if one-quarter to one-half of it is stolen. Then distribution companies begin operating at a loss and eventually cannot pay generators for the electricity produced. Waiting months for late energy payments and having to file paperwork to eventually receive payment creates a disincentive for project developers. Machala Power of Ecuador even had to sue its distributor for an overdue energy payment [2]. Rate makers in Ecuador have attempted to recover some of these financial losses for distribution companies in the rate formula, but are hesitant to increase the price of electricity too much as it would prevent customers from paying and encourage more theft [3].
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In areas like Ecuador where the unnatural distribution losses are very high, neither distribution company representatives nor the police are adequately equipped to enter neighbourhoods and demand payments. The national army is required for this task. While one may assume that only poor neighborhoods steal electricity, the truth is that in Ecuador both rich, gated communities and poor slums that have sprung up on the outskirts of cities are stealing power in almost equal amounts [4]. Better metering devices, a culture of paying for electricity, and improved energy quality that locals can pay for are steps to help solve these problems. The Colombian government hired psychologists to help design a programme to reduce losses and has had success at lowering them from 23 per cent to 16 per cent from 1995 to 2005. One of the tactics used was to offer customers who pay their electricity bills for the first few months free professional soccer game tickets [2].
Security Renewable energy sites, as previously mentioned, tend to be located in remote areas. Often it is not safe for investors or engineers to travel and visit the site alone, and developers must hire bodyguards to accompany all visitors and station permanent guards on site. The province of Olancho, Honduras requires this type of vigilance for the sites of La Babilonia and El Coronado [5]. Río Azul landfill in Costa Rica, which uses methane for electrical generation, needs more than the one guard that watches the premises now that the site is temporarily not accepting trash and has fewer people in the grounds. However, technical problems have reduced the project’s revenue from electricity payments and Certified Emission Reductions (CERs), and the managers cannot afford extra security [6].
Legal challenges Sometimes developers must first establish who the rightful owner of the land is before they can buy or rent the land for generation activities. Often the people living on the land are not the legal owners and the company must then go through the process of compensating the owner and also providing relocation or local benefits for the residents [7 and 8]. This situation occurred during Fuerza Eólica’s attempt to develop a wind farm in Oaxaca, Mexico [8]. This process can be lengthy, cause project delays and add an extra expense not budgeted for in the project plan.
Other social issues Latin Americans can be either fiercely patriotic or sceptical of their own countrymen’s ability to do project development. These prejudices can influence the success of CDM projects as people often have to work with CDM consultants or engineers from both their own country and abroad. According to an
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Ecuadorian project developer, Colombians do not want to work with other Latin American engineers from other countries [4], and local Honduran developers prefer to work with foreign engineers and brokers [9]. At Valdez Sugarmill in Ecuador, where sugarcane residue was being used for electricity and generating CERs through the replacement of grid electricity, locals were at first resistant to working with Brazilians. The Brazilians made a recommendation for putting in additional structural support for the new power house. Valdez’ plant operators did not follow this suggestion and after five days of downpours during the rainy season, the foundation was unstable. Then, the advice was followed and stabilization beams were installed [10].
Community resistance Community acceptance of a project is paramount to the project’s success since locals may bar project development. In Peru, 80 per cent of the community must be in agreement with the project in order for the developer to get the land permit [11]. Since the local acceptance of a project in the form of a stakeholder meeting is a required part of the CDM process, dissatisfied citizens or communities unwilling to participate can prevent CER issuance. In Guatemala, Río Blanco could not even gain the national CDM approval because it was so controversial among locals [12]. Within the Latin American countries, high levels of corruption lead to difficulty siting projects. Communities often refuse to allow the development of projects until terms which may include political concessions, construction of soccer fields, health centres, schools and water treatment plants are completed. In Oaxaca, Mexico, Benito Juarez hydroelectric has been stalled because locals associate private business with the government, against which they are striking in order to influence decisions made by the Oaxacan governor [7]. Also, communities may demand free or reduced-cost electricity, or step-down transformers to access the electricity from the project. Local officials may require bribes before construction can start. Both La Babilonia and El Coronado, small hydro projects looking for CDM revenues in Honduras, suffered delays due to attempts to block development in exchange for bribes [13]. Sometimes these bribe attempts happen because community members think power companies are rich and can afford to make payouts. Other times community members make demands because they think that they will suffer from the operation of the hydro project in terms of water or agricultural land lost. In the case of El Coronado, only one part of the community benefited from the project development by receiving step-down transformers and access to electricity. The part of the community that did not benefit, because it was not in close proximity to the project site, was responsible for making demands to the power company [13]. These types of social barriers could be even more prevalent in the future if the programmatic CDM methodology, which was recently accepted in July of 2007 and is described in Chapter 8, ‘Small-Scale Barriers’, allows future rural
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energy projects to be viable. If some people do not receive the electricity from these systems or are charged more for it, disagreement between village members could occur. Also, the person who maintains the system must be chosen carefully so as not to disrupt the hierarchy of the village, but also to ensure that a capable individual is in charge of the system. Opportunities for corruption are prevalent if the CDM revenues are not managed in a responsible way. In order to ensure that these pitfalls are not realized, locals must be trained in non-technical skills of administration and rule-making in order to successfully run a mini-utility [9]. Or, parts could be stolen if the system is not incorporated well into the community’s existing hierarchy and structure [14]. Sandia National Laboratories has implemented projects that incorporate training and safeguarding measures in order to avoid these pitfalls [15 and 16].
Project-specific conflicts Hydro Hydro projects can be particularly controversial because they can displace communities as large areas of land are flooded and prevent communities from having access to the water for current and future needs. These problems are of such a magnitude that some hydro projects face opposition from groups that are not just local communities. Large hydro applications that were constructed in the 1970s and 1980s like Chixoy in Guatemala, Bayeno in Panama and Río Cajon in Honduras had no environmental impact plan, and displaced people. Those who resisted Chixoy were even killed, and were made martyrs in a Public Broadcasting Service documentary about dam construction [17]. This violent history attracted the attention of international and local environmental groups that now block the development of both small and large hydro applications on the grounds that these projects destroy natural river ecosystems and local cultures. Communities can be impacted greatly by having their water regime changed. Hydro plants limit some illicit harvesting from small coffee and bean plantations and prevent locals from harvesting wood as the upstream land is usually purchased in order to provide watershed protection [5]. Sometimes tracts of land that were owned or occupied by farmers for agriculture or dwellings must be sold to project owners to provide watershed protection and a buffer zone for upstream flooding.1 Because of this land seizure, locals are resentful of the construction and see the developers as unwanted foreign entities in the community. Remote communities off the grid become resentful of the project as it often does not provide them with electricity. Acción Ecológica of Ecuador contends that companies will apply for the rights to water for hydroelectric generation and steal these rights from locals. According to the Water Law of 1972, the rights to water belong to the state in order to reduce conflicts between landowners over irrigation rights. Private citizens and companies have to petition for the right to the water. If the
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community has not formally petitioned and earned their water right, then the company can earn it and leave the community with a dearth of water [18]. NGOs tend to have success barring hydro projects in countries where the community of environmental groups is active and focused on the hydro industry. In countries like Guatemala, NGOs have rallied against hydro development. There, this clean form of electricity is seen as a disturbance to locals and equated to mining as both industries involve foreign developers and disrupt local communities and environments. Therefore, there is a strong movement against both hydro and extractive industry development that is led by the group Madre Selva in Guatemala City. This NGO has drawn the attention of other NGOs in Europe to support its causes [19]. This opposition has grown so strong that now NGOs will sometimes oppose a project simply based on its type as being hydro even if there is nothing in particular about the project that is environmentally or socially damaging. Peru, on the other hand, has had little resistance to new hydro projects because environmentalists have targeted their efforts on the mining development sweeping the country [20]. Guatemalan environmental groups have lumped together hydro and mining companies because the issue of privatization and increased trade liberalization, with adoption of policies such as the Central American Free Trade Agreement, is very controversial. The debate over privatization has tended to polarize people. Those who support private investment tend to think it brings efficiency and lower prices to the consumers while those who support more governmental control think that privatization only benefits the wealthy and leaves the poor without money to pay for newly privatized services, such as water and electricity, that are basic needs. This debate has caused some to demonize hydro facilities and all private development because of its connection with foreign private investment [19]. More details about the electrical sector privatization experiment and its results in each country are described in the country-specific chapters. Developers claim that communities are extorting them to get their way. And often developers would rather appease this extortion by paying a bribe rather than have their project delayed and revenues forgone. Developers claim that they often have to build schools and bridges, provide free electricity and satisfy other bribes in order to develop their projects. International environmental groups, they contend, are only involved in the hydro development because they want to stall the project, demand money for the community, and benefit from part of these proceeds [21]. The location of many excellent hydro resources in protected parks or indigenous territory provides environmentalists and human rights groups with compelling legal arguments against development. In Ecuador, the Environmental Impact Statement for Hidro Victoria was complicated and took longer than expected because part of the tubing for this run-of-river project passes through a buffer zone on the outside of a national park. Developers needed a presidential decree that said that the project was necessary for the stability of Ecuador’s electrical grid in order to gain access to this buffer zone [22].
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Landfills Landfills and dumps can create special social problems as people who once scavenged the garbage are suddenly left without jobs. Usually, landfill gas capture coincides with the technical closure of the plant. So, the scavengers would not have a source of income anyway as the site is covered with dirt and a plastic liner regardless of whether the project was retrofitted for landfill gas capture and made eligible for CDM revenues. However, scavengers are apt to blame the entity developing the project or technical closure for their lack of a livelihood. Sometimes these people are legally contracted by the site operator to help recycle garbage. Most often, though, scavengers are self-employed by gathering material for resale or recycling and live close to the site. In Managua, Nicaragua, hundreds of scavengers live around La Chureca dump. Locals living on the site were offered new homes in different parts of the country after Hurricane Mitch ravaged the country in 1998, but many of these scavengers chose to sell the house and return to the job they knew at La Chureca. There are two exploratory wells on the site monitoring the possibility of gas capture, but trying to develop the site would inevitably lead to conflict [23]. Managers of Río Azul landfill in Costa Rica have had locals living around the site enter illegally at night to cut and steal the plastic tubing that carries the methane from the trash to the power house. Plant engineers hypothesize that some of this theft has resulted because the people who were employed to sort the trash have been out of work since a temporary technical closure of the plant began during the summer of 2007 [6]. In Colombia, the social experiences with developing municipally owned landfills have been mixed. MGM International tried to develop sites in Barranquilla, but found that many scavengers lived on the site. Because the local environmental authority mandated that the company provide alternative sources of income for these people, MGM proposed that a percentage of the CERs go to a recycling centre where the people would work since they are already masterful sorters. However, the project is currently at a standstill [24]. Interaseo of Colombia, on the other hand, has had no problem developing its privately owned landfills for methane capture. This firm refuses to pay scavengers or make other concessions for the community and uses Decree 1713 of 2002, which prohibits scavenging, as its legal backing [25].
Possible remedies Community resistance to projects in many cases results from a lack of socialization whereby the project, its goals of producing electricity and, in the case of the CDM, producing emission reductions and sustainable development, are not clearly articulated to community members. The project developers that had the most success with hydro projects in general were those that attempted to have a direct and frequent dialogue with the community [22]. Making sure that communication and verbal agreements with communities are clear may involve
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hiring translators and/or spending enough time with the community to be considered trustworthy. Having community members sign documents that they cannot read can lead to confusion on the part of both parties about what is expected and delivered. It is also important to note here that not all hydro projects experience resistance from the community. In cases where project developers experienced community opposition, it is essential to investigate which procedure the project developer followed for implementation of the project and compare it to case study examples documented by entities like Sandia National Laboratories that show successful project implementation [26]. Some project developers have proposed creating a matrix that shows the required remunerations for development to ensure an equitable negotiation for both the company and locals [27]. Standardizing the benefits that the community earns would help prevent communities and companies from being taken advantage of in the negotiation process. However, creating this matrix is complicated since each project has singularities that need to be considered individually. There is a need for clear education and frequent communication about project effects on communities to improve the tense relationship between locals and developers. These solutions for community involvement could also be applied to landfill gas capture projects to mitigate the social concerns of scavengers who will be left without jobs. Companies in Costa Rica have begun addressing these concerns by encouraging companies to comply with the International Standards Organization’s 14,000 certification series for environmental responsibility [27]. Panama has taken a different approach by proposing a law that requires 20–30 per cent of the CERs generated to go to community development [28]. Colombia offers a 35 per cent income tax deduction on the project if 50 per cent of the CERs are reinvested in community development [29]. Hidro Victoria of Ecuador has solved the social problem by having the community have an equity stake in the project. The community will own 25 per cent of project. The Canje de Deuda of Spain is paying for this equity stake and cancelling some of Ecuador’s debt to Spain in exchange for having the first rights to buying the CERs derived from the projects. The total equity stake comes to $2.2 million at the start of the project. The community is very satisfied with this agreement and has been assured that the water from the run-of-river application will be returned to the river, on which they rely, before it reaches the community. The active environmental community in Ecuador has not protested against this particular project [22]. Empresas Varias of Medellín, Colombia, has resolved the landfill social problems for the Curva de Rodas site they hope to develop by asking a local university to partner with them. Empresas Varias, who operated the landfill until 2003 and was responsible for the technical closure, has given money many times to try to help compensate people for living near a landfill, but the money sometimes filtered through the municipal government and did not actually benefit the locals. Therefore, Empresas Varias was sceptical that it
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would be able to undertake a transformation of the site that required the community’s approval. Empreas Varias decided to have the Antioquia University help them with the CDM project cycle and community relations because this school has a reputation of being of and for the people and could use the CDM revenues as a social investment since it has many students from the lowest social classes (1 and 2), which Colombia categorizes to structure cross incentives and pricing differences for utility payments. This selection has helped give credibility to mediators, and university students and faculty from an interdisciplinary committee of anthropologists, sociologists and engineers have had successful experiences talking with the community. All of the money the university earns from this project will be invested in research projects of this public education facility. Using a carbon broker like MGM International, which has a large presence and office in Medellín, may have lent more expertise to the project, but, in general, locals are suspicious of companies. The Antioquia interdisciplinary group has specified in a contract that 5 per cent of the CER revenues that will be generated will be reinvested back into the community for construction of new roofs, a soccer field and a bus stop. While these examples of resolving social problems can serve to guide future project developers, they will not be able to address all future community relations problems. The individual nature of each project will necessitate careful consideration of the appropriate steps to take to avoid conflict.
Conclusion A variety of social problems ranging through stolen electricity, site security, land deeds and community resistance jeopardize CDM project success. In particular, hydro and landfill projects tend to raise the most social issues. As a result of recent societal integration problems, a variety of creative solutions to these problems have been pioneered for individual projects.
Note 1 These communities can also be educated to protect these watershed zones as is being done by Fundación Defensores de la Naturaleza in Guatemala [30].
References 1 2 3 4
World Bank (2005) ‘Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005’, World Bank, Washington, DC Castillo, D. (2007) Interview with D. Castillo, President of ERD Consultants, 18 November, Guayaquil, Ecuador Carrión, R. (2007) Interview with R. Carrión, CONELEC Administrator in Planning, 26 October, Quito, Ecuador Zeller, R. (2007) Interview with R. Zeller, President of Alquimiatec, 24 October, Quito, Ecuador
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5 6 7 8 9
10 11 12
13 14 15 16 17 18 19 20
21 22 23 24 25 26 27
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Bueso, C. (2007) Interview with C. Bueso, Coronado Hydro Site Engineer for ENERGIZA, 13 September, San Esteban, Olancho, Honduras Samora, R. (2007) Interview with R. Samora, Head of the Rio Azul Plant for SARET, 28 September, San José, Costa Rica Mekler, J. (2007) Interview with J Mekler, Project Developer for COMEXHIDRO, 15 August, Mexico City, Mexico Gottfried, P. (2007) Interview with P. Gottfried, Project Manager for Fuerza Eólica of Mexico, 17 August, Mexico City, Mexico Ley, D. (2007) Interview with D. Ley, United Nations Consultant for Economic Commission for Latin America and the Caribbean, 16 August, Mexico City, Mexico Gomez, J. C. (2007) Interview with J. C. Gomez, Plant Manager for Ecoelectric at Valdez Sugarmill, 28 October, El Milagro, Ecuador Harmon, G. C. (2007) Interview with G. C. Harmon, Santa Rosa Project Developer, 7 November, Lima, Peru Castaneda, R. (2007) Interview with R. Castaneda, Designated National Authority of Guatemala, Ministerio del Medio Ambiente y Recursos Naturales, 3 September, Guatemala City, Guatemala Mayin, C. A. M. (2007) Interview with C. A. M. Mayin, Presidente Patronato, 13 September, San Esteban, Olancho, Honduras Nathan Associates (2006) ‘Integrity in Bangledesh’s rural electrification’, prepared for USAID, April, p5 Ley, D. (2006) ‘Solar power meets rural energy needs in Guatemala’, Sandia National Laboratories Ley, D. (2006) ‘Using renewable energy to promote ecotourism’, Sandia National Laboratories Johnson, B. R. (2007) ‘Chixoy Dam legacy issues study’, available from http://shr.aaas.org/guatemala/chixoy/chixoy.htm Reyes, D. (2007) Interview with D. Reyes, Acción Ecológica Director of Hydro Project, 26 October, Quito, Ecuador Conde, O. (2007) Interview with O. Conde, Representative from Madre Selva, 6 September, Guatemala City, Guatemala Melindo, M., Armas, H. and Reyes, J. O. (2007) Interview with M. Melindo, H. Armas and J. O. Reyes, Ministerio de Energía y Minas, Unidad de Electrificación, 6 November, Lima, Peru Riviera, A. (2007) Interview with A. Riviera, CEO and President of Groupo Riviera, 7 September, Guatemala City, Guatemala Muñoz, F. (2007) Interview with F. Muñoz, Hidrovictoria project developer, 28 October, Quito, Ecuador Cinteno, M. (2007) Interview with M. Cinteno, La Chureca Site Manager for the City of Managua, 19 September, Managua, Nicaragua Gonzalez, M. (2007) Interview with M. Gonzalez, Carbon Consultant for MGM International, 19 October, Medellin, Colombia Gonzalez, J. (2007) Interview with J. Gonzalez, Project Developer for Interaseo, 16 October, Medellin, Colombia Smith, B. G. and Ley, D. (2009) ‘Sustainable tourism and clean water project for two Guatemalan communities: A case study’, Desalination (in press) Alvarado, M. (2007) Interview with M. Alvarado, President of Asociación Costarricense de Productores de Energía (ACOPE), 25 September, San José, Costa Rica
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28 Días, F. (2007) Interview with F. Días, Comisión de Política Energética, Ministerio de Economía y Finanzas, 5 October, Panama City, Panama 29 Fernandez, O. (2007) Interview with O. Fernandez, Departamento de Generación de Empresas Publicas de Medellín, 18 October, Medellín, Colombia 30 Ley, D. (2008) Interview with D. Ley, Former United Nations ECLAC Consultant, 30 April
4 Financial Barriers
Financial barriers stem from a variety of areas that include general renewable energy project problems, country instability due to a turbulent political and economic climate, institutional rigidity and low Certified Emission Reduction (CER) prices in general and especially as offered by international development banks, and a host of Clean Development Mechanism (CDM)-specific problems.
General renewable energy project problems Renewable energy projects are unique in their demands on project financing because of the feasibility studies necessary, the long payback of the projects due to the high initial project costs, and the perception of high risk for some technologies. Expensive feasibility studies must be undertaken to choose the proper site for development. These studies consist of a resource assessment and initial environmental impact reports. This stage of the project development is considered pre-investment and may or may not be repaid, depending on whether or not the project is developed. It is usually taken on by the company interested in development with the hope that capital invested during this time will be recovered through the operation of the plant. However, in countries with significant political risk, this investment is lacking and prevents projects from even being considered. Also, project developers can struggle to secure financing since renewable energy projects tend to have a long payback time before the high capital costs will be recovered. (See Table 4.1 for an overview of the levelized and investment costs of renewable energy versus the levelized cost of conventional energy. Generation costs include the initial cost of investment and fuel whereas the investment costs only take into account the first costs of the system.) Typically, an acceptable internal rate of return on a project is 25 per cent; however, investment funds will occasionally not accept lower than a 30 per cent return on investment [1]. This translates into approximately a four to fiveyear payback. Hydro projects will sometimes have up to a ten-year payback.
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Table 4.1 Investment and average generation costs for various energy technologies Technology Natural gas combined cycle Coal Nuclear Wind Biomass Geothermal Small hydro Photovoltaic
Average generation costs (US ¢/kWh)
Investment costs (US $/Watt)
3.5 4.8 4.8 5.5 6.5 6.5 7.5 55
0.6 1.2 1.8 1.4 2 1.5 1 7
Source: Altomonte, H., Coviello, M. and Lutz, W. F. (2003) ‘Energías renovables y eficiencia energética en America Latina y el Caribe: Restricciones y perspectivas’, ECLAC – Division of Natural Resources and Infrastructure, October
The reason these projects are still pursued is that they can operate for over 100 years and recover the costs of investment over a long period of time. Because of these special circumstances, renewable energy projects will often need a longterm Power Purchase Agreement (PPA) of up to 20 years to get financing. This agreement will ensure to the bank that the project owners have off-takers that will purchase the electricity for a set price [2]. Usually power producers are free to make these PPAs with large consumers, but some countries do not permit it. There is currently no wholesale electricity market in Nicaragua. All private generators must have PPAs with the former state-run, but now privatized national utility, Empresa Nacional de Electricidad [3]. Honduras is much the same with no wholesale market and only the state-run Empresa Nacional de Energía Eléctrica (ENEE) as the sale option for independent power producers. Prices that ENEE offers are based on node prices or competitive bids if generation is solicited [4]. Panama has a restriction on PPA length of previously four and now ten years [5]. The necessity to use a PPA is particularly key for countries like Uruguay that have low spot market prices because of the large hydro portion operated by the state utility on the grid. Power producers can command a higher PPA price than the spot market if they guarantee availability of the power. However, this promise is often impossible for intermittent renewables and can lead to penalties if the power expected is not produced. Power producers in Mexico are free to arrange PPAs, but they must be structured so that the off-taker has at least a 1 per cent share in the power producers’ operations. Also, the power producer must pay from 15 to 30 per cent of the price negotiated in the PPA to the state utility as a transmission tariff [6]. Small projects are at a disadvantage in this process since conducting a feasibility study, the bank loan request process, and permit requirements all must be completed for both small and large projects, and these stages take a similar amount of time for both small and large projects. The revenue and CERs that
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can be generated are proportionally less. These barriers and specific provisions that countries have made to overcome them are discussed in more detail in Chapter 8, ‘Small-Scale Barriers’.
Political/financial instability The stability of a country’s economy and politics has a large bearing on whether or not foreign investors will be enticed to invest in the country. Often the reputation a country may have from past political conflict or economic strife is not merited. However, the country’s misfortune often creates such a bad reputation that it will suffer from a lack of investment even after it has recovered. Colombia is a prime example of a country with tremendous CDM project potential but a violent past because of drug-related trade, and the perception of an unstable economy may be limiting project development. In reality, Colombia’s economy is and has been strong, with an average growth rate of 4.5 per cent annually for the last 25 years. This sustained growth is unprecedented in Latin America and is due to its diverse economy, liberalized trade, high investment rates, low government spending and conservative debt management. During this time of growth, Colombia did experience one year, 1999–2000, when the economy declined 4.5 per cent and unemployment grew to 20 per cent. Since 2002, President Alvaro Uribe’s policies have helped the economy begin to recover and improved the country’s image [7]. Uribe’s leadership helps Colombia rank ahead of Argentina, Bolivia and Ecuador in its short-term political risk. Since President Uribe’s second term is nearing its end and no clear successor is in sight, however, Colombia has a less favourable long-term political rating [8]. This long-term negative political rating and its well-publicized violent past due to the drug trade could be preventing Colombia from realizing its potential with regard to CDM projects given its relatively industrialized nature and sustained economic growth [9]. As of February 2008, only ten projects had been registered [10]. Nicaragua is another country that struggles from a lack of interested foreign investors and as a result hosts only three CDM projects. The country’s war-torn past, and political instability which often consists of corrupt administrations and a lack of continuity from one government to the next, have led to the current situation. Nicaragua is a prime example of a country that needs the state or an international bank to develop some CDM projects in order to promote private investment. However, Nicaragua cannot always get loans from these banks since it periodically maximizes its limits on debt [11].1 Argentina is in desperate need of renewable energy capacity additions, but hosts only three renewable energy CDM projects because of the economic crisis of 2001–2002 that left the peso devalued by 30 per cent. The once booming and open economy suddenly became more closed as the government began to regulate the price of electricity to protect customers, and foreign investors began to withdraw from making investments.
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Ecuador had a similar economic collapse in 1998–2000. Inflation rose from 43 per cent to 91 per cent from 1998 to 2000 while the Sucre was devalued 200 per cent in 1999. In 1999, unemployment doubled to 16 per cent and the real GDP shrank 8 per cent. Debt rose from 64 per cent in 1997 to 118 per cent in 1999 [12]. This situation has caused the country to have minimal foreign investment even though there are aggressive feed-in tariffs that offer high, fixed prices for renewable generation. Even project developers that are taking advantage of these tariffs, like the owners of Valdez sugarmill, do not trust that the tariffs will always be available and have contingency plans for sustaining profitable operations [13]. As a solution to the problem of attracting foreign investment, large developers like AES could creatively use a local company as a shield by investing the capital necessary, but not associating the larger company’s name with the project. Then, if the project fails, it is not the foreign company whose reputation is marred. In this situation, however, the foreign firm would still run the risk of losing its financial investment in the project. This arrangement requires a huge amount of trust on the part of the developer and a close relationship between the local and foreign companies [1].
Low carbon prices The overwhelming majority of project developers in the author’s interviews said that the CDM, in and of itself, was not enough to stimulate project development. In other words, the project would have to be financially viable without CDM revenues to make sense. CDM revenues may add 1–2¢/kWh (depending on the grid emission factor and other details). Carbon brokers like 3C claim that the project developers they work with earn an internal rate of return (IRR)2 that is on average 1.5 per cent higher than without CDM revenues [14]. This amount of money certainly entices project developers that were going to develop a project anyway to attempt to earn CDM revenues. But it is not, in the opinion of most developers, enough to have the CDM as the driving force behind the projects [15]. Carbon brokers will claim that CDM revenues make it easier to gain a loan for a project [14], but the risk involved in the registration of a project and verification of its emission reductions means that these revenues are uncertain. Banks’ distrust and unfamiliarity with the Mechanism also hinder the process of having a project developed solely for the prospect of emission reductions since most renewable energy projects have high initial investment costs and require loans. A United Nations Framework Convention on Climate Change (UNFCCC) study on the impact of CERs on the IRR on renewable energy projects shows how this IRR increases over time and with increasing CER prices. Table 4.2 below shows this analysis. These estimates show more optimistic impacts of CERs on IRRs than the 1.5 per cent rate impact that 3C predicts. Of course, the exact impact the CERs will have depends on the number generated, the price per CER and the number of years that the CERs are issued [16].
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Table 4.2 Incremental impact of the CER price on the internal rate of return of the project (percentage per purchase period) CER Price in USD
5 10 15 20
5 years (Numbers in %)
7 years (Numbers in %)
10 years (Numbers in %)
14 years (Numbers in %)
0.5 1.0 1.6 2.2
0.6 1.4 2.1 2.9
0.8 1.7 2.7 3.6
0.6 1.4 2.1 2.9
21 years Impact per (Numbers unit in %) in USD 1.2 2.3 3.3 4.5
3.16/MWh 6.33/MWh 9.49/MWh 12.65/MWh
Source: UNFCCC (2007) ‘Investment and financial flows to address climate change’, Background Paper, available at http://unfccc.int/cooperation_and_support/financial_mechanism/items/4053.php
Often, developers mentioned that they did not trust that they could earn the CDM revenues because of the complexity of the issuance process but were trying for them anyway. Other developers interviewed were somewhat unfamiliar with the Mechanism altogether but a carbon broker had approached them and offered to do the paperwork in exchange for a portion of the reductions generated.3 These admissions in interviews mean that many renewable energy projects are not additional and undermine the purpose of the CDM to reduce global greenhouse gas emissions. As reduction targets become more stringent and carbon prices increase, it is likely that the CDM will have more of an impact on project development. The breaking point at which carbon prices will be high enough to promote additional development is not an absolute. This price will be different as each project developer’s standards for risk tolerance and IRR requirements vary.
Multilateral development banks Multilateral development banks such as the World Bank, the International Bank for Reconstruction and Development (IBRD), Inter-American Development Bank (IDB), Central American Bank for Economic Integration (CABEI), the International Development Bank, and the Corporación Andina de Fomento (CAF) will often complete the CDM paperwork for no upfront costs. Of these multilateral banks, the World Bank dominates CDM project development. Its Carbon Finance Unit is divided into several project-specific funds. In these funds, developers pool their investments to support a certain type of CDM project. The number of funds worldwide, of the World Bank and other funds, has grown from three in 2000 with capital of €351 million to 54 in 2007 with total funds of €6250 million in early 2007 [16]. The World Bank funds include the Prototype Carbon, BioCarbon and Community Development Carbon Funds. It also hosts the Carbon Fund for the Europe Investment Bank, the Netherlands Europe Carbon Facility for the International Bank for Reconstruction and Development and Italian, Spanish, Danish and European funds [17]. Certain of these funds only provide loans only for municipalities and other public entities in the host country. For the Prototype Carbon Fund, countries
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must be members of the Host Country Committee in order to submit projects [18]. A separate division of the World Bank called the International Finance Corporation can provide loans for private investors. Private investors can, however, be involved in funds for public loans by being investors in the fund or by submitting their projects for carbon credits through these funds [19]. The existence of these banks helped promote early CDM project development. These banks were involved in offering loans for CDM-like projects that promoted sustainable development prior to the Marrakesh Accords. They were accustomed to structuring loans that provided up to 80 per cent of the project’s first costs. Therefore, when CDM came about as a way to boost the revenues for renewable energy projects, these banks were already familiar with these projects, which pioneered the CDM project cycle. In this way, they were able to offer their services before many of the carbon consultants existed. This position of dominance in the market allowed CAF and the World Bank to pay low prices for CERs and structure deals where the bulk of the carbon credits were taken in exchange for negotiating the paperwork and/or offering the project loan. These banks also offered low carbon prices because they were operating during the early stages of the carbon markets when the price of carbon was uncertain. They still offer prices that are below the prices offered by carbon brokers and often enforce large penalties for not issuing the CERs promised [20]. Now that there is competition for CDM services, these banks dominate less of the market share. However, many project developers continue to work with these multilateral banks for a variety of reasons. In some countries, banks do not understand the value of CERs and will not consider them for accounting purposes [21]. The financial additionality criterion requires that the project be unprofitable without CERs, and inclusion of these CERs in the pro forma is often essential. Multilateral development banks that are familiar with the value of CERs can offer loans to these projects that developers could not otherwise get. Other developers choose these banks because they are bound to working with approved entities like them by the strict rules of the municipality or state that will own the generation facility [20]. The Public Utility of Medellín (Empresas Públicas de Medellín (EPM)) began pursuing CDM projects in 2001 and was discouraged by the low CER price of $1 they were offered by CAF for their La Sierra fuel switching project. Furthermore, CAF was going to take 43 per cent of the CERs generated as payment for the CDM project cycle. EPM later chose to sell CERs to the World Bank for the Jepirachí wind farm. The CER price and terms offered were not favourable, but were the best option that EPM could secure at the time, which was early in the life of CDM projects. Also, EPM chose the World Bank because it was familiar with implementing a project on indigenous territory, which was necessary for Jepirachí [22]. In the World Bank contract with EPM, EPM received $4.5 per CER, and had to give $1 of each CER to community development. EPM constructed a desalinization plant for locals, but was not put in charge of operating it. The operation of the plant has been unsuccessful, and EPM is being held responsible
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by the project’s Designated Operational Entity (DOE) for the failure because of the way the Emission Reduction Purchase Agreement (ERPA) was structured. The failure of the desalination plant has put the issuance of CERs for the wind farm at risk. Therefore, EPM negotiated a new contract with the World Bank in 2007 that absolves EPM from the responsibility for the desalinization plant.4 Also, the new contract gives a slightly higher CER price of $4.72 and issues the CERs to EPM sooner. However, the renegotiated contract requires EPM to put even more of each CER into community development. In the new contract, $1.22 of each CER must be reinvested into the community [23]. Beyond the unfavourable prices and terms offered, EPM found the World Bank to be inflexible in its negotiations. Also, decisions took a long time since both the World Bank and EPM are large, hierarchical institutions that require many people to sign documents and approve changes and decisions. The delay in EPM was often due to the unfamiliarity of supervisors with the CDM and the time it took to educate them about the opportunity to earn CERs. Because of the rigid structure of the World Bank and low prices offered, EPM looked for a more competitive offering and has chosen to work with MGM International on its most recent project, the La Vuelta/Herradura hydro facilities. EPM negotiated a contract with MGM that pays $11.65 per CER, none of which must be dedicated to community development [24]. Now that project owners have competition for their CERs, they can choose a number of consultants to complete the CDM project cycle; they have multiple buyers in Europe and Japan for CERs, and are able to earn more competitive prices for CERs that are closer to the second European Trading Scheme (ETS) price of ~ €20 (as of February 2008). Again, these banks are utilizing their strong financial position to take advantage of a new market niche, post-2012 CER prices. Since the Kyoto Protocol ends in 2012, these banks are only offering about $4 for CERs produced during this time [25]. Most project developers are waiting to sell their CERs at the time of generation to see if they can achieve a better price, but those projects that need upfront capital from CERs are forced to accept these low prices. There is an interesting future possibility for CDM project funding through the World Bank’s proposed Climate Investment Funds (CIFs), which would provide additional grants and financing for developing countries that address climate change challenges. CIFs would be additional to existing Official Development Assistance (ODA) and make strides towards reducing greenhouse gases in the private sector and through policy reform. All of the CIFs will be host country-led and created as an equal partnership between the implementing entity and the host country. Two of these funds that have been formed are the Clean Technology Fund, which focuses on the role of new technologies as climate change solutions, and the Strategic Climate Fund, which would provide financing for new approaches to address climate change. The Pilot Program for Climate Resilience will be the first project under the Strategic Climate Fund and will explore ways to promote adaptation to climate change and be tied to the Adaptation Fund of the Kyoto Protocol [26]. Since no
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projects have yet been developed through the CIFs, their potential for CDM projects is not yet known.
Direct sale to Annex I country Other than working with a carbon broker or international bank, or attempting to negotiate the project cycle and sale of CERs itself, a project developer now also has the option of working directly with an Annex I country to transfer or sell the CERs. These countries will often offer special terms to project owners in exchange for the first right to buy CERs or a set CER price. Sometimes this exchange will offer the project developer special incentives. For example, Hidro Victoria in Ecuador worked with the Spanish Canje de Deuda by offering this entity the first right to buy the CERs generated from the project at the market price. In exchange for this first right to buy, Spain is paying $2.2 million for the community close to the hydroelectric plant to own 25 per cent of it and cancelling this amount of debt that Ecuador owes Spain [27]. Uruguay has also structured a deal with Spain where a portion of Uruguay’s debt is cancelled in exchange for Spain having the first right to buy the CERs from a 10MW wind farm that the Spanish utility Gamesa is developing [28]. The Netherlands aggressively moved towards using CERs to fulfil its Kyoto reduction targets by creating the Certified Emission Reduction Unit Procurement Tender (CERUPT) in 2001 with a $1.3 billion budget to facilitate the purchase of CERs from developing countries. CERUPT has stimulated many projects and offered a buyer for even more, but with the current maximum price for CERs set at €5.5, it may not be able to offer competitive prices in the second ETS.
CDM-specific problems Some financial problems of the CDM process have come to light after several years of experience with these projects. These problems relate to penalties for not producing a certain number of CERs, questions of legal authority, language barriers, price information and refinance schemes. As mentioned in the previous section, there are occasionally clauses in the ERPA that prevent CERs from being sold. In the case of EPM, the fulfilment of community development was essential for project validation. More commonly, these contracts contain penalties for not producing a certain number of CERs just as utilities will often fine generators that cannot produce the promised generation. These penalties are meant to protect the bank from having too few CERs to supply to its buyers. Projects with uncertain technical aspects should not have ERPAs that obligate them to produce a specified number of CERs [29]. The undersupply of CERs has caused some banks and brokers to have a steep learning curve. Ecosecurities’ stock plummeted by 50 per cent in the last
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quarter of 2007 because the firm had fewer CERs than expected to supply buyers at the end of the first ETS [30]. Now, banks, brokers and consultancies are buying more CERs and from a wider variety of projects to cover this uncertainty. Within ERPAs, entities that are most often from different nations must decide which country’s laws to abide by for issues related to the contract. This simple choice can cause controversy as some project participants think they are being discriminated against if their country is not chosen. Also, which language is used in the ERPA and in discussions becomes problematic. In Colombia, all lawyers are legally bound to work in Spanish for signed documents. Rules such as this complicate and add expense to projects as multiple forms of documents in more than one language must be prepared. Some of the CDM terms are also unfamiliar to project participants even if the documents are in their native language. Therefore, these terms must be defined and explained. The prices for CDM projects can result in complication as well. The price of a CER varies widely as explained in the background section of Chapter 1. This variability is due to whether the CER is forward sold, whether it is sold in a secondary market or through a broker, whether it is for pre- or post-2012 compliance, the type of project that it is generated from, the political risk of the country where it is from and a host of other factors. As project developers try to understand how much they should expect for the CERs, they are sometimes led astray. Project developers at EPM explain how the Andean Center for Environmental Economics (CAEMA) published projected Joint Implementation (JI) Emission Reduction Unit (ERU) prices which were higher than CER prices. The equivalent of the public utilities commission of Medellín (Controlería of Medellín), who watches how the city’s money is spent, saw these higher JI ERU prices, confused them with CERs, and consequently audited EPM. The Controlería demanded justification of the low CER price they were receiving from the World Bank and why the process was taking so long [24]. Other, less sophisticated project developer who have even less little contact with the carbon market than the Controlería de Medellín, do not know whether they are being offered a reasonable CER price by brokers [25]. Now, interested project developers can utilize a variety of new tools to get an estimation of guaranteed CER market value. Thompson Reuters Interactive offers a free online service that indexes European Union Allowance (EUA), CER and Voluntary Emission Reduction (VER) prices [31]. Barclays Capital also offers a CER and EUA price index [32]. As companies try to maximize their profits and minimize their risk, some have considered refinancing projects that qualified for CDM revenues under a financial additionality scenario which did not include the new terms of a refinance [33]. Lower interest loans can change the economics of a project enough to make the CERs unnecessary for the survival of the project. Refinance schemes have not been tested by the CDM rules and could place projects in jeopardy of maintaining an annual flow of CERs [34].
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Conclusion Renewable energy project developers face financial barriers from the general obstacles of a long payback time, lack of bank confidence and a shortage of money for feasibility studies. Specific country situations, such as policies that restrict PPA length and political instability, further complicate the prospects of attracting foreign investors and earning loans. Multilateral development banks that understand the risks of renewable energy CDM projects can offer project financing, but often do so in exchange for taking most of the CER revenues by offering low CER prices or a small percentage of CERs for the project owner. CDM-specific financial barriers like penalties for not producing the CERs promised, difficulty choosing the legal rules to follow for enforcement of the ERPA, ERPA language barriers and asymmetric CER price information create complex and confusing financial negotiations for project developers.
Notes 1 It should be noted that despite this limit on debt, Nicaragua did receive a $32.7 million loan from the Inter-American Development Bank for strengthening the electrical sector in December of 2007 [35]. 2 The internal rate of return is the annualized effective compounded return rate that can be earned on the invested capital or, in other words, the amount of return on investment earned. It is often used to compare the investment to alternative investments [36]. 3 Specific references to project developers and projects are absent in this section to protect the privacy of interviewed participants. 4 The failure of the desalination plant draws into question the merit of the community development portion of this arrangement.
References 1 2
3
4
5 6 7
Zeller, R. (2007) Interview with R. Zeller, President of Alquimiatec, 24 October, Quito, Ecuador Altomonte, H., Coviello, M. and Lutz, W. F. (2003) ‘Energías renovables y eficiencia energética en America Latina y el Caribe: Restricciones y perspectivas’, ECLAC – Division of Natural Resources and Infrastructure, October Millán, J. (1999) ‘The power sector in Nicaragua’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC Millán, J. (1999) ‘The power sector in Honduras’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC de Gracia, R. (2007) Interview with R. de Gracia, Association de Servicios Públicos, 5 October, Panama City, Panama Mekler, J. (2007) Interview with J. Mekler, Project Developer for COMEXHIDRO, 15 August, Mexico City, Mexico Global Security (2008) ‘Colombia: Economic conditions’, available from www.globalsecurity.org/military/world/colombia/colombia_briefing.htm
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10 11 12
13 14 15 16
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23 24 25 26 27 28
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Business Monitor International (2004) ‘Colombia: Political risk under the microscope’, available from www.fdi.net/bmi/bmidisplay.cfm?filename= OEMO_20070913_146003_xml.html Bettelli, P., Garcia, A. and Graviator, S. (2007) Interviews with P. Bettelli, A. Garcia and S. Graviator, Designated National Authority en la Unidad de Cambio Climático de Ministerio del Medio Ambiente, Vivienda, y Desarrollo Territorial, 12 October CDM UNFCCC Project Search, 1 May 2008, available from http://cdm.unfccc.int/Projects/projsearch.html Feinstein, C. (2008) Interview with C. Feinstein, World Bank Europe and East Asia Department, former member of Latin American Department, 14 January Ycaza, J. L. (Chairman of the Board of Directors of the Central Bank of Ecuador) (2000) ‘Andean integration and dollarization: Some reflections about Ecuador’s case’, 25 August, available from www.comunidadandina.org/ingles/press/speeches/ Ycaza25-8-00.htm Corporación Andino de Fomento (2006) Ecoelectric-Valdez bagasse cogeneration plant Project Design Document, UNFCCC, 16 June Woods, R. (2008) ‘Renewable energy is booming in Latin America’, Business News Americas, 6 May Bongiovanni, Z. (2008) Interview with Z. Bongiovanni, SolFocus Project Developer, 19 March, Palo Alto, California UNFCCC (2007) ‘Investment and financial flows to address climate change’, Background Paper, available at http://unfccc.int/cooperation_and_support/ financial_mechanism/items/4053.php The World Bank Carbon Finance Unit (2008) ‘Catalyzing markets for climate protection and sustainable development’, available from http://carbonfinance.org/Router.cfm?Page=Home&ItemID=24675 Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An assessment of DNAs in Latin America and the Caribbean’, 2 June, Inter-American Development Bank, Washington, DC Baroudy, E. (2008) Interview with E. Baroudy, Manager of the BioCarbon Fund of the World Bank, 21 March, Manzano, I. (2007) Interview with I. Manzano, President and CEO of Manzano and Associates, 1 November, Guayaquil, Ecuador Garcia, D. (2007) Interview with D. Garcia, FONAM Energy and CDM Specialist, 5 November, Lima, Peru Sandoval, A., Colorado, F. and Aramburo, J. (2007) Interviews with A. Sandoval, F. Colorado and J. Aramburo, Empresas Públicas de Medellín, 18 October, Medellín, Colombia Garizábal, C. (2007) Interview with C. Garizábal, Departamento de Planificación Empresas Públicas de Medellín, 15 October, Medellín, Colombia Vélez, O. L. (2007) Interview with O. L. Vélez, Empresas Públicas de Medellín, Subdirección Medio Ambiente, 18 October, Medellín, Colombia Salgado, C. (2007) Interview with C. Salgado, Carbon Broker, Ecoinvest, 20 March, Cartagena, Colombia World Bank (2008) ‘Proposed Climate Investment Funds’, 22 April, available from www.worldbank.org/cif Muñoz, F. (2007) Interview with F. Muñoz, Hidrovictoria Project Developer, 28 October, Quito, Ecuador Tasende, D. (2007) Interview with D. Tasende, Director of Renewables, UTE, 27 November, Montevideo, Uruguay
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29 Streck, C. (2007) ‘A new contracting model for ERPAs: Equity and efficiency in legal and contractual issues’, at CDM Tech. 2007 21 March, Cartagena, Colombia 30 Carbon Finance (2007) ‘EcoSecurities’ woes prompt CER rethink’, 20 November, www.carbon-financeonline.com 31 Thompson Reuters, Carbon Market Community 32 Barclays Capital (2007) ‘Barclays Capital launches first Global Carbon Index’, news release, 6 December 33 Coto, O. (2007) Interview with O. Coto, CDM Consultant, 1 October, San José, Costa Rica 34 Godinez, G. (2008) Interview with G. Godinez, CDM Validator/Verifier for Det Norske Veritas, 16 January 35 Inter-American Development Bank (2007) ‘IDB approves US$ 32.7 million for Nicaragua’s electric system’, press release, 10 December 36 Business Dictionary, Internal Rate of Return (IRR), available from www.businessdictionary.com/definition/internal-rate-of-return-IRR.html
5 Informational Barriers
One of the best explanations for the current distribution of Clean Development Mechanism (CDM) projects is the access to information that people have about opportunities to earn Certified Emission Reductions (CERs). The distribution of projects tends to be clumped because project developers sometimes only become aware of CDM opportunities after their neighbour or colleague has become involved. The Designated National Authority (DNA) office is charged with promoting CDM projects and does so to varying degrees. The other main sources of information tend to come from UN organizations, development banks, industry associations, non-governmental organizations (NGOs), governmental laboratories, regional organizations, carbon brokers and universities. Each of these sources of CDM information dissemination will be discussed in turn. Another type of informational barrier exists for project owners who are not savvy in negotiating Emission Reduction Purchase Agreements (ERPAs). This informational barrier is discussed separately after the CDM information dissemination agents are considered.
DNA office and other institutional support The DNA office can prove to be both an aid and an impediment to CDM projects. The United Nations Framework Convention on Climate Change (UNFCCC) hoped to allow countries to maintain some autonomy in the CDM process by giving this office the discretion to decide where it will be housed, how it will be funded, the degree of promotion it will support and the definition of sustainable development it will apply [1]. The way in which this office operates has managed to lower some informational barriers, while building up other institutional ones. Former CDM Executive Board member and CDM consultant Christiana Figueres studied the DNA offices in each Latin American country and concluded in 2004 that these offices are hindered by three important issues. She explains that:
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(1) the environmental agencies are typically one of the weakest in the array of governmental agencies; (2) they are perceived as enforcers of rules and regulations that the private sector typically resist; and (3) they do not have an entrepreneurial approach to their operations. [1] These issues remain in 2008, but cannot be easily remedied since the DNA office has not been able to survive outside of the government where it receives financing. Some DNA offices have attempted to integrate the private sector by having a board of both private and public sector representatives. But this board only advises the office and does not participate in its day-to-day functions. DNA regulatory offices in the private sectors have all folded or been moved to a governmental agency as they have not been able to continue to earn donations or generate revenue to sustain their operations [1]. Beyond these observations, the author recognized other challenges that these offices face. The DNA office within each country is charged with both promoting and assessing the sustainable development of CDM projects. The establishment of this office is essential to hosting CDM projects. As of February 2007, only twothirds of Latin American countries had set up DNA offices and were therefore eligible for project implementation [2]. At the other end of the spectrum, some countries such as Ecuador and Peru took the promotion assignment seriously and developed a separate office for stimulating CDM activities. Other countries, such as Argentina and Mexico, have carbon funds that are meant to help projects in the initial stages of the CDM cycle for free and then later charge a fair amount of CERs for help creating the Project Design Document (PDD) [3]. In Mexico, this fund is run by a division of Banco Commercial de Comercio Exterior (BANCOMEXT) while in Argentina it operates on grants from foundations [4]. The CDM promotion offices in Ecuador and Peru also operate on grants and therefore may lack permanence [5]. The degree to which DNA offices successfully juggle both tasks of promotion and regulation depends on the resources they are allocated. In general, offices attempt to offer seminars for industry trade groups and the general public to make them aware of CDM opportunities, have a comprehensive website with general CDM procedures as well as the country-specific process for approval, and pamphlets for developers on the status of the CDM in the country. Also, the DNA can choose to accumulate a library of information that can help project developers through the complex CDM project cycle. This library may include regional baseline calculations, financial feasibility studies, and project documents that have successfully proven additionality. Some DNA offices or institutional bodies like those in some countries such as Ecuador, El Salvador, Argentina and Colombia have even created a country baseline of CO2 emissions to cut the project costs for small-scale developers who can use this average in their PDDs [6 and 7]. Other countries such as Ecuador and Uruguay have completed in-depth analyses, often with the help of external aid organizations, of the opportunities and barriers for CDM projects within their
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country [8 and 9]. While some DNA offices reach out to industries that could take advantage of the CDM, other DNA offices are less aggressive or have so few resources that they are barely able to respond to the requests that they receive for capacity building workshops. While the DNA office usually offers project support and guidance, it can also pose significant barriers to project development. Eron Bloomgarden, a consultant for Ecosecurities, contends that DNAs and their offices vary from country to country; ‘they can be a partner in the CDM process or cause unnecessary delays’. DNA offices that do not have a separate office, fund or division for promotion can find that the tasks of promotion and regulation are incompatible. How can a regulator objectively assess the sustainable development of a project if that same person is supposed to be promoting these projects in his country? This situation causes an implicit incentive to be lax on regulation criteria. Critics of Peru’s promotion office, FONAM, claim that there is a potential conflict of interest in having the director of the regulatory DNA office also heading the board of FONAM [10]. However, countries that have not even separated these offices face even more of a direct conflict. The DNA offices of Colombia, Ecuador, Peru and Bolivia have created an Andean Carbon Hub with information about key CDM information, each country’s national CDM entities, the country’s CDM portfolio, and materials prepared for the annual Carbon Expo in Europe [11]. As an extension of the promotion of CDM projects, a few DNA offices are pursuing integration of CDM into national policies. Carbon management is mentioned in Ecuador’s policy agenda. Honduras screens all new renewable energy projects for CDM potential. Nicaragua’s DNA helped promote a National Development Plan that includes small-scale renewable energy generation as a development goal. Colombia provides a tax exemption for project developers that give 50 per cent of their CERs to community development. Panama is proposing that 20–30 per cent of CERs go towards community development and considers CERs when awarding local carbon credit revenues [1 and 12]. Since the regulatory arm of the office allows the DNA to decide whether or not a project fulfils the goal of sustainable development and no specific criteria have been drafted for what constitutes sustainable development, there is the possibility that the DNA would show preferential treatment to project participants that have provided money or other favours to the office and its employees. Most countries interpret the sustainable development criteria to mean that the project must be in compliance with local and national environmental regulations; however, because of recent controversy over this task, several countries including Argentina, Mexico, Peru, Uruguay, Colombia and Chile have begun to adopt social, environmental and economic requirements that the project must meet in order to contribute to sustainable development [13]. If a country has not drafted sustainable development criteria, then DNAs can expand the definition of this term and do an informal validation of the
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CDM project. In Argentina, the DNA initially rejected a project proposed by Ecoinvest because the DNA considered the project to not be additional. When the project was finally passed through the national process in a second submission, the validator and Executive Board of the CDM found the project to be additional and registered it [14]. Critics of the Colombian DNA office claim that it does a legal and technical analysis of the project when that is not its role [15]. The Ecuadorian DNA visits each project site and taxes the CERs from the project to cover the costs of this visit. However, there are no set criteria that the DNA looks for in projects, and the DNA often must assess projects when they are in the early stages of development [16]. Because the regulatory procedures are so different from country to country, it is important for project developers to be familiar with the Letter of Approval process in the host country. This process is usually found on the DNA-operated national CDM website, if it is complex. Some countries have a series of up to 15 steps project developers must follow and require official letters of approval in order to proceed with the project for carbon revenues. First a Letter of No Objection is issued after the developer presents the office with a Project Idea Note (PIN). Then, a Letter of Commitment is issued as the project is under construction. Finally, the Letter of Approval is issued when the project is accepted. Host countries were given total freedom not only in the decision about what constitutes sustainable development, but also about where the DNA office is located within or outside of the government. Usually the DNA is housed under the Ministry of the Environment or Natural Resources, but some countries such as Ecuador and Peru have separate offices for the DNA [13]. Having the office located under another department may bring associated benefits or complications. A benefit of not having the DNA housed in this larger office could be that it is more efficient and has more streamlined tasks. DNA offices like Peru’s that are housed in a larger environmental office sometimes must complete greenhouse gas inventories for the country and organize adaptation activities to climate change impacts [17]. Having the office outside of a larger energy or environmental ministry can mean that it has a lack of contact between entities that must be in dialogue to make a decision about the approval of a CDM project. This slow communication can delay projects’ approval processes, which then impacts the other parts of the CDM project cycle and ultimately when the project can begin operations, since it must achieve CDM registration before generating its first megawatthour. Most countries set a time limit on the national approval process. However, if the deadlines are approaching, the DNA office will often ask project developers for more detailed information that takes a while to track down and provides a legitimate reason for the delay [18]. Delays in giving national approval also stem from the understaffing of most DNA offices. In many cases, the office has only one full-time staff member. Additional personnel serve to assess the technical aspects of projects. Often DNA offices are also tasked with national greenhouse gas inventories and climate change adaptation tasks [1].
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DNA offices have so much freedom in their creation and operations that they can even tax the CER revenues from a project. In Bolivia, the DNA office operates separately from the government but is overseen by a governmental department. This office supports its operations by taxing the CERs between 15 and 35 per cent. The exact amount has not yet been decided [19]. Ecuador also taxes projects, but the amount of CERs taken from projects is much lower at 3–6 per cent (depending on project size) and goes towards paying the costs of evaluating the sustainable development of that project [16]. Promotion offices in Ecuador and Peru are also considering taking a percentage of CERs from the projects that they help, to sustain their operations [5 and 20]. The carbon funds in Argentina and Mexico will take a portion of the CERs when they eventually successfully develop PDDs [3 and 4]. Thomas Black of the Andean Center for Environmental Economics (CAEMA) thinks that the restriction of giving a certain percentage of CERs away weakens the additionality argument for a project. The financial additionality argument should show that without the CERs the project would not be economically viable. Therefore, if a significant portion of the CERs are taken away from the project developer, then the project would have existed without these additional revenues [21].
Other support networks United Nations organizations Most of the CDM analyses and reports, which analyse the CDM, provide insight for prospective developers and assess how well the CDM is meeting its goals, are sponsored by United Nations organizations. The two main organizations are the United Nations Development Programme (UNDP) and the United Nations Environment Programme (UNEP). Independent of these organizations are several climate change technology transfer programmes that have come into existence as a result of UNFCCC negotiations. The UNDP is concerned with the CDM because of its commitment to helping developing countries address climate change. The UNDP helped sponsor a study entitled ‘Engaging the Private Sector in Clean Development Mechanism (CDM) Project Activities under the UNFCCC/Kyoto Protocol’. The UNDP had spent $350,000 to $450,000 in Latin American capacity building by 2004. The UNDP has also published a CDM User’s Guide and helped an online community of CDM-interested persons become acquainted with each other through CDM-Connect [1]. The UNEP/Risø Centre, the World Bank and UNDP helped co-sponsor a CDM Rulebook meant to provide a comprehensive set of CDM legal rules that is organized and easy to navigate. Its sections quote UNFCCC decrees and explain them for developers [22]. The UNEP has been involved in analysing the CDM, especially baseline calculations and additionality arguments, since its inception. It has also partnered with the Risø Centre on Energy, Climate and Sustainable Development, which is sponsored by the Danish International Development
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Assistance and the Technical University of Denmark. The UNEP and Risø Centre’s work has been focused on projects that are a part of the Capacity Development for the CDM (CD4CDM). The CD4CDM project has created a number of useful documents on topics such as CDM financing and pitfalls in PDD writing. It also created a massive set of spreadsheets that show details about current CDM projects and those in the pipeline and provides some regional and project type analysis. In addition to the efforts of the UNEP and UNDP, the UN promotes nonCDM-specific renewable energy projects in its efforts to promote climate change-mitigating technology transfer. In 1995 a coalition of Organisation for Economic Co-operation and Development (OECD) countries and the European Union (EU) established the Climate Technology Initiative (CTI). Then after the 2001 Marrakesh Accords, the Experts Group on Technology Transfer was established. Since then, the US implemented the Technology Cooperation Agreement Pilot Project (TCAPP) from 1999 to 2001 and the Climate Technology Partnership (CTP) in 2001. All of these initiatives seek to work with host countries to identify, prioritize and implement useful climate change-mitigating technology [23].
Development banks There are a variety of development banks that are now interested in financing and carrying out the CDM project cycle for Latin American projects. A full list of these banks can be found in Chapter 4, ‘Financial Barriers’. Two banks in Latin America stand out as providing exceptional capacity development for CDM, the World Bank and Corporación Andina de Fomento (CAF). The World Bank has supported CDM projects since 1999 when it launched its Prototype Carbon Fund (PCF). Then, in 2000, a PCFplus programme was launched with the mission of providing outreach, research and training. It has also worked with DNAs in each country to help initiate the office and its function. From 2001 to 2004, it dedicated nearly $1 million to this cause. The World Bank (with the government of Sweden) also sponsored the National Strategy Studies Programme, which assesses CDM potential and challenges on a country-by-country basis [1]. CAF is a regional developmental bank established in 1970 with the mission of promoting sustainable development and economic integration in the Andean and Latin American Regions. Sustainable Development for the Americas (CSDA) and carbon consultant Econergy International raised and donated €40 million for CAF to create a Latin American Carbon Programme (PLAC) to help CAF shareholder countries participate in the CDM. Through the CAF–Netherlands CDM Facility, CAF became the first regional bank to be a secondary CDM buyer and seller. CAF has also sponsored the operation of the DNAs in Colombia, Ecuador and Bolivia [1]. Development banks have also begun to be involved in the quest for climate change solutions by showing preference for projects that help mitigate greenhouse gases. The Inter-American Development Bank (IDB) created a
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Sustainable Energy and Climate Change Initiative (SECCI) in March of 2007. The goal of this initiative is to support the Latin American and Caribbean region in finding economically and environmentally sound energy solutions. SECCI focuses on financial solutions and will complete its task by helping renewable energy and energy efficiency projects in achieving financing, removing institutional barriers, promoting novel policy ideas, making sustainable energy investment and financing tools more mainstream and accessible, utilizing the carbon finance market, addressing adaptation needs and forming new partnerships with both the public and private sectors [24]. The World Bank has several proposed Climate Investment Funds (CIFs), which would provide additional grants and financing for developing countries that address climate change challenges. CIFs would be additional to existing Official Development Assistance (ODA) and make strides towards reducing greenhouse gases in the private sectors and through policy reform. All of the CIFs will be host country-led and created as an equal partnership between the implementing entity and the host country. Two of these funds that have been formed are the Clean Technology Fund, which focuses on the role of new technologies as climate change solutions, and the Strategic Climate Fund, which would provide financing for new approaches to address climate change. The Pilot Program for Climate Resilience will be the first project under the Strategic Climate Fund and will explore ways to promote adaptation to climate change in conjunction with the Kyoto Protocol’s Adaptation Fund. Whether or not this preferred financing will jeopardize the additionality argument of CDM projects is not yet known as none of the projects under these programmes have applied for CDM revenues [25].
Industry associations Industry groups in some countries can help complement the efforts of the DNA office. For example, in Honduras, an active renewable generators association called AHPPER (Asociación Hondureña de Pequeños Productores de Energía Renovable) has helped provide information about CDM opportunities through workshops and conferences. Likewise, Guatemala has an association called AGER (Asociación de Generadores de Energía Renovable) that works mainly with the small hydro developers. AGER is interested in the possibility of using CDM revenues for its members’ projects, but does not have the capacity to provide the CDM expertise for registering projects. Other associations such as the Biomass Users Network do not think the CDM can be useful for its projects because of the high CDM transaction costs. Table 5.1 below shows the renewable energy trade associations.
Non-governmental organizations (NGOs) Beyond these trade organizations, there are NGOs that also help promote CDM. For example, in Guatemala, Fundación Solar is involved in making policy recommendations for renewable energy and has analysed the market potential for Verified or Voluntary Emission Reductions (VERs) in the volun-
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Table 5.1 Major Renewable Energy Associations in Region Country
Associations
Mexico
Mexican Wind Energy Association (AMDEE) Asociación Nacional de Energía Solar Red Mexicana de Bioenergía Asociación Mexicana de Proveedores de Energías Renovables (AMPER) Asociación de Generadores de Energía Renovable (AGER) Asociación de Biocombustibles de El Salvador Asociación Hondureña de Pequeños Productores de Energía Renovable Asociación Nicaragüense de Promotores y Productores de Energía Renovable (ANPPER) Asociación Costarricense de Productores de Energía (ACOPE) Financiamiento de Empresas de Energía Renovable de América Central (FERNA) Biomass Users Network (BUN-CA) Asociación Panameña de Productores de Energías Renovables (APPER) Federación de Biocombustibles Federación de Cultivadores de Palma de Aceite Asociación Peruana de Productores de Azucar y Biocombustibles (APPAB) São Paulo Sugarcane Agroindustry Union (UNICA) Associação Brasileira das Indústrias de Biodiesel Red de Inversiones y Exportaciones (Rediex) Administracion Nacional de Combustibles (ANCAP) Cámara de Productores de Biodiesel de Uruguay Asociación Argentina de Energías Renovables y Ambiente (ASADES) Cámara Argentina de Energías Renovables Cámara Argentina de Generadores Eólicos (CADEGE) Asociación Argentina de Energía Eólica Federación de Energía Renovable en América Central y el Caribe (FERCA)
Guatemala El Salvador Honduras Nicaragua Costa Rica
Panama Colombia Peru Brazil Paraguay Uruguay Argentina
Central America and Caribbean Latin America
Asociación Latinoamericana de Energía Eólica (LAWEA)
tary market [26]. (VERs are described in more detail in Chapter 8, ‘Small-Scale Barriers’.) International NGOs like the Renewable Energy and Energy Efficiency Project (REEEP) and Practical Action have also been involved in helping to promote CDM activities in several countries.
National laboratories and governments International collaboration also occurs through governmental labs like the National Renewable Energy Laboratory (NREL), which with UNDP funding mapped the wind potential in Oaxaca, Mexico and northern countries of Central America and Cuba with the Solar and Wind Energy Resource Assessment (SWERA). NREL was in conversation with the Ministry of Energy and Mines in Peru to do a wind map of the country [27]. NREL, the World Bank, the US Agency for International Development, US Department of Energy, Winrock International and some private companies have also helped create the Global Village Energy Partnership (GVEP) that has promoted rural electrification with projects in Mexico, Guatemala, Honduras, Brazil, Ecuador and Peru [28].
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Sandia National Lab, with the help of Winrock International and New Mexico State University, has helped pave the way for renewable energy in Central America. Sandia has a strong interest in studying solar energy in Mexico and initiated the Programa Cooperativo de Energía Renovable (PROCER) between Mexico and the US and has done capacity building, pilot projects and training in Central America with the Clean Energy and Environment Programme [29]. A US Agency for International Development initiative called Financiamiento de Empresas de Energía en Centroamerica (FENERCA) and private company E+Co helped promote renewables in Guatemala, El Salvador, Honduras, Nicaragua and Panama by providing capacity building and helping to secure financing from 2000 to 2003 [30].
Regional organizations A group of regional organizations also provide support for renewables by completing pertinent studies. Organización Latinoamericana de Energía (OLADE) covers the entire region and completes studies on energy statistics and the potential for renewable energy. The Economic Commission for Latin America and the Caribbean (ECLAC in English or CEPAL in Spanish) completes studies assessing the potential and current political environment for projects in all of Latin America. Within South America, the Andean Secretaries Network has begun to show interest in renewable energy potential and commissioned a study on the barriers to renewable energy CDM development in Andean countries in late 2007. Within Central America, there are several organizations that support both renewable energy development and the CDM. The Consejo de Eletrificación de América Central (CAEC) was created for regional grid integration in 1985. The Comisión Centroamericana del Ambiente y Desarrollo (CCAD) was formed in 1990 for the utilization of natural resources in the area to control pollution [31]. The Central American Alliance for Sustainable Development (ALIDES) provides political support for promoting renewables. The Central American Integration System (SICA) has an Energy and Environment Partnership (EEP) with Central America which is an initiative of the United Nations World Summit on Sustainable Development of 2002. This system provides non-reimbursable grants to project developers of the private sector, communities, NGOs and the government for feasibility studies and pilot studies for amounts from €20,000 to €50,000. By April of 2007, €3 million had been distributed to 77 projects in the region [32]. In 2006, the Ministers of Environment and Energy of Central America met and signed the ‘San Salvador Declaration’, which provides instructions to create and support regional energy and energy efficiency policies. The US is involved in an agreement called CONCAUSA, a plan to avoid natural disasters like climate change. Currently, there is a Plan Puebla-Panama (PPP) that aims to promote ecological and sociological richness in the region through a major transmission interconnection project [31].
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In addition to these regional organizations, there are several renewable energy initiatives with ties to countries in other regions. The Latin American and Caribbean Initiative for Sustainable Development set a goal of 10 per cent renewable energy in the region by 2010. The Johannesburg Renewable Energy Coalition in 2003 solicited the participation of 78 Latin American and other countries to promote renewable energy. The REEEP conceived at the World Summit on Sustainable Development in August 2002 has the backing of national governments, businesses, development banks and NGOs and strives to influence international, national and regional policy dialogues. The International Energy Agency has a Renewable Energy Working Party to reduce barriers for renewable technologies. The US has an Office of Energy Efficiency and Renewable Energy within the Department of Energy which supports 12 different programmes to facilitate renewable energy worldwide [33].
University participation Local university participation in CDM projects can offer an opportunity for students to learn about the emerging carbon market as well as provide developers with more affordable help navigating the complex project cycle. The University of Antioquia in Medellín, Colombia has begun helping the city of Medellín with a feasibility study and PDD for a methane capture and flare from a landfill called La Curva de Rodas. The students are working with Green Gas of Germany to ensure that their work is consistent with the standards for the UNFCCC. The university is also considering a Master’s level CDM programme that would train students to be involved in the carbon negotiation process. Graduating experts in CDM at the national level would provide Colombia as a country with an advantage, as local project developers could hire more affordable, local consultants [34].
Carbon broker interest and existence CDM projects have also succeeded in countries where there are consultants with offices. Usually, these consultants first set up operations and approached project developers in a particular country because they saw opportunities there. Then, after a few projects were completed, project developers in the country began pursuing the carbon brokers. This situation occurred in Mexico where AgCert first began converting hog farms for methane capture and destruction. Then, Ecosecurities tapped into this market. Now, Mexico’s governmental agency to promote agricultural businesses, Fidecomiso de Riesgo Compartido (FIRCO) of the Mexican Agricultural Department, is investigating the potential of these projects for development [35]. Potential projects near carbon consultancy offices that specialize in developing CDM projects are at an advantage as they will probably be approached by this group. Once a consultancy has host country approval, and familiarized itself with the country’s culture and renewable energy laws, it is easier to complete another project in the same place. Also, some companies that have favourable
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experiences with CDM begin to look for other ways to improve their operations and earn CERs [21]. Additionality arguments in one PDD also become easy to apply to another in the same country and industrial sector. Therefore, the distribution of CDM projects is due in large part to the efforts of the carbon consultants. It is no coincidence that Mexico has approximately 120 AgCert employees in the country and has therefore developed 56 methane capture projects by February 2008, which accounted for 31 per cent of the country’s CERs [36].
Emission Reduction Purchase Agreements (ERPAs) Even if a carbon broker is located in a country and can offer its services to clients, informational barriers can prevent these individuals from deriving the maximum benefit from CDM. Like most legal agreements, the ‘devil is in the detail’ when it comes to who truly benefits from ERPAs – which describe the terms and conditions for the sale of the CERs. These legal documents are typically 50 pages long, use economic terms unfamiliar to project developers, and are in English. This barrier is especially high for local project developers like hog farmers who are not exposed to the daily transactions of the global and European trading schemes. These individuals have to seek out and pay for help from lawyers, other carbon brokers, multinational banks or the local DNA office. Often they are at a price disadvantage for CDM project costs since they do not have multiple entities competing for their work. These folks also suffer from a lack of experience and knowledge about how to structure an ERPA in an advantageous way. Since carbon brokers make a profit on the spread between the purchase and sale price of CERs, there are many ways that the ERPAs can be structured to shortchange the project owner. Hiring a lawyer to decipher what is best for the seller is often too expensive. As a result, project owners can earn less revenue than expected and experience delays in payments because of disputes over when the CERs are delivered, non-compliance fees, the government chosen to handle dispute resolution, which party communicates with the Executive Board, and the price structure (fixed, floating or percentage) of the CERs [37]. Mexican hog farmers inadvertently signed a contract with carbon brokers that left them with no portion of the CDM revenues. This contract gave almost all of the first ten years’ worth of revenues from CERs to the project developer and carbon consultant in exchange for providing flare and biodigester equipment. After that period, the farmers were under the impression that the CER revenues would belong entirely to them. However, the carbon consultant opted for the ten-year crediting period, which is non-renewable. After this time period, another PDD and costly project cycle must be completed to earn additional revenues. And the new baseline after ten years includes the existing methane capture project. So, unless upgrades to the project are made, no CERs will result after the first ten-year crediting period.1
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As a remedy to these ERPA contract asymmetries of information, the UNEP and Risø Centre created a CDM Bazaar website in December of 2007 where CDM buyers and seller can find and directly contact each other. This forum allows project owners to eliminate the carbon broker middleman step where much money can be lost [38]. Also, in June of 2007, lawyers at Climate Focus and Lee International created a generic ERPA in English, Spanish, French, Portuguese and Chinese that project owners and CER purchasers can modify and use free of charge. This project helps eliminate costly legal fees to draft these documents. Funding for this project was provided by the Inter-American Investment Corporation, which is a member of the Inter-American Development Bank Group [39].
Conclusion There are a variety of entities from the country’s DNA office to UN organizations, developmental banks, NGOs, national laboratories, regional organizations, industry associations, universities and carbon brokers that support renewable energy and CDM activities. The distribution of these organizations, their mission, how well they are run, and the resources dedicated to their existence determine their effectiveness. Therefore, not all countries and project developers have equal opportunities to learn about and harness the potential of CDM. This situation helps contribute to an unequal distribution of projects and can lead to poorly understood and unfair ERPAs.
Note 1 This information is not cited to protect the author and the parties involved.
References 1
2 3 4
5 6
7
Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An assessment of DNAs in Latin America and the Caribbean’, Inter-American Development Bank, Washington, DC, October Michaelowa, A. (2007) ‘Fundamentals of programmatic CDM’, presentation at CDM Tech Workshop, Cartagena, Colombia, 21 March Galbusera, S. (2007) Interview with S. Galbusera, Fondo Argentino de Carbono, 20 November, Buenos Aires, Argentina MacGregor, E. and Nienau, M. A. (2007) Interviews with E. MacGregor and M. A. Nienau, Administrators of Fondo Mexicano de Carbono for BANCOMEXT, 29 August, Mexico City, Mexico Núñez, A. M. (2007) Interview with A. M. Núñez, CDM Coordinator in CORDELIM, 23 October, Quito, Ecuador Secretaría de Energía (2006) ‘Cálculo del factor de emisión de CO2 de la Red Argentina de Energía Eléctrica’, Version 2007, available at http://energia3.mecon.gov.ar/contenidos/verpagina.php?idpagina=2311, accessed on 22 April 2009 Zapata, H. J. (2007) Interview with H. J. Zapata, Renewable Energy Coordinator UPME, 10 October, Bogota, Colombia
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Neira, D., Van Den Berg, B. and De la Torre, F. (2006) ‘El Mecanismo de Desarrollo Limpio en Ecuador: Un diagnostico rápido de los retos y oportunidades en el Mercado de Carbono’, Banco Interamericano de Desarrollo and Ministerio del Ambiente and Corporacion Interamericana de Inversiones Unidad de Cambio Climático (2002) ‘Estudio de apoyo a la aplicación del Mecanismo para el Desarrollo Limpio del Protocolo de Kioto en Uruguay’, Ministerio de Vivienda, Ordenamiento Territorial y Medio Ambiente, May. Iturregui, P. (2007) Interview with P. Iturregui, Former DNA of Peru, 11 November, Lima, Peru Oficina de Desarrollo Limpio de Bolivia, CORDELIM de Ecuador, FONAM de Peru, and Ministerio del Medio Ambiente de Colombia (2008) Andean Carbon Hub, available from www.andeancarbon.com/ Días, F. (2007) Interview with F. Días, Comisión de Política Energética, Ministerio de Economía y Finanzas, 5 October, Panama City, Panama United Nations Economic Commission for Latin America & the Caribbean (2006) Study for the Fourth Meeting of the Economic and Society Working Group of Forum for East Asia–Latin America Cooperation’, 7–8 June, Tokyo, Japan Camara, A. (2007) Interview with A. Camara, Ecoinvest Carbon Consultant, 22 November, Buenos Aires, Argentina Gonzalez, M. (2007) Interview with M. Gonzalez, Carbon Consultant for MGM International, 19 October, Medellín, Colombia Cornejo, J. (2007) Interview with J. Cornejo, DNA of Ecuador in the Unidad del Cambio Climático de la Comisión Nacional del Medio Ambiente, 25 October, Quito, Ecuador Gieseke, R. (2007) Interview with R. Gieseke, CONAM Designated National Authority Office, 6 November, Lima, Peru Zeller, R. (2007) Interview with R. Zeller, President of Alquimiatec, 24 October, Quito, Ecuador Trujillo, R. (2008) Interview with R. Trujillo, DNA of Bolivia, 16 April Garcia, D. (2007) Interview with D. Garcia, FONAM Energy and CDM Specialist, 5 November, Lima, Peru Black, T. (2007) Interview with T. Black, Executive Director of CAEMA, 9 October, Bogota, Colombia Baker & McKenzie, CDM Rulebook: Clean Development Mechanism Rules, Practice, and Procedures, http://cdmrulebook.org/, accessed 28 March 2008 Kline, D.M., Vimmerstedt, L. and Benioff, R. (2003) ‘Clean energy technology transfer: A review of programs under the UNFCCC’, Mitigation and Adaptation Strategies for Global Change, vol 9, no 1, March 2004 Inter-American Development Bank (2008) ‘SECCI at a glance’, available from www.iadb.org/secci/secciAtGlance.cfm?language=English World Bank (2008) Proposed Climate Investment Funds, 22 April, available from www.worldbank.org/cif Azurdia, I. (2007) Interview with I. Azurdia, Executive Director, Foundación Solar, 7 September, Guatemala City, Guatemala Barco-Roda, J. (2007) Interview with J. Barco-Roda, NorWind Project Developer, 7 November, Lima, Peru Global Village Energy Partnership International (2008) Latin America, available from www.gvepinternational.org/where_we_are_working/latin_america Ley, D. (2008) Interview with D. Ley, Former United Nations ECLAC Consultant, 30 April
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30 US Department of Energy, Office of Policy and International Affairs (2002) ‘Increased use of renewable resources program for Central America’, from series Energy and Water for Sustainable Living, paper prepared for the World Summit on Sustainable Development, Johannesburg, South Africa, 26 August to 4 September 2002, available at www.pi.energy.gov/documents/EWSLcentralamerica.pdf 31 CEPAL and GTZ (2004) ‘Fuentes renovables de energía en America Latina y el Caribe: Situación y propuestas de política’, 19 May 32 Coviello, M. F. (2007) Renewable Energy Sources in Latin America and the Caribbean: Two Years After the Bonn Conference, United Nations Economic Commission for Latin America and the Caribbean, Santiago 33 Coviello, M. F. (2003) Etorno internacional y oportunidades para el desarrollo de fuentes renovables de energía en los países de America Latina y el Caribe, CEPAL, Division of Natural Resources and Infrastructure, Santiago 34 Uribe, C. (2007) Interview with C. Uribe, PDD Author of Curva de Rodas, 17 October, Medellín, Colombia 35 Márquez, F. (2007) Interview with F. Márquez, Estudios y Técnicas Especializadas en Ingeniera, 29 August, Mexico City, Mexico 36 CDM Pipeline (2009) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 February 37 Streck, C. (2007) ‘A new contracting model for ERPAs: Equity and efficiency in legal and contractual issues’, presentation at CDM Tech Workshop, 21 March Cartagena, Colombia 38 UNEP Risø Centre (2007) ‘CDM Bazaar’, December, available from www.cdmbazaar.net/ 39 Lee International and Climate Focus (2007) Certified Emission Reduction Sales and Purchase Agreement (CERSPA), available at www.cerspa.com/sponsors.html
6 Host Country Institutional Barriers
Institutional support for the Clean Development Mechanism (CDM) and renewable energy in general within host countries varies. Point Carbon prioritizes the ease with which CDM projects can be implemented in a variety of developing countries for prospective investors [1]. This grading procedure is determined by the country’s climate institutions, project status and potential, and investment climate. The German Office of Foreign Trade does a similar analysis for Latin America and shows Chile, Mexico and Brazil as being the most desirable countries because of solid economic indicators, low corruption and well-run Designated National Authority (DNA) offices that are open and accessible [2].1 Table 6.1 Point Carbon’s international CDM host country rating Country China India Chile Mexico Brazil South Africa Malaysia Korea Peru Morocco Indonesia Argentina Vietnam Philippines Egypt Thailand
Rating AABBB BBB BB+ BB+ BB+ BB+ BB BBBBB B B CCC CCC
Source: Point Carbon (2007) ‘CDM host country rating’, December, available from www.pointcarbon.com
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Table 6.2 Latin America’s top rated countries for CDM investment rated by the German Office of Foreign Trade Country
Rating
Chile Mexico Brazil Peru
91.8 88.8 85.0 79.3
Source: Umann, U. (2007) ‘CDM Investment Climate Index: Regional comparison’, German Office for Foreign Trade and Deutsche Investitions, August
This chapter addresses why some countries have more favourable institutional support networks than others by analysing trends and specific examples of the energy policy creation process and its support for renewables. Political division of energy tasks complicates the process of providing support for renewables and the timely processing of requests. Abrupt changes in administrations that do not provide continuity between the programmes of one government and those of the next can also jeopardize long-term energy policy planning and support. How and if the government has set up a market that is open also has a huge bearing on the successful implementation of CDM projects. The DNA offices’ role in promoting or inhibiting CDM is a key factor that can be an institutional barrier. This topic is discussed in full detail in Chapter 5, ‘Informational Barriers’.
Lack of a long-term vision for energy policy For many of these countries, creating energy legislation is a new phenomenon that did not occur until these countries privatized the energy sector. Suddenly, newly formed policy-making groups were responsible for creating laws and a marketplace that instigated enough capacity additions to fulfil the demand of the nation. Therefore, creating renewable energy legislation, like all energy policies, has been a game of trial and error that has led to revisions and second versions of laws in short succession. It has also created a piecemeal approach to most energy legislation. The lack of comprehensive energy legislation means that most laws are poorly coordinated with existing legislation. Sometimes an overlap of responsibilities or neglect of tasks occurs. Each country has structured the energy market completely differently. Honduras, Nicaragua and Costa Rica have arrangements where the state company pays for generation but not capacity and no wholesale market exists. In Guatemala and Panama, traditional Power Purchase Agreements (PPAs) can be signed that provide both capacity and generation payments [3]. A detailed description of the renewable energy policy for each country can be found in the country-specific section. In this chapter and section, the author highlights just a few countries to illustrate the lack of longterm policy thinking and the guessing game of structuring renewable policies. The laws promoting renewable energy development in each country in the region differ, but the trend in most countries is to provide exemption from
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income taxes for first ten years of operation and exemption from import taxes on generation equipment. However, each country tends to have its own method of promoting renewable energy. And, since the recent rise in fossil fuel prices, a flurry of new and revised laws have come into place to more actively support the sector. However, frequent changes to the laws have provided an unsure environment for investors as they try to navigate legislation that has not been tested. For example, the tariff formula for private generators in Costa Rica has changed three times since 1992 [4]. During the autumn of 2007, Mexico, Honduras, Guatemala, Panama and Costa Rica were all in the process of changing legislation to provide more aggressive incentives for renewable energy. Chile and Argentina have new renewable energy legislation, and Peru’s lawmakers are considering stronger renewable energy laws and passed a decree for renewable energy promotion in May of 2008 [5]. Countries like Uruguay have begun to promote renewables in a quest for new capacity additions. However, the 2007 elicitations for 20MW of biomass, 20MW of small hydro and 20MW of wind energy are hardly a long-term or significant step towards promoting these technologies [6]. No hydro bids for this call were made because the elicitation was not published in enough time for the long process of initiating a new hydro installation to be completed. A new call for 26.2MW of renewable energy was initiated by the governmental monopoly, UTE, in early 2008 [7]. Brazil also elicited 3300MW capacity elicitations for biomass, small hydro and wind in an Incentives Programme for Alternative Sources of Electric Energy (PROINFA). Policy makers found that there was a lack of biomass bids because the prices offered for these generators were better outside of the special bid process. Brazil then had to revise the amount of biomass it expected from the elicitation. In comparison with Uruguay’s tender, Brazil did have the foresight to have two phases of its renewables programme. While the rules for the second phase of PROINFA have not been finalized, the general notion is that the required amounts of renewable energy will be more stringent [8]. This second wave of renewables legislation provides interested developers and investors with legislative certainty that there will be a market for these technologies in the future. Both Brazil and Uruguay’s renewable energy legislation does more than just provide MW targets; it creates a local marketplace for the components by requiring that a certain percentage be sourced locally. Beyond just promoting renewable energy and investment from foreign companies, Brazil’s PROINFA legislation requires that 60 per cent of the project components be locally sourced [9]. The next phase of this legislation will most likely require a 90 per cent local requirement [8]. Uruguay has a similar regulation to promote local industry by giving locally produced technologies a 10 per cent advantage over foreign firms with regard to winning renewable energy bids [7]. The trial-and-error method of energy policy is also evident in Chile. As of March 2008, it requires its generators to source at least 10 per cent of their energy from new renewable sources, excluding large hydro, for residential sales
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by 2024 [10]. The goal of this mandate is to help Chile promote capacity additions that will ease its reliance on the natural gas supply from Argentina that was recently cut. The 10 per cent mandate was made after two previous laws (Short Law I and II), which lowered transmission and distribution tariffs and other incentives for renewable generators, failed to promote development [11]. Penalties for non-compliance with the mandate may help increase the price that renewable generators are able to command. The complicated nature of each country’s electrical sector and the changing renewable energy legislation in the region are a challenge for project developers who hope to operate in multiple countries. The table at the end of the countryspecific section provides a brief description of the laws currently in place in each of the countries. In general, countries with a strong regulatory framework for renewable energy, like Brazil and Chile, will be better able to promote nonhydro renewables [12].
Political division of tasks Other political barriers exist in the way in which the energy sector is organized in the country’s government. Some countries like Panama have up to five different governmental organizations which create tariffs, allocate environmental and generation permits, provide CDM national approval and administer the energy market. Most of the institutional bodies that are in charge of managing the country’s market, regulating electricity tariffs, creating new energy policy and handling rural energy development are new since the restructuring of the market. These entities, therefore, may not know exactly how coordination between entities should be handled on issues related to CDM and renewable energy development. Division of these tasks can sometimes lead to confusion as to who should address a particular issue. For example, in Costa Rica, law makers recently realized that Law 7200, which privatized the electricity sector, did not provide clear guidance on who issues water permits. This ambiguity has stopped new investment in hydro resources and closed about 30MW of generation from various plants that cannot renew their water rights. A law to define who should give this permit has been debated in the national assembly for two years [4]. In Guatemala, no one owns the right to use water resources. Generators simply ask permission for their use. Whether or not this permission is granted is a process that is highly political and not based on a set of given criteria [13].
Abrupt and frequent administrative changes An overarching political barrier facing countries today is the abrupt change of administration in each country, which can paralyse efforts to realize a long-term cohesive energy policy and renewable energy development. Often one set of elected leaders cannot fulfil promises they made to their constituents who voted them into office. Then these leaders are voted out of office in the next election
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when their platform goals are not achieved or their administration is proven corrupt.2 The population then chooses to vote for the opposite party candidate with the hope that he or she will be an improvement. These radical changes from one party to another cause governmental programmes to be dropped if they are not consistent with the new party’s platform. Also, the change brings about an evacuation of governmental employees and replacement with new ones that are sometimes not qualified to be in the position, but were appointed to the position because they have connections with the leading party [14]. The change of administration every four or six (in the case of Mexico) years entails a one year lull while new staff members become acquainted with policies, and the last year of the term is dedicated to campaigning for the next election. Also, investors are hesitant to become involved in new projects in the last year of a term since there is little certainty for regulatory measures and the political/economic stability of the country [15]. This upheaval wreaks havoc on the governmental offices where the DNA resides and decides on individual projects’ fulfilment of the sustainable development criteria. These offices are also meant to provide promotion of the CDM in the form of information for the population and capacity building seminars. When members of this office are replaced, all institutional memory is lost and the new members start anew with no knowledge of the complex CDM process. Honduras has suffered from this upheaval in 2005 and had the entire DNA office replaced after the change in administration in 2005 [14].
Market openness to independent power producers Even though there are new laws to promote renewable energy technologies, a well-coordinated fleet of people handling energy policy, and political continuity, are needed for CDM success; other political indicators must also be well aligned in order to have successful project implementation. Costa Rica, as well as Mexico, opened the market partially and now allows only limited private sector participation. Private generators in Costa Rica comprised only 8.3 per cent of the country’s generation in 1999 and by law can make up only 30 per cent of the market [16]. Also, they have to wait until new capacity is solicited. Then they can offer a bid, but it must be accepted by the state-run Instituto Costarricense de Electricidad (ICE) before they can be assured that their generation will be bought. If the bid is accepted, the generator is then in a situation of a monopoly where ICE is the only buyer; the generator must accept whatever price ICE offers. Generators in Costa Rica cannot earn better sale prices because they, by law, are not allowed to sell directly to large consumers or the Central American grid (SIEPAC). These barriers explain why Costa Rica, a place with political stability that has attracted much foreign investment in other sectors like tourism, had only five registered CDM projects as of November 2007. A similar situation occurs in Honduras where generators can only sell to the Empresa Nacional de Energía Eléctrica and must accept the payment this
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state-run company offers [14]. In Nicaragua, independent power producers (IPP)s are limited to creating PPAs with the national utility [17]. In Belize, the electrical sector is still completely controlled by the government and consists mainly of hydroelectricity, which has shown no movement to utilize CDM. In fact, the country has not yet even set up a CDM office. Therefore, those interested in renewable energy generation projects will usually choose to invest in countries with a more open market, the presence of financial incentives and a higher emission factor. On the other hand, Chile and Guatemala have very open markets that have succeeded in attracting many foreign and domestic independent power producers. In Chile the private sector controls 90 per cent of generation, and in Guatemala it controls 50 per cent [18] and [19]. Obviously, more than just the open electrical market lured investors and developers to these countries, but having a marketplace that has few barriers to entry and allows for free market competition does factor into the decision to develop. These experiences from closed markets, as in Costa Rica, Belize and Honduras, and completely privatized ones, as in Guatemala and Chile, show that open markets with few barriers to entry for private generators are best positioned to take advantage of CDM revenues. Entrepreneurs in the private sector are more apt to attempt to navigate the complex CDM approval process in a country that has straightforward permit processes and welcomes development. When the private sector does not get involved in CDM projects, there are few prospects for project success. State-run generation companies have little incentive to fumble through the CDM project cycle when they will be able to recuperate costs from taxpayers regardless of the project costs. If these agencies had to apply for revenues to reduce customer costs, then there would be more state-initiated CDM projects. However, regulatory agencies, who oversee the operations of state companies to make sure that they do not overcharge customers with unnecessarily high rates because of poor energy investments, currently do not mandate that state entities take advantage of CDM revenues to reduce customer rates [20]. In some cases there is even a disincentive to applying for CDM revenues; the Public Utility of Medellín (Empresas Públicas de Medellín) was audited by the city committee that oversees how public money is spent for trying to use the CDM because of the long delays it caused in project development [21]. It is also difficult for state-run generation facilities and municipalities that control landfills to develop projects because the process must be public. This requirement can slow negotiations as various stakeholders and members of the public present their opinion. State-run entities like ICE of Costa Rica may be bound to certain financial rules that force them to accept the least-cost bid for generation [20 and 22]. This requirement almost entirely excludes the participation of CDM projects since they, by definition, have to rely on carbon credit revenues to exist and be considered additional. These state-run entities also cannot freely invest in projects because, as a state entity, they must gain permission from the commission that oversees their activities and provide justification
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for the investment [23]. Therefore, there is little incentive for state employees to pursue the CDM except in rare instances. (A more elaborate discussion of financial and regulatory additionality problems stemming from institutional barriers can be found in Chapter 7, ‘UNFCCC Procedural and Methodological Barriers’.) Other state-run generators have not pursued CDM because it goes against the culture of the organization. Operators are used to serving the goal of providing reliable electricity and aim to maintain the status quo. Navigating complex international carbon markets and rules falls outside their jurisdiction and interest. One notable exception is within the Empresa Nacional de Electricidad (ENEL) in Nicaragua where Mario Torres is spearheading a directive to earn Certified Emission Reductions (CERs) for four hydro projects. Torres, however, is an anomaly within ENEL and other state entities because he previously worked for the CDM national approval office located within the Ministerio del Ambiente y Recursos Naturales [24].
Conclusion The institutional barriers of a lack of a long-term vision for energy policy that incorporates renewables, closed electricity markets, disorganized political divisions that complicate tasks essential for CDM project development, and frequent and abrupt political upheaval may seem like insurmountable challenges to project development. In general, laws created to promote renewable energy tend to be experiments, which have to be revised to produce the desired results. Although renewable energy policies in many Latin American countries have gone through a period of trial and error, they ultimately have helped promote renewables, CDM development and, in the case of Uruguay and Brazil, local industries.
Notes 1 This German study contradicts the experience of other energy professionals who have encountered high levels of corruption in Mexico [15]. 2 Some countries do not even allow for re-election.
References 1 2 3
4 5
Point Carbon (2007) ‘CDM host country rating’, December, available from www.pointcarbon.com Umann, U. (2007) ‘CDM Investment Climate Index: Regional comparison’, German Office for Foreign Trade and Deutsche Investitions, August Matute, L. J. (2006) ‘Incentivos a las energías renovables en Centroamérica’, presentation at Forum ‘European Union Meets Latin America on Renewable Energy’, Panama, 9–11 October Villa, G. (2007) Interview with G. Villa, Director of Energy within Ministerio de Ambiente y Energy, Costa Rica, 27 September, San José, Costa Rica Business News Americas (2008) ‘President inks renewables promotion decree’, Electric Sector, 5 May, www.bnamericas.com/news/electricpower/ President_inks_renewables_promotion_decree
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7 8
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18.
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Kasprzyk, M. (2007) Interview with M. Kasprzyk, Designated National Authority in the Ministerio de Vivienda, Ordenamiento, Territorial, y Medio Ambiente, Division de Cambio Climático, 27 November, Montevideo, Uruguay Tasende, D. (2007) Interview with D. Tasende, Director of Renewables, UTE, 27 November, Montevideo, Uruguay do Valle, C. (n.d.) ‘Renewable Energy Policy: Brazil’, Centro Clima: Center for Integrated Studies on Climate Change and the Environment, available through Renewable Energy Policy Network for the 21st Century at www.ren21.net/ pdf/WorkShop_Presentations/do-Valle_Renewable%20Energy%20Policy% 5B1%5D.ppt World Wind Energy Association (2007) World Wind Energy Award 2007 goes to Government of Brazil for Proinfa Programme, 4 October Reuters UK (2008) ‘Chile’s Congress approves renewable energy law’, 6 March Ministerio de Economía Fomento y Reconstrucción (2004) ‘Ley Corto I: Regla Sistemas de Transporte de Energía Eléctrica, Establece un Nuevo Regimen de Tarifas para Sistemas Eléctricos Medianos, y Introduce Adecuaciones que Indica a la Ley General de Servicios Eléctricos’, Diario Oficial de la República de Chile, 13 March Woods, R. (2008) ‘Renewable energy is booming in Latin America’, Business News Americas, 6 May Ruiz, O. (2007) Interview with O. Ruiz, Head of the Centre of Information and Promotion of Renewable Energy, Ministerio de Energía y Minas, 7 September, Guatemala City, Guatemala Salgado, G. (2007) Interview with G. Salgado, CDM Consultant, former Designated National Authority of Honduras, 11 September, Tegucigalpa, Honduras Ley, D. (2008) Interview with D. Ley, Former United Nations ECLAC Consultant, 30 April Millán, J. (1999) ‘The power sector in Costa Rica’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC Millán, J. (1999) ‘The power sector in Nicaragua’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC Millán, J. (1999) ‘The electrical sector in Guatemala’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC Millán, J. (1999) ‘The electrical sector in Chile’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC Cordero, F. and Mayorga, G. (2007) Interviews with F. Cordero and G. Mayorga, Strategic Business Unit of Instituto Costarricense de Electricidad (ICE), 25 September, San José, Costa Rica Vélez, O. L. (2007) Interview with O. L. Vélez, Empresas Públicas de Medellín, Subdirección Medio Ambiente, 18 October, Medellín, Colombia Barnes de Castro, F. (2007) Interview with F. Barnes de Castro, Commissioner of Comision Regulatoria de Energía, 30 August Delgado, W. (2007) Interview with W. Delgado, Project Developer for Companía Nacional de Fuerza y Luz, 27 September, San José, Costa Rica Torres, M. (2007) Interview with M. Torres, Project Planner for Empresa Nacional de Electricidad of Nicaragua 19 September
7 UNFCCC Procedural and Methodological Barriers
United Nations Framework Convention on Climate Change (UNFCCC) procedural and methodology barriers for renewable energy Clean Development Mechanism (CDM) projects fall into a variety of categories including the following: an unstable CDM market; complications that arise from countries having low emission factors and high levels of imported generation; misunderstanding of CDM methodology; adjustments made to build and operating margins and methodologies that do not promote the economic viability of projects; changing CDM methodologies; conflicts with the regulatory and financial additionality of projects; and the availability of carbon brokers and Designated Operational Entities (DOEs) in each country. The barriers for small-scale projects to earn Certified Emission Reductions (CERs) are many, and discussed thoroughly in Chapter 8, ‘Small-Scale Barriers’.
Instability of the CDM market The CDM market is unstable for several reasons. Firstly, it is a part of the emerging carbon market that suffers from price fluctuations as the cost of reducing carbon domestically is somewhat unknown. Also, the number of allowances CO2 throughout the European Union (EU) has a huge bearing on the price of CERs. However, the number of allowances that are excess or not needed is unknown until the end of each trading period, 2007 and 2012. At that point, the price of carbon can either skyrocket or plummet as it did in the spring of 2006 when regulated entities realized there was a glut of allowances on the market [1]. The number of CERs that will be generated from the developed projects is also highly speculative since their generation hinges on the proper functioning of the system. In July of 2007, Christiana Figueres and Ken Newcombe made estimates for a paper published by the World Bank. The paper shows the total CERs needed from the EU in the second trading scheme to be 1.25 billion by 2012 (1.25 gigatonnes of reductions). If other Annex I countries like Canada
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(but not the US and Australia) are included, the CERs needed would total 2.7 billion. In this second scenario with a need of 2.7 billion CERs, current pipeline supply with no additional projects would approximately meet the need [2]. Another World Bank report by Karen Copoor and Philippe Ambrosi, written in May of 2007, predicts that EU buyers (who make up the bulk of the CER market), have fulfilled only 45 per cent of their demand for CERs and Emission Reduction Units from Joint Implementation. Excluding potential Australian, Canadian and US demand, they conclude that there is a remaining demand of about one billion CERs and Emission Reduction Units from Joint Implementation activities for the 2012 target, which is close to the Figueres/Newcombe prediction of 1.25 billion CERs [3]. These estimates for future CER demand are difficult to predict for a variety of reasons. Assumed project failure rate has a large bearing on the number of CERs that will be available. The Figueres/Newcombe report which estimates that demand, including all Annex I countries, would be met by current pipeline projects does incorporate a failure rate [2]. The US Electric Power Research Institute estimates that about half of the CERs that are expected to be generated will fail because projects are delayed, malfunction or experience other problems, while other carbon market analysts assume project failure rates of 15–20 per cent [4 and 5]. Given the huge expected increase in CERs because of projects in the pipeline, the level of success of these prospective projects will have a large bearing on the number of CERs available. Figure 7.1 below shows the total CERs that will be generated from already registered and pipeline projects worldwide. This graph assumes that industrial gases will not be included in the future supply. 45 Pipeline projects 40
Registered projects
35
Gtons of CO2
30 25 20 15 10 5 0
2017
2024
Source: Figueres, C. and Newcombe, K. (2007) Evolution of the CDM: Toward 2012 and Beyond, World Bank, Washington, DC
Figure 7.1 CERs predicted without industrial gas inclusion
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CER estimates must make assumptions about the supplementary clause or how much each country can use project-based CERs or Joint Implementation Emission Reduction Units to fulfil its reduction targets [3]. Canada has set its clause at 10 per cent of total reductions necessary while the clauses within EU countries average 13.5 per cent, but vary from 8 per cent in the UK to 20 per cent in Spain [4]. Each estimate could have used different average supplementary clauses. These estimates of a flooded CER market or having a shortage of CERs must be considered carefully because they assume that the US, Australia and Canada will not have a significant demand for CERs. These predictions were made before Australia’s recent move to ratify the Kyoto Protocol in December of 2007 [6]. Also, with the domestic movement on both the east and west coasts of the US to control greenhouse gas emissions, the US could have a demand for CERs before 2012. Beyond these complications of project failure rate, the supplementary clause, and future country participation with CER forecasting, there are regulatory and other uncertainties that make it difficult to predict post-2012 CERs generated. Many negotiators think that the industrial gas emissions will not be allowed as valid reductions in the post-2012 regime since these projects have raised several questions of whether or not they fulfil the goal of sustainable development. Which sectors will be regulated also places uncertainty in these estimates. Aviation, shipping and vehicles are being discussed as potential sectors for regulation in the EU. Inclusion of these sectors could greatly increase demand for CERs [3]. Predictions about future CER demand have to make assumptions about renewal periods after seven years and the success of projects’ ability to register in these future periods. Also, estimates do not include new projects that are not currently in the pipeline. Finally, these estimates mean little without knowledge about what the reduction targets for each country will be and whether or not the market will be flooded. Another market uncertainty results from the unclear post-2012 Kyoto obligations. Since most renewable energy projects require several years to initiate and have long-term payback periods, developers are hesitant to take on new projects that will generate CERs for 7 to 21 years, well into a time when CERs may have no value. There are few post-2012 CER buyers. Offers from the few buyers that exist tend to be low because of the uncertainty of reduction targets and CER market saturation [7]. Until the rules are finalized, the CERs that can be forward-purchased from projects in the pipeline will suffer from low prices. Therefore, the market for CDM projects may decline significantly in the coming years. The instability of the carbon market causes confusion for project developers and investors. Having the value of and ability to obtain CERs being uncertain prevents these entities from depending on their existence. This situation undermines the additionality of projects, as those that would occur in a business-as-usual situation are the ones that are able to exist. When this occurs,
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CDM revenues act as additional profits for already financially viable projects, but do nothing to promote marginally profitable projects.
Methodology confusion As project owners, DNAs and carbon brokers have learned the CDM project cycle through practice and some mistakes have been made. In Peru, one of these mistakes caused the Paramonga Sugarmill to be denied registration. In 2002, the country’s Consejo Nacional del Ambiente (CONAM) or national environmental office did an initial assessment that showed the project to be small-scale based on its generation of less than 15MW. Then, the Andean Center for Environmental Economics (CAEMA) wrote a Project Design Document (PDD) based on this assessment, and the Det Norske Veritas (DNV) validated the project. However, the CDM Executive Board rejected it because the project had 85,000 annual emission reductions rather than the required 60,000 for small-scale status. Confusion about this project arose because the project was both a fuel switching and renewable energy project. Fuel was switched from petroleum to biomass in a 15MW power plant. In the early assessment of the project, the CONAM, CAEMA and DNV had all incorrectly assessed the project size [8]. Undaunted by this experience, Paramonga is now considering bundling a new project with this older project into one PDD [8]. However, this expectation may not be realistic, and based on incorrect CDM information. The biomass plant of 2002 that Paramonga hopes to earn CERs for is already operating. After 31 March 2007, projects that had already begun operations were not eligible for registration [9].
Low emission factors There is a bureaucratic barrier that results from CDM projects in countries that have low emission factors. The CDM project displaces generation that occurs within the country, and the amount of CERs produced is typically a product of the megawatt-hour (MWh) generated times the carbon intensity of the fuel used to produce the energy for the country in a business-as-usual scenario. For countries like Costa Rica that have low national emission factors (or CO2 produced per MWh generated) because 70 per cent of the country’s generation is from hydro, fewer CERs are generated from a project that is the same size as a project in a country with a higher national emission factor. However, since Costa Rica’s main hydro sites have already been utilized, their future electrical production to fulfil demand growth will most likely be fossil fuel-based from imported fuels [10]. For countries with a generation portfolio and future fuel mix like Costa Rica’s, perhaps baseline calculations should not be based on historical emissions, but instead on predicted future emissions. Structuring the baseline calculation on historical emissions punishes countries that currently have large
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sources of clean energy and rewards countries that have developed with a strong dependency on fossil fuels [11].
Imported energy Imported energy can also cause a country to have an artificially low emission factor since it counts as zero for the country’s emission factor [12]. It is essential to count this generation as zero because it would be difficult to track frequent energy transactions across borders and then trace the source of generation for each unit. Counting generation from other countries would also mean that it would have to be subtracted from the host country’s emission factor when calculating reductions made domestically. These calculations would add complexity to the already complicated process of determining emission reductions. Because there is no easy way to deal with this problem, countries with high energy importation rates, such as Uruguay at 35 per cent and Ecuador at 10–14 per cent, suffer from earning fewer emission reductions [13 and 14]. Therefore, CDM projects in these countries are not as desirable.
Adjusting the build and operating margin Sometimes carbon brokers try to earn more emission reductions for their projects by adjusting the build and operating margin of their projects in the baseline calculation. The operating margin refers to the emission factor of the power plants on the grid, while the build margin refers to the emission factor of the most recent capacity additions to the system. Typically, these two factors are averaged together equally to create the baseline emission factor in tonnes of CO2 per MWh of electricity produced. Renewable energy CERs are calculated by multiplying the MWh of electricity the project produces by the emission factor. For solar and wind projects, an operating margin of 75 per cent and build margin of 25 per cent are used since these projects tend to correspond with peak loads.1 All other projects use a 50/50 ratio for the build/operating margin. Deviations from these standards must be justified as an exception to the preferred method [15]. Whatever ratio of operating and build margin is selected in the PDD remains for the life of the project, which is either seven or ten years. Carbon brokers and project developers will sometimes adjust these ratios slightly to produce what they think will generate more CERs. However, an adjustment that may yield more CERs in the current year may yield less in future years. Since the emissions reductions are calculated each year to incorporate the most up-to-date and accurate numbers, changing the numbers can produce an unexpected result. For example, in Colombia, La Niña years tend to have more precipitation, allowing dams to run at full capacity. El Niño years are drier and the country must rely on more thermal generation.2 Therefore, arguing for a higher or lower percentage will not always give a project more
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CERs since the operating margin changes depending on the availability of water in Colombia [16]. The operating and build margins can also differ depending on changes in fossil fuel availability. Chile’s operating margin has changed in recent years as the natural gas supply line was cut off from Argentina. Chile has had to retrofit many of its plants that accepted natural gas to take fuel oil now. This change has increased the carbon intensity of its operating margin fuel mix. Therefore, weighting the build margin more heavily in Chile prior to this change would have yielded fewer CERs [17]. Beyond fuel shortages, countries also may not be able to procure fossil fuel resources because of ideological or political differences with their neighbours. Chile refuses to grant Bolivia access to a Pacific port between the northern border of Chile and southern border of Peru. Because of this conflict, Bolivia refuses to sell natural gas to Chile [17]. Given the uncertainties in the build margin because of the price of fuels, political climate of the country, and availability of water resources, most carbon brokers choose to keep the recommended ratio.
Proposing new methodologies Adjusting existing methodologies or proposing new ones to yield more CERs can also produce unexpected results. The CDM was designed to be flexible since new types of carbon reductions are being devised every day. This flexibility allows new methodologies to be proposed. In Chile, the project developers of Chacabuquito hydro facility decided to propose a new methodology called New Methodology 0076, which was eventually accepted in a slightly different form as Approved Methodology (AM) 0026. The logic behind proposing this methodology was that it would allow more reductions to be earned from renewable energy CDM projects in the country. Chile’s special method of valuing water in dams means that non-run-of-river hydro facilities with a reservoir only release water for generation when the least-cost bid process shows that the ‘value of water’ or ‘shadow’ price given to the water is lower than other forms of generation. The ‘value of water’ can be thought of as the opportunity cost of using the water at that moment instead of saving it to be used at a later time. This price is based on the price that electricity commands at any given time. This use of dams is different from countries that use them simply as a baseload where the cost of operation and/or capital cost are the only factors considered for the least-cost bid [17]. After severe droughts in 1998, the value of water in dams increased in Chile. Chacabuquito developers, which included the World Bank’s Prototype Carbon Fund and Hidroelectrica Guardia Vieja representatives, realized that under the preferred baseline calculation for the operating margin, which takes into account the last 10 per cent dispatched on the grid to calculate CERs under Approved Consolidated Methodology (ACM) 0002, few reductions would be calculated. The last 10 per cent dispatched on the Chilean grid was
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almost always hydro since this resource was considered most expensive and all cheaper options are selected by the merit order dispatch grid which employs an independent entity for optimal system performance based on the lowest marginal cost of generation. So, developers decided that a new methodology for countries like Chile with merit order dispatch systems should be created. New Methodology 0076 proposed that only the first thermal generation in the dispatch order for calculating the operating margin emission factor should be considered for calculation of CERs from displaced generation. The rationale for this proposal was that the CDM project would only displace thermal generation because the generation would always be of less value than the ‘value of water’. Also, the limited storage capacity of some CDM projects ensures that they must be immediately dispatched and do not have the ability to load follow, which places them below the ‘value of water’ in terms of cost of generation and the dispatch order. Therefore, they concluded, the CDM project would always be replacing a thermal resource and never water [18]. The UNFCCC accepted the methodology, but changed it in a significant way that left the methodology authors with significantly fewer CERs than they had predicted for the Chacabuquito project [19]. The proposed methodology took into account the fact that the CDM project would almost always replace thermal generation and specified that ‘hydro resources should be excluded from the definition of marginal plants if thermal power units are dispatched below those hydro resources on economic merit. If no thermal power plants are needed to meet the demand without the CDM projects, then the hydro resources are at the margin and therefore the emission factor is zero.’ However, the actual methodology omitted the first sentence above and only included ‘If no thermal power plants are needed to meet the demand without the CDM projects, then the emission factor is zero.’ In this way, Chilean developers used many resources on the creation of a new methodology only to have it changed by the CDM Executive Board to be very similar to the AM0002, which does not take into account the nuances of merit order dispatch grids [18]. (More details about this methodology can be found in the countryspecific section on Chile.) Even though Chacabuquito project developers were disappointed that their methodology was not selected as written, the methodology may be necessary for today’s electricity market in Chile. Chile’s fuel supply crisis since 2002 when the natural gas supply from Argentina began to be cut has dramatically changed the shadow price of water in comparison to fossil fuels. So, in the spring of 2007 when fossil fuels commanded a price of $250/MWh, the price of fossil fuels was most likely considered more expensive than the ‘value of water’, and dispatched last [17]. Therefore, the CDM project would, according to AM0026, be displacing fossil fuel generation and yielding maximum CERs even without the provisions of New Methodology 0076 [18].
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Changing existing methodologies An alteration in UNFCCC methodology for the destruction of methane has changed the economics of methane capture projects significantly. Prior to November 2006, the UNFCCC methodology allowed developers to assume that 100 per cent of the methane was destroyed by these open flares. However, the UNFCCC’s new, revised destruction of methane methodology sets a maximum amount of methane destroyed from these open flares of 50 per cent. In order to prove that more than 50 per cent of the methane is destroyed, farm owners have to have a closed flare with a temperature gauge. The heat of the gas flared determines how efficiently the flare is working and the quantity of gas destroyed [20]. The temperature gauge only costs about $1200, but the cost of the flares varies widely. Open flares cost only $27,000–$150,000 while closed flares range between $105,000 and $195,000. The price range reflects the capacity of the flare, and in general, a closed flare costs 1.5 to 2 times more than its open counterpart [21]. A Mexican company called Geosistemas has created a less expensive closed flare that is comparable in price to the open flare. However, this flare is not yet available for purchase [22]. Projects that started under the assumption that they could buy and use open flares, but did not register the project before the change in methodology, have had to revise their budgets to incorporate the cost of the closed flares and in some cases have had to return open flares already purchased. Fear that the methodology could change again prompts projects in the CDM cycle to finish in a rush and discourages new project development from one company who had to change 29 digester plans in Mexico after the methodology was revised.3 This methane destruction from animal wastes methodology (ACM 0010) is just one example of a methodology that has changed three times. As of March 2008, the methodology for grid-connected renewable energy (ACM 0002) had seven revisions. Project developers have had difficulty timing the start of their projects with CDM registration because of all of the complicated steps and unforeseen delays that can occur in the process. If a project begins producing energy before it is registered, it cannot qualify for CDM [23]. Prior to March of 2007, projects that had begun operations could retroactively register and backdate credits. This provision was put in place to allow the projects that had begun operations between 2001 and 2005 (after the Marrakesh Accords of 2001 established CDM and before the Kyoto Protocol was ratified in 2005) to achieve registration [9]. Having uncertainty about the methodology one is using and the timing of when the project will be registered adds a layer of complexity to the CDM process that has discouraged project developers.
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Regulatory and financial additionality State-run electric power companies Another problematic aspect of the CDM rules is the question of regulatory and financial additionality. Regulatory additionality exists only if a project has not been mandated by the government where it is located. Problems with regulatory additionality arise in markets that are still highly regulated, as in Costa Rica and Mexico. In these countries, if an energy application is not in the national expansion plan, by law it usually cannot be considered for development [24]. If a project is named in the plan, then it is considered to be development that would occur in a business-as-usual situation and is not additional [25]. This barrier prevented the Costa Rican state-run utility, Instituto Costaricense de Electricidad (ICE), from successfully registering Peñas Blancas hydro project [25]. Financial additionality requires that the project depend on CDM revenues for its existence. This requirement is another huge barrier for state-run electrical utilities. ICE of Costa Rica is obligated to pursue the generation that is least cost for the sake of providing the cheapest rates for their customers. If renewable energy is found to be the cheapest option, it will be pursued in a business-asusual situation, making it nearly impossible to demonstrate financial additionality for the CDM. CDM revenues are not allowed to be factored into ICE’s financial analysis to make renewable energy cost-competitive with other sources of generation because these revenues are considered uncertain. Therefore, it is almost impossible for ICE to initiate CDM projects. However, ICE was able to structure one successful CDM wind project by negotiating a unique arrangement that involved a private company called Norteco owning 75 per cent of a wind farm called La Tejona. ICE had the option of buying the installation over five years. This arrangement and the upfront money for CERs from the Dutch Certified Emissions Reductions Procurement Tender (CERUPT) fund allowed ICE to avoid having to ask permission to make an investment, which may have been denied, and ultimately led to the development of La Tejona wind farm. This project was able to prove financial additionality because an experienced carbon consultant called Climate Focus developed the PDD and showed that the CERs were essential to the project’s financial success and factored into the project’s pro forma from the onset of project planning. However, this rare purchase agreement has not been replicated because of the complexity of structuring the ownership [25]. ICE was also able to sidestep the problematic demonstration of regulatory additionality, for example, the Tejona wind farm. This farm, at just 20MW, was small enough to be left out of ICE’s future expansion plan because it did not have a major impact on the grid’s functioning. Therefore, it was not considered business-as-usual as it would be if it were mentioned in this plan [25]. Mexico’s Comisión Federal de Electricidad (CFE) also faces huge barriers to implementing CDM projects. Not only does CFE face the same regulatory and additionality problems that ICE does, but CFE’s structure is such that it
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does not have protocols as to how to handle CER revenues. By law, CFE could not keep these extra revenues. They would most likely go into a separate fund held by the Mexican government instead of directly to CFE. Therefore, CFE has little incentive to be involved in the process. If CFE tried to lobby for the incorporation of CERs in the least-cost planning process for projects, then the Mexican government would be at risk of allowing a project that depends on these revenues. If the project failed to be registered or CERs were worthless in the post-2012 rules, the Mexican government would be forced to pay the CER value in order to prevent the project from going into debt. If CFE wants to enjoy the value of the CERs, then it must be very creative in how it structures its energy purchases. For the 102MW wind farm called La Ventosa in Oaxaca, CFE elicited a bid for construction that was accepted by Iberdrola of Spain. Iberdrola then built the wind farm and will operate it for 25 years. Iberdrola is selling the electricity to CFE in a Power Purchase Agreement (PPA) and will transfer the installation to CFE after 25 years. The energy price negotiated in the PPA probably incorporates the cost of construction and the value of the CERs. Iberdrola is then able to earn the CERs as any other independent power producer (IPP) would, with a financial additionality and/or barriers analysis [26]. CFE was also able to earn CERs for the country’s first commercial wind farm, known as La Venta II. It is unclear from the PDD for this project how the financial and regulatory additionality argument complications were overcome as the Mexican least-cost planning process and expansion plan were not mentioned [27]. When directly questioned about this issue, CFE representatives were unresponsive. In summary, regulatory and financial additionality is complicated when a country has a state-run energy sector that has strict rules about the inclusion of energy projects in planning documents or laws that mandate the creation of the CDM project. Experienced, adept PDD authors, however, can sometimes navigate these pitfalls and prove additionality even as the Executive Board tightens its controls on registration.
A perverse incentive? The regulatory and financial additionality barriers can also complicate the process of promoting domestic action to slow climate change. Up until 2005, countries were hesitant to take policy steps towards mitigating greenhouse gas emissions. Their concern was that the policies that reduced emissions or mandated renewable energy development would prevent new CDM projects from proving regulatory additionality. Also, if incentives were in place, like a feed-in tariff, and renewable energy became competitive with fossil fuel-based alternatives, then financial additionality would be impossible to prove. Furthermore, if a policy was put in place after a CDM project began operating, it could change the baseline of that project in subsequent crediting periods, causing it to earn fewer CERs than the investors initially predicted at the start of the project [2].
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This concern was justified as some countries prevented projects that complied with a mandate from earning Executive Board approval. Costa Rica has a renewable energy mandate of 20 per cent. Projects that fulfilled this mandate were not allowed by the CDM Methodological Panel to earn CERs in 2004 [28]. Also, a 1995 requirement that privately generated electricity in Costa Rica be derived from renewable sources that had the goal of decarbonizing the country’s energy portfolio and reducing reliance on imported fossil fuels has recently caused the CDM Methodology Panel to question the additionality of private hydroelectric plants. Also, countries worried that energy efficiency standards would negate the additionality of projects that improved performance efficiency. As a result, Colombia chose not to officially incorporate energy efficiency standards into its energy laws in 2003 and 2004 following a country-wide assessment of CDM potential. Therefore, ironically, the Kyoto Protocol had created a perverse incentive for developing countries to do nothing domestically to reduce greenhouse gas emissions. Although the Executive Board (EB) was silent mandate on whether or not mandates and incentives for greenhouse gas-mitigating activities would compromise the additionality of projects, it was aware of the issue. The EB initially struggled internally with the treatment of various types of legally binding mandates (L- and L+) and voluntary incentives (E- and E+) [29]. Then, in November of 2005 at its 22nd meeting, the EB abolished the idea of treating mandatory and voluntary programmes differently and differentiated these programmes by those that promoted more and fewer emissions-intensive fuels and practices. To ensure that countries did not implement programmes that intentionally raised emissions in order to capture the revenue from CERs, the EB stated that policies implemented after the December 1997 ratification of the Kyoto Protocol would not be considered when calculating project emission reductions. Reductions would be calculated based on ‘a hypothetical situation without the national and/or sector policies or regulations’. For policies that reduce emissions, ‘the baseline scenario need not take these policies into account if the policy was implemented since the adoption of the CDM Modalities and Procedures in November, 2001’. [29] Now, PDD authors were able to use the hypothetical situation that would reflect a business-as-usual case without laws passed after 2001 that reduce emissions in order to estimate predicted reductions. In this way, project owners can be ensured that their projects will still earn an acceptable number of CERs in a country with strong renewable energy legislation [30]. This ruling implicitly penalizes countries that took early-action steps prior to 2001 to address climate change. However, to create a hypothetical scenario of emissions for a baseline calculation that took into account policies that were implemented over nine years ago would greatly complicate an already confusing calculation and most likely not result in an accurate baseline [31]. While this 2005 ruling addresses CDM developers’ concerns about emission reductions that can be earned in a country with strong incentives for greenhouse gas-mitigating activities like renewable energy incentives, it does
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not speak to complications of regulatory and financial additionality. Since this statement was put in an Annex entitled ‘Further Guidance for the Treatment of National or Sectoral Policies in the Baseline’, the author of this book and CDM experts from Baker & McKenzie’s Brazilian Environmental and Climate Change Practice Group interpret this ruling to apply only to baseline calculations [29 and 31]. Problems with the perverse incentive still arise because a renewable energy mandate could compromise regulatory additionality as the project could be shown to have occurred in a business-as-usual situation. And a production tax credit that provides a fixed premium per kWh rate for renewable energy must be taken into account in the financial additionality argument for projects. These complications have led carbon brokers like Ecosecurities to pursue projects in countries without incentives or mandates for renewable energy [32].
Country-specific complications Since the EB proclamation about baselines in 2005, countries have begun to implement policies that promote greenhouse gas reduction. In July of 2007, Costa Rica boldly set a goal of becoming carbon neutral in its transport and electricity sectors by the year 2021 with its Law of Peace with Nature (Ley de Paz con Naturaleza) [33]. This bold resolution is an important step towards mitigating climate change that few other developing nations have followed [34]. Panama also has new renewable energy laws that provide aggressive incentives that cover up to 25 per cent of the initial project costs for renewable energy generation [35]. Currently, however, Panamanian law prevents CDM projects from earning both this domestic financial incentive and CERs. Other countries, such as Brazil, Uruguay and Chile, have renewable energy mandates, while Argentina has a production tax credit and Ecuador a feed-in tariff. A host of incentives for renewable energy have swept through almost all of the countries in the region (which will be described in detail in the country-specific chapters), but it is not yet clear if these renewable energy mandates and incentives will conflict with the demonstration of additionality. Questions of regulatory additionality also exist for methane capture projects. In Mexico, Regulation 083 provides comprehensive guidance for the collection, utilization and flaring of landfill gas. Also, new hog farms are, by Mexican law, required to build biodigesters [36]. Given the existence of these rules, any landfill gas capture project or new hog farm biodigester in the country would not be additional. However, this regulation for landfills is systematically not followed because it is a part of a Federal Law and municipalities handle local municipal waste. Also, it is routinely not enforced [37]. The new hog farm biodigester ruling has yet to be tested. The CDM rules state that if a regulation that would mandate the existence of a CDM project is systematically not enforced, then additionality can still be proven [38]. The burden of proving that the law is not followed, however, falls on the PDD author.
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Programme of activities Another question of additionality is raised by a new CDM methodology, as of July 2007, that is meant to provide a clear incentive for greenhouse gas reduction policies for certain projects. The Programme of Activities (PoA) promotes activities in specific industrial sectors, allowing multiple projects implemented at different times, that comply with a governmental regulation or private sector initiative, to be registered together. This PoA, therefore, provides an incentive for developing countries to devise policies that promote greenhouse gas reductions [2]. The policy itself cannot qualify for CDM, but programmes implemented under or as a result of the policy can. However, the rules of the programmatic CDM are not clear with regard to whether or not the CDM project would be able to demonstrate regulatory additionality [31]. If the project helped fulfil a national mandate or other regulatory requirement, would its additionality not be in question as the project would have had to exist to meet the standard anyway? Another barrier to the implementation of programmatic CDM projects is the fact that the Designated Operational Entity (DOE) is liable for any CERs that are issued in error. If the DOE approves a project that the CDM Executive Board later rejects, according to PoA rules, that DOE must pay for any CERs that were issued between the time of issuance and rejection. The DOE will often create a clause in their contract with the project developer that makes the developer responsible for this liability. Since DOEs are in high demand and have plenty of work, PoA projects are low on their priority list [39]. There has been not one programmatic project registered in the ten months since the methodology was passed because of uncertainties in how the process would work. Only one grouping of programmatic solar home systems in Bangladesh and one methane capture project from swine farms in Brazil were in the validation process as of April 2008 [40]. Countries may also be hesitant to implement laws that promote development because they are still concerned that they could negate the additionality of CDM projects or cause complications in the national approval process. In March of 2008, Estonia’s DNA declared that it would not approve renewable energy projects for Joint Implementation Emission Reduction Units because they do not need carbon finance with all of the domestic support they currently receive [41].
Increasing stringency on additionality arguments The challenges to proving both regulatory and financial additionality have been heightened in recent months. Since 2005, the Executive Board’s average rejection rate for registering projects was 7 per cent; during the time period September to November of 2007, the rejection rate was 30 per cent. Young, eager consultants who have begun to carefully scrutinize PDDs and validation reports have been recently hired by the Board. They report that 40 per cent of PDDs make a poor additionality argument and 20 per cent use an incorrect methodology. This experience highlights the importance of having an experienced person or firm complete the PDD and hiring a thorough DOE with a
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good reputation to complete validation [42]. Some DOEs have begun to get a reputation for allowing non-additional projects to pass validation [43].
Availability of DOEs and carbon brokers As explained in Chapter 5, ‘Informational Barriers’, and each country-specific chapter, the existence of local carbon brokers can have a large bearing on whether or not a project becomes successful. Without these folks to help instigate and support projects, informational and logistical barriers can prevent their implementation. If a carbon broker does not have an office in the country, it can be prohibitively expensive for the project developer to hire a foreign carbon broker and pay to fly him or her to the site of the project multiple times. The availability of DOEs, who validate a project by ensuring the PDD matches the actual project’s operations and verify the reported emission reductions each year, is also key to project implementation. During 2007, the wait times for hiring a DOE averaged six months per project. The shortage of certified DOEs added to the lengthy process of registration; validation by the DOE and registration, even without the wait time, can take up to six months [5]. Another problem with DOEs and carbon brokers is that hiring them can be very costly. Hiring local DOEs like Instituto Colombiano de Normas Técnicas y Certificación (ICONTEC) of Colombia tends to be more economical since the cost of wages is cheaper and the DOE’s travel expenses are minimal. However, because the DOEs have to receive a $15,000 certification from the CDM Executive Board before they can validate or verify a project, most of these entities are based in Europe [44]. A ‘chicken and egg’ problem is created as countries with few CDM opportunities may not entice many local firms to get UNFCCC accredited; on the other hand, too few DOEs in a given country may discourage the development of CDM projects since there will be no cheap, local DOEs available to verify projects. The most well-known of the DOEs are companies like Det Norske Veritas (DNV) which have a background of auditing companies to ensure that they comply with standards, and began validating and verifying projects as an extension of their core business. Developers of Zambizá landfill gas capture in Ecuador found that to do routine maintenance, like changing the battery on the gas meter, they had to have the DOE who was based in Brazil fly to the site in Quito in order to verify that the operators of Zambizá did not tamper with the meter to yield more emission reductions [45]. Countries or projects that do not attract the attention of carbon brokers are at an additional disadvantage when it comes to hiring a DOE. Large carbon brokerages have relationships with DOEs that allow them to get preferential prices. Some carbon consultants advertise in their proposals to project owners that they can secure up to a 40 per cent discount with well-known CDM auditors if the project owner contracts their services. Without utilizing a carbon broker, project owners would be forced to pay the full price for an auditor’s services.4
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Conclusion Significant CDM-specific procedural and methodological barriers have discouraged the development of some projects. However, each complex procedure in the CDM project cycle has a purpose that attempts to filter out the non-additional projects. As the process of CDM rule refinement continues and new versions of methodologies are released, the process gets more complicated. Sometimes these changes further discourage development, but they can also stimulate it as is the case with the PoA methodology. The flexible nature of the CDM process allows project developers and consultants to propose changes to the operating and build margin ratios and existing methodologies, but sometimes these changes can have unexpected consequences that do not generate more CERs. Future adjustments to CDM renewable energy methodologies to account for countries with low emission factors and high levels of imported energy could help level the playing field for all countries. As the CDM develops, issues of regulatory additionality will continue to be clarified and hopefully will be modified to clearly allow state-run utilities to register CDM projects even if they are planned capacity additions. Also, the EB will hopefully make a ruling to clarify issues of financial and regulatory additionality for host countries that have legislation that mitigates greenhouse gases so as to prevent these countries from having a perverse incentive to do nothing about climate change. The necessity for more, local carbon consultants and DOEs is obvious as the cost of hiring foreign firms is often prohibitively expensive for developers. These consultants and DOEs need to be more careful in their evaluation of projects to pass the Executive Board’s new stringent requirements.
Notes 1 The author assumes that the logic in this 75 per cent (operating) / 25 per cent (build) split is that the build margin consists mainly of plants being brought online to fulfil off-peak demand, which would not be appropriately replaced by wind and solar plants. 2 El Niño Southern Oscillation (ENSO) and La Niña are caused by ocean surface water fluctuations in the Pacific Ocean, occurring at irregular intervals between two and seven years, that cause weather changes [46]. 3 This information is not cited to protect the author and parties involved. 4 This special relationship between the carbon consultant and DOE also draws into question the possibility of allowing non-additional projects to be recommended for registration since it is in the interest of both of these entities to register as many projects as possible and continue their practice of referrals. (The source of this material has been kept confidential to protect the author and parties involved.)
References 1 2
Point Carbon (2007) ‘Historical EUA prices’, 1 March Figueres, C. and Newcombe, K. (2007) Evolution of the CDM: Toward 2012 and Beyond, World Bank, Washington, DC
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Capoor, K. and Ambrosi, P. (2007) State and Trends of the Carbon Market 2007, World Bank, Washington, DC Diamont, A. (2008) ‘The key role of greenhouse gas emissions offsets in evolving GHG cap and trade programs’, presentation at RMEL Conference, Carbon Issues and Strategies, 17 April, Denver, Colorado Capoor, K. and Ambroisi, P. (2008) State and Trends of the Carbon Market 2008, World Bank, Washington, DC Australian Associated Press (2007) ‘Australia ratifies Kyoto Protocol’, Sydney Morning Herald, 3 December, Sydney, Australia Haites, E. (2004) Estimating the Market Potential for the Clean Development Mechanism: Review of Models and Lessons Learned, World Bank, International Energy Agency and International Emissions Trading Association Ayon, H. (2007) Interview with H. Ayon, Gerente de Finanzas de Paramonga, 7 November, Lima, Peru Salgado, C. (2007) Interview with C. Salgado, Carbon Broker, Ecoinvest, 20 March, Cartagena, Colombia Centro Nacional de Planificación Eléctrica Proceso Expansión Integrada de Instituto Costarricense de Electricidad (2006) Plan de Expansión de la Generación Eléctrica Periodo 2006–2025, Instituto Costarricense de Electricidad Salazar, M. (2007) Interview with M. Salazar, Latin American Division Head, Ecosecurities, 12 March UNFCCC (2007) ‘Methodological tool: Tool to calculate the emission factor for an electricity system’ version 01.1, CDM Executive Board Report 35, Annex 12 Administracion Nacional de Usinas y Trasmisones Electricas (2006) Cifras, Organizacion y Estudios Empresarioales Relaciones Publicas Administracion Nacional de Usinas y Transmisones Electricas, Montevideo Castillo, D. (2007) Interview with D. Castillo, President of ERD Consultants, 1 November, Guayaquil, Ecuador UNFCCC (2007) ‘Approved consolidated baseline and monitoring methodology ACM0002: Consolidated baseline methodology for grid-connected electricity generation from renewable sources’, CDM Executive Board Report 36, 30 November Fernandez, O. (2007) Interview with O. Fernandez, Departamento de Generacion de Empresas Publicas de Medellin, 18 October, Medellin, Colombia Frias, C. A. (2007) Interview with C. A. Frias, Especialista Area Ingenieria, 18 November, Santiago, Chile Synex: Ingenieros Consultores (2006) ‘Determination of the operating margin when a CDM project displaces a reservoir hydro power plant’, 25 July Manuel, J. (2007) Interview with J. Manuel, Hydromaule Project Developer, 16 November, Santiago, Chile UNFCCC (2006) ‘Methane recovery in agricultural and agro industry activities’, Methodology AMS III-D, version 13, November, p2 Caine, M. (2000) ‘Biogas flares: State of the art and market review’, Topic report of the IEA Bioenergy Agreement Task 24: Biological conversion of municipal solid waste, December, p11 Velario, L. (2007) Interview with L. Velario, Granjas Carroll Mexico Project Engineer for Geosistemas, 22 August, Perote, Mexico Gomez, J. C. (2007) Interview with J. C. Gomez, Plant Manager for Ecoelectric at Valdez Sugarmill, 28 October, El Milagro, Ecuador Barnes de Castro, F. (2007) Interview with F. Barnes de Castro, Commissioner of Comision Regulatoria de Energía, 30 August
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25 Cordero, F. and Mayorga, G. (2007) Interviews with F. Cordero and G. Mayorga, Strategic Business Unit of Instituto Costarricense de Electricidad (ICE), 25 September, San José, Costa Rica 26 Iberdrola (2007) Iberdrola, La Ventosa Project Design Document, UNFCCC, 14 June 27 The Spanish Carbon Fund (2006) Project Design Document for La Venta II, UNFCCC, 30 August 28 Figueres, C. (2004) Institutional Capacity to Integrate Economic Development and Climate Change Considerations: An Assessment of DNAs in Latin America and the Caribbean, Inter-American Development Bank, Washington DC 29 Figueres, C. and Haites, E. (2006) Policies and Programs in the CDM, International Institute for Sustainable Development (IISD) in the context of the Development Dividend Project, Winnipeg 30 UNFCCC (2005) ‘Clarifications on the consideration of national and/or sectoral policies and circumstances in baseline scenarios’, CDM Executive Board Report 22, Annex 3, 23–25 November 31 Sales, R. and Sabbag, B. K. (2006) Legal Compliance with Environmental Requirements Impacting Assessment and Demonstration of Additionality in Clean Development Mechanisms: A Legal Review under the UNFCCC, the Kyoto Protocol and the Brazilian Legal Framework on Climate Change, Baker & McKenzie’s Brazilian Environmental and Climate Change Practice Group 32 Sarria, P. (2007) Interview with P. Sarria, Project Developer for Ecosecurities, 27 February 33 Ponchner, D. and Vargas A. (2007) Interviews with D. Ponchner and A. Vargas, Gobierno lanzará iniciativa ‘Paz con la Naturaleza’, in La Nacion, 4 July, San Jose, Costa Rica 34 Estrada, M. (2007) Interview with M. Estrada, CDM Consultant for Terracarbon, 18 August, Mexico City, Mexico 35 Ministerio de Economia y Financas de Comision de Politica Energetica de Panama (2004) Legislative Assembly Law 45, 4 August 36 Ochoa, V. (2007) Interview with V. Ochoa, General Manager of Granjas Carroll México, 22 August, Perote, Mexico 37 Hasars (2007) Hasars Project Design Document, UNFCCC, 11 April, p10 38 UNFCCC (2007) ‘Methodological tool: Tool for the demonstration and assessment of additionality’, version 04, CDM Executive Board Report 36, Annex 13, p4 39 Point Carbon (2008) ‘Programmatic CDM stalls on “liability” concerns’, CDM/JI Monitor, 14 May 40 CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, April 41 Point Carbon (2008) ‘Renewable energy support halts Estonia’s JI approval process’, 3 March 42 Newcombe, K. (2007) Interview with K. Newcombe, Goldman Sachs Carbon Division, in CORFO Chile Invest, 14 November, Santiago, Chile 43 Michaelowa, A. (2007) ‘Fundamentals of programmatic CDM’, presentation at CDM Tech Workshop, Cartagena, Colombia, 21 March 44 UNFCCC CDM (2007) Application for Accreditation, 24 February 45 Zeller, R. (2007) Interview with R. Zeller, President of Alquimiatec, 24 October, Quito, Ecuador 46 Intergovernmental Panel on Climate Change (2001) ‘Interannual variability: ENSO’, ch 9 of Climate Change 2001: Working Group I: The Scientific Basis, IPCC, Paris
8 Small-Scale Barriers
Introduction Small-scale renewable energy projects under 15MW can be broken down into two categories: (1) those funded by for-profit entities for the purpose of feeding electricity into the grid or to sustain a factory’s operations; and (2) those sponsored by donations or grants that provide off-grid energy for rural communities. The latter of these projects rarely earn Clean Development Mechanism (CDM) credit because of their size, even though they almost always promote sustainable development. In fact, in Latin America there are no off-grid CDM projects. Also, if a non-profit entity provides a grant for a project, that grant usually precludes the project from being proven financially additional. It is for these reasons that it is particularly important to investigate the barriers to small-scale projects. Carbon brokers are usually not interested in developing projects under 15MW for CDM credit because their size is too small to generate enough Certified Emission Reductions (CERs) to cover consultant costs. Therefore, only 6.4 per cent of the CERs of registered projects by March 2008 are derived from small-scale projects [1]. Small-project developers are further discouraged by the fact that 80 per cent of all projects do not make it to the registration stage of the project cycle because of all the barriers that face projects [2]. However, there are some instances where these projects, especially microhydro ones, are profitable and undertaken by developers, financers and carbon brokers. Most of the smallscale projects in Spanish-speaking Latin America thus far have been undertaken by for-profit entities, and consist of microhydro projects and methane capture from hog farms for flare or use in a microturbine [3].
The current status of small-scale projects in Latin America The microhydro projects were profitable before CDM revenues were available, and undertaken by foreign firms like Italy’s Enel. Now CDM revenues add additional profit to these projects. Many of the CDM hydro projects under 15MW are in the Central American countries because that size of capacity addition is appropriate for the needs of these smaller grids.
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By May of 2007, 54 small-scale projects in the region existed and 94 per cent of these projects were methane capture or microhydro [3]. Methane capture and use for electrical generation or flare were some of the first projects developed because they generate a large number of reductions for relatively small capital costs when compared with other renewable energy projects. The high warming potential of methane yields many reductions even if it is not sent through a turbogenerator to displace fossil fuel-intensive electricity from the grid. Therefore, the basic requirements for the creation of one of these projects are just a plastic tarp to cover the manure, a suction system to pull the methane to a flare, a gas meter and a flare. For connection to the grid, transmission lines and a turbogenerator are required. While this system may seem simple, poor performance of these projects proves that for maximum CER production, a more refined system with more components is necessary. (More details about these types of systems can be found in Chapter 2, ‘Technical Barriers’.) The carbon consultant involved in the CDM project cycle for 29 of these methane capture projects also claims that this type of project enjoyed early success with small-scale registration because all 29 of the methane projects are actually for one owner, who unbundled an umbrella of projects owned by the same farm operations in order to be able to use the streamlined methodology for small-scale projects. Unbundling projects in this way is not allowed by the CDM Executive Board. Given this situation, the total number of projects should not be impressive since most of these methane capture projects are really just one larger project.1 Twenty-one more projects involve the creation or upgrading of small hydro facilities. Critics suggest that most microhydro CDM projects were planned before developers knew of CDM revenues and would have existed without CDM revenues since the revenues only add 1–2 per cent to the overall project revenues [4 and 5]. A representative of the Guatemalan Centre for Cleaner Production (Centro Guatemalteco de Producción Más Limpia) explains that there are several hydro projects because of subsidies that reduce the import tax for hydroelectric equipment in Guatemala. Also, once project developers are familiar with the methodology for hydro development in the region, it is easy for the same or other developers to replicate it [6]. The possible improper use of small-scale methodologies for the methane projects and non-additional nature of the microhydro projects suggests that the barriers to quality additional small-scale project development in this region are too cumbersome to overcome [7]. A streamlined small-scale methodology sought to address this flaw by putting small projects on a level playing field with large ones. Recently, a Programme of Activities (PoA) methodology has furthered this effort. More details about both of these methodologies are described in detail later in this chapter. Next in this chapter, the financial viability of small-scale projects based on current carbon prices is assessed. Finally, country and region-specific measures to promote or discourage small-scale projects are discussed.
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Existing small-scale methodology Currently there is one streamlined methodology for small-scale CDM projects under 15MW. This methodology is still quite involved and complicated and, like large-scale CDM projects, small-scale projects must still usually hire carbon brokers to facilitate the project cycle. The current small-scale methodology for renewable energy projects differs from the comprehensive methodology in a few important ways. There is a simplified baseline emission calculation that allows project developers to compare the emissions resulting from the project to the emissions that would occur in a typical business-as-usual scenario (baseline emissions), using a grid emission factor that is an average of tonnes of CO2/MWh from old and new facilities and those under construction. These two factors are known as the operating and build margins.2 Developers of larger CDM projects typically have to determine the exact emissions that are being replaced by calculating the carbon intensity of the emissions from power plants that produce the last 10 per cent of generation in the transmission grid of the project for every hour of the year. Although this baseline simplification is a step in the right direction, it is still difficult for project developers in rural areas to find an average emission rate [8]. This emission rate can be difficult to pin down because villagers use a mix of fuel wood, car batteries, diesel generators and kerosene from a variety of sources, which each have different energy intensities. Also, the amounts of firewood fuel used are described in terms of local measurements that differ from person to person as they relate to the amount one can carry [9]. Secondly, the small-scale CDM methodology allows project developers to fulfil only one of the five additionality requirements. The current requirements mandate that large-scale CDM projects break technological, financial and firstof-a-kind barriers to establish that they would not occur in a business-as-usual case [10]. Allowing the fulfilment of only one additionality criterion greatly simplifies this step. However, the one additionality criterion that the smallscale project fulfils must be a prohibitive barrier that is significant enough to prevent the project from being developed without CDM revenues [11]. The third important way in which small-scale projects differ from largescale ones is that small projects can be bundled together for the purpose of validation [12]. This rule allows small projects to share a Project Design Document (PDD) and cut transaction costs since the PDD would only have to be written and approved once. This bundling mechanism works best for projects of the same type since writing one PDD for a wind and solar project with different baseline calculations and additionality requirements would be almost the same amount of work as writing two PDDs [13]. Lastly, there are two other small benefits available for small-scale project cycle participants. As of 2007, small-scale projects are now able to waive registration costs, which are about $6000 for small-scale projects [14]. These projects also have simplified PDDs and the same Designated Operational Entity (DOE) can validate and verify a project [10].
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Although the special small-scale methodology is meant to make it easier for small projects to pass through the project cycle, it does not always achieve its goal. The advantage of having small-scale projects bundled together to benefit from only having to write only one PDD proves difficult to take advantage of in reality. The Public Utility of Medellín (Empresas Públicas de Medellín (EPM)) had difficulty bundling microhydro projects since there are not always land and water rights available for purchase, or transmission networks that can serve prime microhydro sites [15]. Since no solar projects in the region exist, the simplified methodology is clearly not streamlined enough to stimulate development in this sector. As a result, IT Power partially funded a study that considered a methodology, specifically for solar home systems, that would allow for the use of a simplified baseline calculation of an average global emission factor of kerosene, which is usually used for lighting before these systems are installed [16]. This methodology ended up never being utilized.
Programme of activities This streamlined methodology has also failed for very small-scale, renewable energy projects under 1MW in rural populations. Often, these renewable energy projects will involve the use of solar panels for light and electricity. In the absence of the photovoltaic cells, some CO2emissions are released from the fuel wood, diesel generator sets, car batteries, or kerosene that villagers once used, but these emissions are usually quite small since the electrical demand of rural villages is usually low compared with the demand of city residents. Therefore, few CERs can be earned from these types of projects and the typical rural population cannot pay for the upfront costs and operation and maintenance of the system with CDM revenues. If CDM revenues were combined with grants from international organizations or domestic programmes to assist with the electrification of rural populations, then they could be economically feasible. However, as previously mentioned, current CDM rules to establish additionality discourage the use of grants and subsidies for these types of projects. Subsidies make the projects more financially feasible, but, at the same time, they make it difficult to establish that the project would not have occurred in a business-as-usual case [9]. Because of this conflict between aid organizations’ donations and the acquisition of CDM revenues, a type of programmatic CDM or PoA was created in July 2007 [17 and 18]. In the programmatic CDM rule-making, parties decided that a programme of activities (PoA) is a voluntary coordinated action by a private or public entity which coordinates and implements any policy/measure or stated goal (i.e. incentive schemes and voluntary programmes), which leads to anthropogenic GHG emission reductions or net anthropogenic greenhouse gas
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removals by sinks that are additional to any that would occur in the absence of the PoA. [19] In other words, a programme that a country puts in place to promote a certain behaviour that lowers greenhouse gas emissions, such as installing compact fluorescent lights or buying a hybrid vehicle, can qualify as a CDM project. This methodology differs from the current small-scale bundling mechanism (where projects are grouped together until they make up the maximum number of emissions for a small-scale project definition) in that projects can be grouped to exceed the size limit of a small-scale project. Also, projects do not have to be registered at the same time, allowing projects that begin generation years after the PDD was written to qualify. Finally, PoAs can cross country borders. They do, however, have to go through the registration process and must have real and measurable emission reductions that may be calculated and verified through a sampling and extrapolation technique [20]. A country that has a policy that promotes emission reduction projects does not automatically qualify for a PoA, however, individual projects or activities that comply with a policy that promotes greenhouse gas mitigation activities can supposedly be registered as a PoA. [21]. For a more detailed discussion of the nuances of the PoA and project eligibility, see Chapter 7. Part of the impetus for the PoA was to allow under-represented populations to benefit from CDM revenues, making the distribution of funds more equitable [21]. It has the potential to do just this and eliminate the huge barrier of small-scale transaction costs by allowing individual households and small industries to participate [22]. With regard to renewable energy, the potential for PoA CDM projects is huge in rural electrification programmes that may include provisions for photovoltaics, biomass, and small hydro and wind systems. Most people, however, envision PoA to apply to energy efficiency and transport projects before renewable energy projects. An energy efficiency programme that encouraged homeowners to buy more efficient refrigerators, stoves or cars could theoretically create activities that would be eligible for registration under the PoA CDM, provided the project is still deemed additional [23]. Despite the enormous potential for programmatic CDM, it has not yet been implemented anywhere worldwide. As of March 2008, Brazil and Bangladesh are undergoing validations with this methodology [24]. Mexico hopes to register a programmatic forestry project in the near future as well [25]. The untested rules for validation and verification are so different from other methodologies that countries’ governments may be hesitant to expend time and energy on the process of formulating a policy that would allow for project registration under it. Also, most governments tend to have little education about CDM and few direct incentives to promote it. Policies for programmatic CDM could emanate from a variety of governmental departments, some of which may or may not be aware of this possibility. During the author’s interview process with the DNAs and Ministries of Energy of 12 Latin
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American countries, no governmental officials had a clear idea of how the PoA would impact their country or knew how to create policies that would be consistent with it. Furthermore, the PoA could be stalled because the process of policy making often takes years as aspects of the legislation are contentious. (For more information about the PoA, see Chapter 7, ‘UNFCCC Procedural and Methodological Barriers’.)
Transaction costs Despite the efforts to reduce transaction costs for small-scale projects through the streamlined methodology and PoA, critics from the Pembina Institute of Canada, IT Power India and the Centre for Clean Air Policy claim that ‘the UNFCCC simplified procedures for small-scale CDM projects do not sufficiently reduce transaction costs to make these projects attractive for investors’. Also, the overwhelming response that project owners and carbon brokers give as to why more small-scale projects have not been developed is ‘transaction costs’. The transaction costs to certify a small-scale project can be almost as high as certifying a large-scale one [8]. CDM project cycle costs can be up to $500,000 for the complete document creation, registration, validation and annual verification [26]. IT Power and IT India in 2001 predicted that the average small-scale project costs would be ~$58,400 [27] and the World Bank estimated that the current streamlined methodology can reduce project transaction costs by $155,000 per project [28]. When measured on a per tonne of CO2 equivalent basis, the CDM transaction costs range from €0.1 for a very large industrial gas projects to €10 for a small hydro project and €1000 for a photovoltaic project [29].
An example of project viability To consider if a project is viable or not for CDM revenues, one must just compare these per tonne of CO2 mitigation costs with the price that can be attained per CER, which was between €10 and €25 in February of 2008 [30]. Other estimates show the minimum project size for project viability. The Pembina Institute of Canada estimates that the CDM is not worthwhile at carbon prices below $8/tonne of CO2 and projects must be at least 1.5MW to be economical [8]. A report by the Organisation for Economic Co-operation and Development (OECD) estimated in a 2001 report that the minimum renewable energy project size for the transaction costs to be covered by the CERs generated is 1MW at a price of $5/tonne of CO2 or 10 per cent of the overall project costs [31]. These estimates of minimum project size are at the low end of current carbon brokers’ requirements; brokers like Ecoinvest will not consider projects that generate less than 30,000 CERs per year or have a minimum capacity of about 16MW, just above the size requirement for small-scale projects [32]. A wind energy project with a capacity factor of 30 per cent in Ecuador, where there are relatively high regional emission factors because of a heavy reliance
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on fossil fuels, can provide the requisite number of CERs for Ecoinvest to participate as a project developer or carbon broker. However, the same size wind project with the same capacity factor would not produce sufficient CERs in Costa Rica because of the low regional emission factors due to the large number of hydro applications in the country. In Costa Rica, a wind project with a 30 per cent capacity factor would have to have a rated capacity of 63MW to stimulate the interest of Ecoinvest. The extra revenue generated per kWh from each of these applications would also vary from $0.18/kWh in Costa Rica to $0.713/kWh in Ecuador if a CER price of $10/tonne of CO2 is assumed.3 These CERs represent about 3 per cent additional revenue in Costa Rica (if renewable generators receive an estimated $0.06/kWh) and 7.4 per cent additional revenue in Ecuador (assuming generators receive the feed-in tariff price of $0.0939/kWh for their wind generation) [33]. See Appendix A for the calculations related to this analysis. CDM revenues for projects like solar energy that cost more per kWh to implement will contribute less to the overall project costs. For projects like methane capture and use in a microturbine, which will have a higher capacity factor of about 85 per cent, a smaller nameplate capacity that generates the requisite number of CERs could be of interest to a carbon broker. For example, a biomass project in Costa Rica with an assumed capacity factor of 85 per cent could be economical at 22MW instead of the wind project, which would have to be 63MW. The extra revenue generated per kWh for this type of project would be $0.18/kWh or 19 per cent additional revenues. Although most carbon brokers are not interested in purchasing CERs from small-scale projects, there are some customers who are willing to pay a premium for them since they usually promote community development. South Pole Carbon of Switzerland and FC2E of Spain act as carbon brokers for smallscale projects and sell these CERs to customers, such as the Swiss Climate Cent Foundation and Kommunalkredit, who buy CERs on behalf of the Swiss and Austrian governments. These carbon brokers also buy the emissions reductions as Voluntary or Verified Emissions Reductions (VERs), which also each represent a tonne of CO2 sequestered or mitigated and often undergo a similar, but less rigorous process than the CDM project cycle and are sold on the voluntary offset market in the US and elsewhere [34].
VER market as an alternative to the CDM VERs are typically not project developers’ first choice since they almost always command a lower price of about 30 per cent less than CERs. This decreased value is a result of the lack of standardization of these credits and a reflection of purchasers’ inability to use them for compliance purposes. The rigour that voluntary projects face with regard to ensuring that the emission reductions are additional to a business-as-usual situation, and are annually verified, varies. Generating VERs is an option for projects that are stuck in the CDM registration process and have not yet begun generating CERs. After a project achieves CDM registration and begins generating CERs, it cannot
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continue to create VERs as that would constitute double-counting. These pre-compliance VERs allow project developers to capture some of the carbon revenues they may have relied on for the project’s existance. Since a VER is not for compliance purposes, no certification is necessary unless demanded by the customer. A few certification bodies have recently been created for this market to ensure that these reductions are measurable, real, additional and verifiable. The highest level of VER certification comes from the Gold Standard, which only recognizes energy efficiency and renewable energy projects and requires that a strict set of guidelines be followed for projects for high-quality VERs that produce sustainable development and can earn high prices. However, this process of certification through the Gold Standard involves the entire CDM process (with the Gold Standard representatives instead of the United Nations Framework Convention on Climate Change (UNFCCC) acting as the registration body) plus a few additional steps to ensure the project promotes sustainable development [35]. When facing this level of complexity for certification, project owners usually opt to undergo the CDM process where they can typically earn a higher price for their CERs. Another well-known voluntary certification is called the Voluntary Carbon Standard (VCS), which accepts all types of projects and uses the methodologies, DOEs and procedures of the UNFCCC. VCS was developed by the International Emissions Trading Association and has the reputation of being a reliable certification, but not as strict as the Gold Standard [36]. VER Plus is another voluntary protocol, which was created by Designated Operational Entity TÜV SÜD, but is not as widely recognized or used [37]. The Chicago Climate Exchange has created its own methodologies for VER offsets for its voluntary but legally binding market in the US. The Climate Action Registry, originally created for offsets utilized in the emerging Californian compliance market, but available for use anywhere in the US, is yet another voluntary standard that is gaining traction [38]. Only in rare instances can VERs earn more than CERs; one of these examples occurred in sub-Saharan Africa where a VER from an off-grid solar project commanded a price of €30 per tonne [39]. Another transaction resulted in a VER sale of $78 per tonne of CO2 [40]. While the Gold Standard represents the highest level of certification complexity, no certification procedures at all comprise the other end of the spectrum. In Nicaragua, the author met with the president of a local solar installation company that was receiving some VER revenues. The VER provider, who will remain unnamed, approached this solar company after it was an established business with many clients and offered to pay a dollar value for each subsequent MW of solar panels they installed. The extra revenue that the solar company now receives comes from a portion of the VER sales that the offset provider completes. The VERs that the offset providers’ customers purchase from this project are not additional since they do not directly promote the installation of these projects. The solar company was installing systems before the offset provider gave it VER revenues and
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would still install systems in the absence of these revenues. It is true that a vibrant local solar installation business is not a typical trademark of Nicaragua. Therefore, the offset provider’s VER revenues are providing a donation that helps promote an underdeveloped industry in this country. However, if the offset provider’s customers believe they are making quantifiable and real carbon reductions with each VER purchase, as the product is marketed, they are being deceived. Customers in this market may not yet be savvy enough to realize that they need to select a VER that has been certified. And, even if it has been certified, the standards for certification are so diverse that the customer may still not know if he or she is helping make carbon reductions that are additional.4 US businesses have begun buying VERs not only to promote a positive public image of the company, but also because they hope that these credits will be fungible in future markets or that they will receive early-mover recognition and benefits in a future domestic carbon market. However, given the lack of standardization in certification of VERs and the questionable nature of some of them that are sold, it is unlikely that these businesses will be able to transfer these purchases into this market [41]. Typically, VERs are sought by project owners when the project fails to achieve CDM registration. These reductions are seen as a backup mechanism and way to provide a bit of extra profit for the already financially viable project. Also, some developers choose to pursue VERs if the transaction costs of completing the CDM project cycle are too high. Fundación Solar is working on a project to assess the potential that VERs have to contribute to the project finances of isolated, off-grid solar systems in Guatemala [42]. VERs are also sought as pre-compliance CERs. Pre-compliance VERs could be generated before the 31 March 2006 deadline that the UNFCCC set for utilization of the credits that had been generated since 2001 after the Marrakesh Accords. Now, they are only generated when a project has submitted its paperwork to the UNFCCC Registration and Issuance Team and is awaiting its decision. Technically, the project should not begin operations until it is formally registered, but bottlenecks in the UNFCCC process have allowed some projects to earn carbon revenues for VERs in the form of pre-compliance CERs [43].
The size of industries as a barrier The size of most of the industries in the Central American countries is not large enough to support the CDM transaction costs. The renewable energy sector suffers since capacity additions tend to be small and incremental. Also, other industries, like the agro-industry sector, that can benefit from methane capture and electrical generation, have not benefited as industries have in Mexico because the area does not have large farms with a critical mass of animals to make the operation profitable. AgCert, the world’s leader in methane capture projects for CDM revenues, will not develop a biodigester for a farm with less than 5000 hogs in full cycle (sows, gilts, boars, weaners and finishers) or 3500
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large finisher hogs. Most farms in Central America have fewer hogs than this critical number [44]. Bundling farms to reach the requisite number of animals tends to be complicated since the project developer has to work with multiple project owners, farm veterinarians and staff. Coordinating many farms increases project risk as more variables could influence project performance. Also, in some of the countries like Costa Rica, farms are operated separately and, like the hog farms, do not lend themselves to grouping [45].5 Despite critics’ complaints that the current methodologies do not provide sufficient incentives for small-scale development because of high transaction costs, making the certification process too simple could compromise the goals of the Kyoto Protocol by allowing projects that would have occurred in a business-as-usual scenario to qualify and be counted as an Annex I country’s mitigated emissions. Or, if the monitoring of mitigated emissions is not strict enough, then less carbon than expected could be removed from the atmosphere. However, an OECD report predicts that the maximum amount of ‘free-riding’ or non-additional projects that would be allowed if the small-scale methodologies were made less stringent and all renewable energy projects in the region applied for CDM revenues is 3 per cent of the required emission reductions from Annex I countries [31]. Chandra Sinha, a carbon financer for the World Bank, contends that until there is a sufficient ‘ridership’, it does not make sense to worry about ‘freeriders’. A host of other solutions to promote small-scale project activity have been proposed. Some of them include allocating more CERs to small-scale projects since they are typically more additional, letting the small-scale project be exempt from the 2 per cent adaptation to climate change fund tax on CERs, and making an even more streamlined methodology for projects under 5MW [46 and 47]. A more comprehensive list of recommendations can be found in Chapter 29, ‘Stimulating Investment and Overcoming CDM Barriers’.
Country-specific measures to support or discourage small scale Some countries have rules that either support or block small-scale project development. Most of these rules are country-specific, but one rule of the European Union (EU) for the European Trading Scheme (ETS) II has had a dramatic impact on all CDM countries. Hydro projects that are over 30MW must now pass an extra approval process from the World Commission on Dams in order to be used within the EU. This procedure entails a study of the impacts on the environment and community near the dam and adds time to the process of approval [48]. A few countries, such as Ecuador [49], El Salvador [50] and Colombia [51], have created average baselines of their electrical sector’s operating and build margins that small-scale project owners can use to calculate emission reductions. Usually the country’s DNA office is in charge of this task. Before embarking upon a small-scale project, developers should check to see if the country of interest has completed a study such as this.
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El Salvador has a new Fiscal Incentives Law for the Promotion of Renewable Energy as of November of 2007 that provides an exoneration of taxes on renewable energy projects below 10MW for ten years and allows projects of 10–20MW to be exempt from taxes for five years. Also, projects do not have to pay taxes on CER revenues [52]. Costa Rica has a National Off-Grid Electrification Programme based on Renewable Energy Sources, developed by the United Nations Development Programme, the Global Environment Facility and Instituto Costarricense de Electricidad. The goals of the programme are to both electrify off-grid sites and reduce carbon emissions. Two million dollars have been given to the initial phase, and Phase II will dedicate $19 million. This programme will most certainly open doors to small-scale, off-grid projects in the country. Whether or not these small projects earn CDM revenues will depend on if the project will generate enough CERs to cover the transaction costs and if they are found to be financially additional with these grants [53]. In Guatemala, a series of laws support small systems. Renewable Energy Law 52 of 2003 requires distributors and retailers to allow renewable generators above 5MW to sell to both entities and receive the best price for their electricity [54]. Having the option to sell to both of these entities allows the generator to get a more competitive price for the electricity [55]. A new law in October 2007 allows generation below 5MW to connect to the grid and requires distributors to purchase their generation [42]. Hydro projects under 5MW have a simplified permit process for using the water and only have to register for the water usage with the ministry [56]. Similarly, in Peru, no concession for geothermal or hydro under 10MW is needed from the Peruvian government [57]. Honduras promotes systems under 3MW by not requiring them to have a generating licence and being exempt from doing a full Environmental Impact Statement (EIS) [58]. In Chile, the Short Law I of 2004 provided exemption from transmission and distribution charges for projects under 9MW and rates that scale with the size of the project for those between 9 and 20MW. Short Law I also gave generators under 20MW guaranteed access to the grid and the ability to sell within the spot market [59]. Also, only hydro under 20MW qualifies for the country’s 10 per cent by 2024 renewable energy mandate [60]. Chile also has an opportunity for generators under 20MW which allows them to receive up to $60,000 for feasibility studies and up to $12,500 to cover 50 per cent of the PDD costs [61 and 62]. The Dominican Republic has laws that allow houses or industries that selfproduce from renewable energy to use up to 75 per cent of the investment in the equipment as an income tax credit and provides a favourable interest rate for 75 per cent of the cost of equipment for communities that install small-scale renewable energy and cogeneration projects below 5MW [63]. Despite these incentives, some countries have policies that discourage small-scale development. In Colombia, generators over 20MW get dispatched centrally, receive offers and bids in the energy market, and can choose to sell in
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the spot or contract market. Plants between 10 and 20MW can only choose to be dispatched during periods of rationing; at other times, they are not necessarily dispatched on the system. Plants under 10MW are at the greatest disadvantage in that they only have the option to sell directly to the distributor, but this distributor is not obligated to buy their electricity. In this system, small generators can earn only a maximum of the spot price, and the distributor can go as low as possible for the price in the negotiations. This system makes dispatch less complicated for the dispatch commission, but is a huge disincentive for small generators [64]. The Ecuadorian DNA office takes a portion of the CERs from projects to cover the costs of visiting the project to determine if it fulfils the sustainable development goals of the country. This cost is 20 per cent of the former UNFCCC registration cost calculation. The percentage of CERs deducted turns out to be between 3 and 6 per cent. The percentage of CERs taken is based on the number of CERs generated. The smallest projects are taxed at 6 per cent and the largest at 3 per cent. The reasoning behind this system of taxation is that visiting small projects requires the same amount of effort on the part of the DNA, but fewer revenues would be collected if a set percentage of CERs were deducted [65]. But, taking up to 6 per cent of CER profits acts as an additional challenge for small-scale project development.
Conclusion Efforts to make small-scale projects more viable through the creation of the streamlined small-scale methodology and the recent PoA methodology show that the CDM Executive Board is concerned with promoting these types of projects in order to allow for a more equitable distribution of projects. Critics of these methodologies claim that transaction costs and project cycle complexity will still deter development. Some countries have recognized the barriers that face small projects and created policies that support their promotion. Other countries, however, still allow policies that discourage their promotion.
Appendix A: Calculations for sample CDM revenues Capacity Factor CERs generated
⫻
Emission Factor
⫻
MW of Installation
⫻
hours in a year =
CER revenues / (capacity of plant ⫻ hours in a year ⫻ capacity factor of plant) = $ of CDM revenue/kWh Capacity factor for sample wind farm = 30 per cent 30,000 CERs (tonnes of CO2 equivalence) must be generated for the typical carbon broker to be involved. Emission factor = average of operating margin + build margin Operating margin = the weighted average of emissions of all generating sources in the region where the installation is being built
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Build margin = the weighted average of emissions of recent capacity additions Ecuador For Ecuador, with an emission factor of 0.707 tonnes of CO2/MWh X ⫻ 8760 hours ⫻ .3 (site-dependent capacity factor) CO2/MWh= 30,000
⫻
.707 tonnes of
(X = 16MW = minimum size of CDM wind project) CDM Revenues = 30,000 CERs ⫻ $10/tonne of CO2 = $300,000 (assuming a CER market price of $10/tonne of CO2) $300,000 / (16MW ⫻ 8760 hours ⫻ 0.3) = $7.13/MWh or $0.00713/kWh Percentage of Extra Revenue due to CERs = (0.7¢/kWh) / (9.39¢/kWh) = 7.4 per cent (Price of electricity (9.39 ¢/kWh) is based on Ecuador’s most recent feed-in tariff prices for wind energy) [33] Costa Rica For Costa Rica, with an emission factor of 0.18 tonnes of CO2/MWh [66] X ⫻ 8760 hours ⫻ 0.3 (site-dependent capacity factor) CO2/MWh = 30,000
⫻
0.18 tonnes of
(X= 63MW = minimum size of CDM wind project) (It is unlikely that two sites would have the same capacity factor, but the author used 30 per cent in this example for both the Ecuadorian and Costa Rican wind sites to emphasize the importance of the country’s emission factor.) CDM Revenues = 30,000 CERs ⫻ $10/tonne of CO2 = $300,000 (assuming a CER market price of $10/tonne of CO2) $300,000 / (63MW ⫻ 8760 hours ⫻ 0.3) = $1.8/MWh or $0.0018/kWh Percentage of Extra Revenues due to CERs = (0.18¢/kWh)/(6¢/kWh) = 3 per cent (6¢/kWh = assumed average wholesale price of electricity in Ecuador.)
Notes 1 This information was not cited to protect the author and parties involved. 2 The actual baseline calculation that is used depends on the type of technology being replaced, but renewable energy small-scale project developers have their choice of a few baseline calculations, including the aforementioned one that uses ‘business-asusual’ emissions data. 3 This analysis shows a conservative estimate of the requisite sizes of these wind farms in order to account for possible future price fluctuations in the CER and European Union Allowance (EUA). This analysis used a price of $10/CER, which was the average price of CER in 2006 [67]. 4 This information is not cited in order to protect the author and parties involved. 5 There are two agro-industries that are large enough to consider CDM revenues for their operations in Central America. Empacadora Toledo has had positive
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experiences with small methane capture systems on its farms and is now in negotiations with Ecoinvest to develop digesters in Guatemala. INDESA palm producers will be attempting a methane avoidance methodology to create fertilizer with residue processing water and the unused part of the palm fruit in Guatemala.
References 1 2 3 4
5 6
7
8 9
10
11
12
13
14 15 16
CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April Black-Arbeláez, T. (2007) ‘The creation of value in emission reduction projects’ in CDM Tech, 21 March, Cartagena, Colombia CDM UNFCCC Project Search, 1 May 2008, available from http://cdm.unfccc.int/Projects/projsearch.html Gastelumendi, J. (2007) Interview with J. Gastelumendi, Kennedy School of Government at Harvard University, Master’s of Public Policy student. Former Head of Environmental Division at Estudio Grau, 4 March McCully, P. and Haya, B. (2007) ‘Failed Mechanism: Hundreds of hydros expose serious flaws in the CDM’, International Rivers Press Release, 2 December Porta, M. A. (2007) Interview with M. A. Porta, Executive Director of El Centro de Producción Mas Limpia de Guatemala, 3 September, Guatemala City, Guatemala FEALAC (2006) ‘Analysis of the present situation and future prospects of the Clean Development Mechanism (CDM) in the FEALAC member countries’, Study for the Fourth Meeting of the Economic and Society Working Group of Forum for East Asia–Latin America Cooperation (FEALAC), Tokyo, 8 June Peters, R. and Brunt, C. (2004) ‘Small-scale CDM project development: Key issues and solutions’, paper for Pembina Institute for Appropriate Development, January Ley, D. (2007) Interview with D. Ley, United Nations Consultant, Economic Commission for Latin America and the Caribbean, Mexico Subregional office, Energy and Natural Resources Unit, 21 April UNDP (2003) ‘Simplified procedures for small-scale projects’, ch 4, The Clean Development Mechanism: A User’s Guide, Energy and Environment Group and Bureau for Development Policy of UNDP, New York Michaelowa, A. (2005) ‘Determination of baselines and additionality for the CDM: A crucial element of credibility of the climate regime’, in F. Yamin (ed) Climate Change and Carbon Markets: A Handbook of Emissions Reductions Mechanisms, Earthscan Publications, Sterling, VA, pp289–304 UNFCCC (2001) ‘Simplified modalities and procedures for small-scale clean development mechanism project activities’, Annex II, in UNFCCC COP-7, Marrakesh, Morocco Michaelowa, A. (2007) Interview with A. Michaelowa, Head of the International Climate Policy Research Programme, Hamburg Institute of International Economics, 23 February Bloomgarden, E. (2007) Interview with E. Bloomgarden, US Country Director, Ecosecurities, 15 March Carmona, C. E. G. (2007) Interview with C. E. G. Carmona, Environmental Team Leader, Public Utility of Medellín, 20 March, Cartagena, Colombia Martens, J. W., Kaufman, S. L., Green, J. and Nieuwenhout, F. D. J. (2000) ‘Towards a streamlined CDM process for solar home systems: A review of issues and options’, Energy Innovation, Sunrise Technologies Consulting, and IT Power
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17 Trujillo, R. (2007) Interview with R. Trujillo, Sustainable Development Project Coordinator, Oficina de Mecanismo de Desarrollo Limpio, Bolivia, 18 April 18 CDM Executive Board (2007) ‘Guidance on the registration of project activities under a programme of activities as a single CDM project activity’, Report 28, version 02, UNFCCC 19 CDM Executive Board (2007) ‘Guidance on the registration of project activities under a programme of activities as a single CDM project activity’, Report 32, version 02, in Annex 38, UNFCCC 20 CDM Executive Board (2007) ‘Procedures for registration of a programme of activities as a single CDM project activity and issuance of CERs for a PoA’, Report 35, UNFCCC 21 Ellis, J. (2006) ‘Issues related to implementing “programmatic CDM”’, OECD/IEA Project for Annex I Expert Group, UNFCCC, 27 March 22 Figueres, C. and Newcombe, K. ‘Evolution of the CDM: Toward 2012 and beyond’, paper prepared for World Bank, Washington, DC 23 Hinostroza, M. , Cheng, C., Zhu, X. and Fenhann, J. (2007) ‘Potential and barriers for end-use efficiency under programmatic CDM’, paper prepared for Capacity Development for the Clean Development Mechanism (CD4CDM) 24 Point Carbon (2008) ‘Brazil aims to host first approved programmatic CDM project’, Carbon Market News, 16 April 25 Estrada, M. (2008) Interview with M. Estrada, CDM Consultant, 24 April 26 Bosi, M. (2001) ‘Fast-tracking small scale CDM projects: Implications for the electricity sector’, Information paper, OECD Environment Directorate and International Energy Agency 27 Bhardwaj, N., Parthan, B., de Coninck, H. C., Roos, D., van der Linden, N. H., Green, J. and Mariyappan, J. (2004) Realising the Potential of Small-Scale CDM Projects in India, IT Power and IT Power India 28 World Bank Carbon Finance Unit (2003) ‘Small scale CDM projects: An overview’, 14 May 29 Michaelowa, A. and Jotzo, F. (2005) ‘Transaction costs, institutional rigidities and the size of the clean development mechanism’, Energy Policy, vol 33, pp511–523 30 Carbon Positive (2008) ‘CER prices fall in world markets turmoil’, newsbrief, 4 February 31 Bosi, M. (2001) ‘Fast-tracking small CDM projects: Implications for the electricity sector’, Information paper, OECD Environment Directorate and International Energy Agency 32 Salgado, C. (2007) Interview with C. Salgado, Carbon Broker, Ecoinvest, 20 March, Cartagena, Colombia 33 Neira, D., Van Den Berg, B. and De la Torre, F. (2006) ‘El Mecanismo de Desarrollo Limpio en Ecuador: Un diagnostico rapido de los retos y oportunidades en el Mercado de Carbono’, report for Banco Interamericano de Desarrollo and Ministerio del Ambiente and Corporación Interamericana de Inversiones 34 Bürgi, P. (2007) Interview with P. Bürgi, Managing Director, South Pole Carbon Asset Management, 30 March, Cartagena, Colombia 35 The Gold Standard (2006) Manual for CDM Project Developers, Version 3, May 2006, www.cdmgoldstandard.org/uploads/file/DeveloperManual_GS-CER.pdf 36 Voluntary Carbon Standard Association (2008) ‘About the VCS’, available from www.v-c-s.org/ 37 VER Plus (2008) ‘Overview’, April, available from www.global-greenhousewarming.com/VER-plus.html
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38 California Climate Action Registry (2008) ‘About’, June, available from www.climateregistry.org 39 Bongiovanni, Z. (2008) Interview with Z. Bongiovanni, SolFocus Project Developer, 19 March, Palo Alto, California 40 Bellassen, V. and Leguet, B. (2007) ‘Voluntary carbon offsets: The awakening’, Research Report #11, Caisse des Dépôts Climate Taskforce 41 Dayal, P. (2007) Standardization of Verified Emission Reductions, UtiliPoint, IssueAlert, 31 August, available at www.ctrade.org/VERsAugust_31_2007.pdf 42 Azurdia, I. (2007) Interview with I. Azurdia, Executive Director, Fundación Solar, 7 September, Guatemala City, Guatemala 43 Purshouse, C. (2008) Interview with C. Purshouse, Senior Consultant for Camco International Group, 26 August 44 Gavaldon, H. (2007) Interview with H. Gavaldon, AgCert Field Engineer, Mexico, 20 August, Veracruz, Mexico 45 Porta, M. (2007) Interview with M. Porta, Executive Director, Centro Guatemalteco de Producción más Limpia, 12 March 46 Sutter, C. (2001) Oral Presentation, C. Sutter, Factor Consulting + Management Ltd, in UNFCCC COP-7, 6 November, Marrakesh, Morocco 47 Ecosecurities (2002) ‘Clean Development Mechanism: Simplified modalities and procedures for small-scale projects’, Final Report for the Department for International Development 48 Brown, M. (2007) Interview with M. Brown, Project Development Manager for Pacific Hydro, at CORFO Invest, 15 November, Santiago, Chile 49 Núñez, A. M. (2007) Interview with A. M. Núñez, CDM Coordinator in CORDELIM, 23 October, Quito, Ecuador 50 Synergy de la Comunidad Europea (2005) ‘Metodologías para la implementación de los mecanismos flexibles de Kioto: Mecanismo de Desarrollo Limpio (MDL) – Guía Latinoamericana del MDL’, Guidebook, available at www.cordelim.net/extra/html/pdf/library/olade.pdf 51 Zapata, H. J. (2007) Interview with H. J. Zapata, Renewable Energy Coordinator UPME, 10 October, Bogota, Colombia 52 Coviello, M. F. (2007) ‘Renewable energy sources in Latin America and the Caribbean: Two years after the Bonn Conference’, report for United Nations Economic Commission for Latin America and the Caribbean, April 53 Global Environment Facility (2002) ‘Cover note: Costa Rica: National off-grid electrification programme based on renewable energy sources’, Project Number 1322, 8 March, http://gefweb.org/Documents/Council_Documents/ GEF_C20/CC_-_Costa_Rica_-_National_Off-grid_Electrification.pdf 54 Congreso de la República de Guatemala (2003) Decreto Numero 52-2003, 10 November, p3 55 Ruiz, O. (2007) Interview with O. Ruiz, Head of the Centre of Information and Promotion of Renewable Energy, Ministerio de Energía y Minas, 7 September, Guatemala City, Guatemala 56 Ley, D. (2007) Interview with D. Ley, United Nations Consultant for Economic Commission for Latin America and the Caribbean, 16 August, Mexico City, Mexico 57 Netherlands CDM Facility (2005) Netherlands CDM Facility, Poechos I Project Design Document, UNFCCC, 14 November 58 Comisión Nacional de Energía (2007) Decreto 70-2007, in La Gaceta: Diario Oficial de La Republica de Honduras, 2 October, Tegucigalpa, Honduras 59 Ministerio de Economía Fomento y Reconstrucción (2004) Ley Corto I: Regla Sistemas de Transporte de Energía Eléctrica, Establece un Nuevo Regimen de
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61
62 63 64 65 66 67
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Tarifas para Sistemas Eléctricos Medianos, y Introduce Adecuaciones que Indica a la Ley General de Servicios Eléctricos, 13 March, Diario Oficial de la Republica de Chile Ministerio de Economía Fomento y Reconstrucción (2005) Ley Corto II: Modifica el Marco Regulatorio del Sector Eléctrico, 19 May, Diario Oficial de la Republica de Chile CORFO and Todochile (2007) ‘Apruba Bases de Llamado a Postulación para Otorgamiento de Subsidios a Estudios de Preinversión o asesorías especializadas en Etapa de Preinversión de Proyectos de Energía de Pequeño Tamaño a Partir de Fuentes Renovables’, report for CORFO Invest Conference, 16 November, Santiago, Chile Garcia, J. (2007) Interview with J. Garcia, CORFO Renewables Coordinator, 16 November, Santiago, Chile Congreso Nacional (2007) Ley No 5707 sobre Incentivo al Desarrollo de Fuentes Renovables de Energía y de sus Regímenes Especiales, May, Dominican Republic Soto, G. C. (2007) Interview with G. C. Soto, Administrator for Comisión Regulatoria de Energía y Gas, 10 October, Bogota, Colombia Cornejo, J. (2007) Interview with J. Cornejo, Unidad del Cambio Climático in Consejo Nacional del Medio Ambiente, 24 October, Quito, Ecuador Essent Energy Trading (2007) Tejona Wind Power Project Project Design Document, UNFCCC, 23 March Capoor, K. and Ambrosi, P. (2007) State and Trends of the Carbon Market 2007, World Bank, Washington, DC
Section 3 Country Market Intelligence for CDM Projects
9 Country-Specific Profiles Introduction
This section of the book will provide a brief overview of each country’s electrical grid in order to give the reader an idea of the climate for renewable energy investment. It is essential to analyse each country individually since the general trends of barriers in Section 2 do not take into account the unique historical, economic, geographic and institutional circumstances that have a huge bearing on a country’s suitability for Clean Development Mechanism (CDM) investment.
Vital statistics First, vital statistics for CDM development will be presented. These statistics, which include the portfolio mix of the grid, the country’s emission factor, the average price of electricity, whether or not the market is privatized, if the country has capacity payments and a spot market, and the names of the pertinent electricity-coordinating institutions, provide a first-order indicator of the country’s suitability for CDM projects. The portfolio mix and average grid emission factor of each country will provide a rough idea of the amount of emission reductions that could be expected. One can get a basic idea of how lucrative a CDM project would be based on the average residential, and in some cases, industrial prices of electricity since these prices are what project developers will be competing against. Whether or not a country’s electrical sector has been privatized will determine how easily independent power producers (IPPs) can enter into the market. The presence or absence of a rural electrification programme will be noted since many off-grid systems run on renewable energy since fossil fuels may be difficult and expensive to import to remote areas. Also, some systems like photovoltaic arrays are better suited for rural areas since they have no moving parts and require little maintenance and few replacement parts. Then, in each country-specific chapter, there follows discussion of how privatized the country’s electrical market is. Considering this factor is key
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since, as Chapter 7, ‘UNFCCC Procedural and Methodological Barriers’, describes, closed, state-run energy markets offer fewer opportunities for private investment in power generation and rarely take advantage of CDM. All Latin American countries went through the process of privatizing markets at different points in the past 20 years. Now they are in varying stages of privatization; Chile, Guatemala and Panama are fully privatized and have a strong set of incentives to promote development while Costa Rica, Mexico and Uruguay are still primarily served by the state generation, transmission and distribution company and have limits on the amount of private generation that can be developed.
Background and privatization The impetus for privatizing the industry was a result of a lack of governmental capacity to develop new generation. When each country reached a state of near emergency for new capacity additions, laws opened up the sector to development. However, in most cases these laws did not provide adequate stimulus for private market involvement and led to the current situation where fossil fuelburning generation facilities are rented or elicited for development in order to fulfil short-term demand in the quickest way possible. The grave situation that these countries found themselves in for meeting demand occasionally caused distributors to sign Power Purchase Agreements (PPAs) with these entities for much higher prices than other generation plants provide. In many parts of Central America, prices per kWh have surged as a result of recent high oil prices and now range from about 19 to 30 cents [1]. Even with these new applications, capacity is just barely meeting demand and there are frequent grid interruptions. Honduras and Nicaragua have daily outages during peak demand from 5.00pm to 7.00pm. Even Costa Rica, where Instituto Costarricense de Electricidad (ICE) has an excellent reputation for reliability, experienced blackouts in April and May 2007 [2]. Unless otherwise indicated, the reader should assume the following about the privatized markets: 1
2 3 4
Through privatization, the country set up a spot market that is based on a least-cost dispatch of resources. Generation that can fulfil demand the cheapest is dispatched first (unless special laws provide exceptions for renewable energy). The last generator to fulfil the demand sets the spot market price that all generators get for a given period of time. Large energy customers are able to negotiate with either generators or distributors to create PPAs. When moving from state to private ownership, each country set up a market manager, regulator and tariff-setting committee. Some countries transferred their state-run utilities to private ownership and others have maintained ownership of these facilities, while allowing new market entrants. This difference will be specified.
COUNTRY-SPECIFIC PROFILES INTRODUCTION
5
149
In most cases, transmission remained a governmentally owned enterprise, while generation and distribution were for private operators.
Renewable energy laws Because open electricity markets have not always promoted sufficient development and recent high fossil fuel prices make thermal generation undesirable, most of these countries have new laws that provide additional incentives for renewable energy generation that will be discussed in a later section of this paper. A combination of these laws and high national grid emission factors in countries that rely on fossil fuels for the bulk of their generation provide exceptional opportunities for renewable energy CDM project development.
CDM portfolio This section will be followed by an analysis of the country’s current CDM portfolio in table format and prose. The table in each section shows the projects that are registered or have submitted Project Design Documents (PDDs) and are in the process of validation. It is important to note that not all of these projects are registered yet, but most are in the final stages of being so. The information in these charts is current as of 1 April 2008 and derived from the Capacity Development for CDM Pipeline. When the information is available, projects in the pipeline for CDM will be mentioned. It is important to know that almost every renewable energy project in the region is now considering CDM revenues. So, when looking at the CDM pipeline and projects, the reader is getting a sense for almost all of the renewable energy projects that have been implemented since 2001, when the CDM started, and are planned for the future.
Special challenges and opportunities In the next section of each country chapter, the author will discuss special challenges for the country in question. These challenges may also have been mentioned in the section on individual types of barriers. They will either be mentioned only briefly again or elaborated upon. The point of having these barriers located in both places is to allow readers to use this book topically to understand barriers in general or as a country-specific guide. These challenges and opportunities are broken down into sections that address the country’s Designated National Authority (DNA) office and other domestic institutional support. The degree to which the DNA office is developed can have a large bearing on the success of projects. For example, Venezuela has ratified the Kyoto Protocol, but has not yet even set up a DNA office and therefore cannot host any CDM projects. In most cases, the DNA office is a governmental office located within the country’s ministry that handles energy or environmental affairs. Some countries, such as Ecuador, Peru and Argentina, have separate promotion offices that are privately run on
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donations and hope to sustain themselves on revenues from completing the CDM project cycle for prospective developers. Other institutional support can include research institutions, national laboratories dedicated to renewable energy, or non-governmental organizations that are taking steps to support the Mechanism. The presence or absence of carbon brokers is the next subsection that is addressed in this larger section of challenges and opportunities. The placement of carbon broker offices and the types of projects they specialize in can explain to a large degree the types of projects that have been successful in the country. Next, the country’s estimated renewable energy potential is presented, if studies to assess each resource have been completed. Unique experiences and situations that affect the success of CDM projects will then be mentioned.
Summary Finally, a short summary of the country’s potential for CDM project development will conclude each country-specific chapter.
References 1 2
Broide, A. (2007) Interview with A. Broide, Development Manager for Mesoamerica Energy, 26 September, San José, Costa Rica Cordero, F. and Mayorga, G. (2007) Interviews with F. Cordero and G. Mayorga, Strategic Business Unit of Instituto Costarricense de Electricidad (ICE), 25 September, San José, Costa Rica
10 Argentina
Vital statistics Portfolio mix: 51.7 per cent from conventional thermal sources (49 per cent combined cycle natural gas, 34 per cent turbo vapour, 17 per cent turbo gas); 43.1 per cent from hydroelectricity; 13 per cent imported; 5 per cent from nuclear power [1] Emission factor: 0.49 tonnes of CO2/MWh [2] Average price of electricity: 3.79¢/kWh (2004) residential; 3.86¢/kWh (2003) industrial [3] Privatized electricity market: yes Existence of spot market: yes Capacity payment: yes, $10/MWh for generators available during the peak demand ($5/MWh for base capacity and $5/MWh for reliability) [4] Market manager: Market administrator Compañía Administradora del Mercado Mayorista Electrico SA (CAMMESA) Policy maker: Secretaria de Energía, Consejo Federal de la Energía Eléctrica and Consejo Federal de la Energía Eléctrica (CFEE) Regulator: Ente Nacional Regulador de la Electricidad (ENRE) Environmental permits: Secretaría de Ambiente y Desarrollo Sustentable
Background and privatization The Argentine peso was devalued in 2001 by 30 per cent and had a profound impact on the electrical sector [5]. This economic crisis shaped the way the country shifted from a privatized market to a more regulated one, the fuel sources available for electrical generation, and the current laws promoting new renewable energy capacity additions. Argentina privatized its electric industry in 1993 as a reaction to mismanagement of the electrical system and sub-par performance by the energy companies. It followed the Chilean model, but instituted a few differences [6].
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Argentina has a least-cost bid auction process that is a bit different from the energy auctions of its neighbours; the least-cost auction is based on a biannual declaration of generation costs by generators [7]. Argentina’s auction has price caps that prevent generators from offering a cost that is too high [6]. Large consumers and distribution companies can buy energy at a stabilized spot price. The goal of averaging the spot price is to reduce the volatility for purchasers [7]. The experiment worked well until 1998 when a recession started. In 2002 Argentine President Eduardo Duhalde decided to devalue the peso by 20 per cent against the US dollar in an attempt to pull the country out of the four-year recession [5]. At this time, the government started setting energy prices so that people could pay their bills. The price for old generators serving residential customers is now fixed at close to $26/MWh from resolution 1281 of 2006 called Energía Plus [8]. Industrial and commercial generators have a hybrid fixed and non-fixed price; demand that exceeds 2001 amounts is not on a fixed price schedule. In order to stimulate new capacity additions, Energía Plus provides new generation with the real spot market price of close to $65/MWh. However, the government sets a price ceiling on the amount that generators can earn [9]. The government also fixed the price for natural gas, which has discouraged new exploration, and in 2004, with the help of Venezuela, created ENARSA (Energía Argentina Sociedad Anónima), a state-run gas and petroleum company meant to help the country recover from the crisis of 2001, by preventing supply and capacity shortages. In 2003, the economy began to recover with an 8.7 per cent growth in one year [10]. This fast growth, combined with a risky investment climate for new natural gas exploration, prompted natural gas shortages in 2004 that impacted 65 per cent of the industrial businesses in the province of Buenos Aires. Since then, Argentina has stopped exporting gas to Uruguay and Chile in order to use it domestically. Also, these international contracts were dropped because the peso was linked to the US dollar, and suddenly exporters were earning a third of what they had previously [11]. Argentina is now experiencing even more of a natural gas shortage as Bolivia has not had new investments in gas exploration since the nationalization of the oil and gas sector and has begun cutting export supplies to Argentina [12]. Because of this changing fuel mix, Argentina is a moving target for investors interested in CDM potential. The country’s emission factor was 0.3 tonnes of CO2/MWh in the 1990s since almost all generation was derived from hydro and gas. In 2004, it went up to 0.45 tonnes because natural gas generation began switching to diesel since there was no new natural gas exploration after the 2002 devaluation crisis. This trend continued until 2007 when the emission factor was close to 0.6 tonnes of CO2/MWh [13]. Since 2004 the economy has grown at about 7 per cent each year. It is now at the point where it was before the crisis. And now, since there was no investment in new capacity additions after the crisis, energy supply is currently just meeting demand. To stimulate more development, the government is consider-
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ing re-enacting a stable node price delivered at each interconnection point on the grid for energy [13].
Renewable energy laws Because of a lack of new generation capacity and a movement to protect the environment, in 1998 the government passed a law promoting solar and wind energy with a one cent (Argentine peso) per kWh production tax credit (PTC) and a 15-year exemption from paying income tax under Law 25,019 [14]. However, when the Argentine peso fell against the US dollar in 2001, this PTC was worth almost nothing and therefore did little to promote development. In 2006, with Law 26,190, the Parliament succeeded in passing a twice-failed bill that provides benefits to more renewable technologies and changed the PTC. The PTC was reset to 1.5 peso ¢/kWh for wind, hydro under 30MW, biomass and geothermal, and 0.9 peso ¢/kWh for solar. The hope is to have utilities source 8 per cent of their generation from renewable sources. This law also allocated about 1.25 per cent of the National Electrical Energy Fund to develop wind energy [15]. Some provinces offer additional PTCs that can be applied on top of the federally offered incentives; for example, Chubut offers an incentive of 0.5 peso ¢/kWh and Buenos Aires offers a one peso ¢/kWh PTC [9]. Because of the capacity shortage during the winter of 2006, several large companies are beginning to take advantage of this PTC by trying to generate their own energy in order to avoid having interruptions. Sugarcane companies in the north of the country have begun to buy more efficient boilers to burn the bagasse and supply themselves. Oil extraction companies like Panamerican Energy with a 40MW wind project in Patagonia have also begun to invest in autosupply resources [13].
CDM portfolio Argentina hosts the first wind farm to be registered for the CDM in the Latin American region; 15MW ‘Antonio Morán Wind Park’ was registered in December of 2005 and is operated by local cooperative Comodor Rivadavia. However, there are no other wind CDM projects in the pipeline or slated for immediate development.
Special challenges and opportunities Local DNA office Argentina has divided its DNA office into regulatory and promotion arms. The regulatory arm is located within the climate unit of the Secretary of Environment and Sustainable Development. The office has an Executive Committee, composed of governmental representatives in the Ministries of Energy, Transportation, Agriculture, Industry, Science and Technology, and Foreign Affairs, and an Advisory Committee, which is made up of private sector representatives, non-governmental organizations (NGOs), and acade-
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10 9
Number of projects
8 7 6 5 4 3 2 1 0
Hydro
Wind
Geothermal
Landfill methane capture
Non-landfill methane capture
Biomass
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April
Figure 10.1 Projects registered or in validation in Argentinaa mics [16]. The official website for the office provides some basic information, but the main source of CDM capacity building is done through the promotion arm. The promotion arm is the Argentine Carbon Fund which helps projects in the initial stages of CDM registration, and was established by a presidential decree in 2005. The fund has completed many Project Design Documents (PDDs) and receives as its payment 1 per cent of the CERs generated from projects. However, no projects that it has helped facilitate have achieved registration and earned CERs yet. Also, even though the title of the organization is ‘Fund’, it has no money to offer to projects. Donations sustain the office, and as of November 2007 it had enough donations to operate for about six more months. This fund also sponsored a study to assess the potential for methane capture from the agro-industry [8].
Other domestic institutional support There is institutional support for methane capture and renewable energy in the form of two national institutes: INTA (Instituto Nacional de Technología Agropequaria) and INTI (Instituto Nacional de Tecnología Industrial), which co-chair a methane-to-markets initiative, and support fisheries, agricultural industries and technological sectors through research and investigation. Argentina’s Secretary of Energy did a calculation of the national grid’s carbon emission factor. This data, which has been made public, could help small-scale project developers reduce CDM transaction costs as this average grid emission factor could be used as a baseline [17]. There is a wind research centre (El Centro Regional de Energía Eólica) that has been operating since 1985 in Chubut, a region in the southern part of the country in Patagonia. Work from this centre facilitated a wind energy potential map of the country [18].
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Other than these research institutes, there are some private and statefunded technology-creation initiatives. INVAP is a small, state-initiated research facility, and a local wind turbine manufacturer. NRG Patagonia is a new turbine manufacturer that has a 1.5MW turbine [9]. IMPSA, another local turbine manufacturer with competency in a variety of water and wind turbines, has a plant in Argentina and is building one in Brazil for a 300MW farm. IMPSA has designed a turbine to operate at high variable speeds without using gears to control the blade speed, which lower the turbine’s efficiency [19]. However, IMPSA’s launch of a test turbine in Argentina was a failure when in high winds it fell and injured three men [20].
Carbon brokers Carbon brokers have a strong presence in Argentina, which allows for local project support and knowledge about the Mechanism. These brokers develop new methodologies that can be used for projects that typically may not achieve registration. MGM International was started and is headquartered in Buenos Aires, and Ecoinvest has a large office there as well [13 and 21]. Ecosecurities and the French carbon broker Ecosur have plans to open offices in Buenos Aires [9].
Renewable energy potential Even though some biomass sugarcane producers have begun to take advantage of more efficiently burning their bagasse, there are still about 400MW of potential that could be tapped and connected to the national grid [22]. Four sites are being studied for their geothermal potential [22]. There are about 25GW of small hydro potential [23]. Solar and wind energy have not been studied extensively to give resource estimates.
Unique experiences and situations Argentina was once split between two grids, one in the northern part of the country and one in Patagonia. Now the two grids are connected, which allows developers to take advantage of the high wind speeds in Patagonia with large projects that serve the needs of the population in the north. However, there is some debate about how desirable the wind regime in Patagonia is since the winds tend to be very strong at 14–16 metres/second (m/s), or non-existent, which do not lend themselves well to the current most common large (1.5MW and above) turbine designs, which consist of large components that are not robust enough to endure rough winds and are optimized to capture steady wind speeds of about 9m/s [9]. Wind energy in Argentina must complete an Environmental Impact Statement (EIS) that follows the manual created for thermal generation. This manual is long and cumbersome. Therefore, it creates additional barriers for wind developers [9].
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Summary Argentina has tremendous potential for renewable energy CDM projects because of its current capacity shortage, excellent resource potential, revised production tax credit (PTC) and growing economy. However, the devaluation of the peso in 2002 may have scared investors away. If the economy continues to grow as it has and new natural gas exploration investments are not made, Argentina could be poised to have rapid growth in renewable energy projects as new capacity must be sourced, and PTC and CDM revenues can be earned with the construction of these projects.
References 1
2
3
4 5 6
7
8 9 10 11
12 13 14 15
Asociación Argentina de Energía Eólica (2006) ‘Matriz mensual de generación bruta (en GWh)’, Boletín electrónico, no 10, September, available at www.argentinaeolica.org.ar/, accessed 13 February 2008 Aceitera General Deheza (2007) Bio energy in General Deheza – Electricity generation based on peanut hull and sunflower husk Project Design Document, UNFCCC, 10 February World Bank (2003) Benchmarking data of the Electricity Distribution Sector in the Latin American and Caribbean Region 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/, accessed 20 February 2008 Gülen, G. (2002) ‘Resource adequacy and capacity schemes’, paper prepared for Institute for Energy, Law & Enterprise at the University of Texas at Austin BBC (2002) ‘Cautious reaction to peso devaluation’, BBC News, Business, 7 January Arango, S., Dyner, I. and Larsen, E. (2006) ‘Lessons from deregulation: Understanding electricity markets in South America’, Utilities Policy, vol 14, no 3, September, pp196–207 Energy Sector Management Assistance Program (ESMAP) (2007) ‘Latin America and the Caribbean Region (LCR): Energy sector – retrospective review and challenges’, report, 15 June Galbusera, S. (2007) Interview with S. Galbusera, Fondo Argentino de Carbono, 20 November, Buenos Aires, Argentina Garcia, A. (2007) Interview with A. Garcia, Project Developer for ABO Wind, 22 November, Buenos Aires, Argentina Rohter, L. (2004) ‘Energy scarce as Argentina faces winter’, The New York Times, 31 March Warton, U.K. (2004) ‘Short circuits in Argentina’s energy crisis’, Knowledge@Wharton, Special Issue, 2 June, Wharton School of the University of Pennsylvania Thomas Financial News (2008) ‘Oil and utilities highlights’, briefing, Hemscott Group Limited, 28 January Piquero, E. (2007) Interview with E. Piquero, Carbon Consultant MGM International, 22 November, Buenos Aires, Argentina El Senado y Cámara de Diputados de la Nación Argentina (1998) Régimen Nacional de Energía Eólica y Solar: Ley 25,019, 7 December, Boletín Oficial El Senado y Cámara de Diputados de la Nación Argentina (2000) Régimen de Fomento Nacional para el Uso de Fuentes Renovables de Energía Destinada a la Producción de Energía Eléctrica: Ley 26,190, 5 July, Boletín Oficial
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16 Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An assessment of DNAs in Latin America and the Caribbean’, report for Inter-American Development Bank, 2 June 17 Secretary of Energy of Argentina (2006) ‘Cálculo del Factor de Emisión de CO2, de la Red Argentina de Energía Eléctrica’, available from http://energia3.mecon.gov.ar/contenidos/verpagina.php?idpagina=2311, accessed 25 February 2008 18 Coviello, M. F. (2007) ‘Renewable energy sources in Latin America and the Caribbean: Two years after the Bonn Conference’, report for United Nations Economic Commission for Latin America and the Caribbean, April 19 Guerra, E. (2007) Interview with E. Guerra, IMPSA Financial Manager, 22 November, Buenos Aires, Argentina 20 Diario CRONICA (2006) ‘Se desmoronó el primer molino eólico fabricado en el país: 3 heridos’, 18 July, Comodoro Rivadavia, Chubut 21 Camara, A. (2007) Interview with A. Camara, Ecoinvest Carbon Consultant, 22 November, Buenos Aires, Argentina 22 Servant, M. (2007) Interview with M. Servant, Director of Renewable Energy, Secretary of Energy, 22 November, Buenos Aires, Argentina 23 Secretaría de Energía de La Nación / Coordinación de Energías Renovables / Dirección Nacional de Promoción (2005) ‘El Potencial de los Pequeños Aprovechamientos Hidroeléctricos en la Republica Argentina’, proceedings of 20th Conferencia Latinoamericana de Electrificación Rural, Cuenca, Ecuador, 2 May
11 Belize
Vital statistics Portfolio mix: 33 per cent hydro; 33 per cent diesel; 33 per cent imported from Mexico [1] Emission factor: n/a Average price of electricity: 44¢/kWh residential [2]; industrial n/a Privatized electricity market: None, although permitted by law Existence of spot market: yes Capacity payment: n/a Market manager: Belize Electricity Limited (BEL) Policy maker: BEL and Public Utilities Commission (PUC) led National Energy Plan recommendations in 2003 Regulator: PUC Environmental permits: Department of the Environment (DOE) within the Ministry of Natural Resources and the Environment
Background and privatization The installed capacity in Belize in 2002 was approximately 75MW in total, with 25MW coming from hydro, 25MW from diesel and 25MW from imported Mexican generation. The lack of indigenous conventional energy resources such as petroleum, natural gas or coal in the country has led to this high rate of importation. Belize plans on satisfying its future demand with a series of hydroelectric plants and improving the efficiency of its diesel plants [1]. Belize’s state-run utility became privatized with the Electricity Act of 1992. However, instead of allowing for a competitive marketplace, in 1993 the government issued a licence that granted the state-run company, Belize Electricity Limited (BEL), the exclusive rights to generate, transmit and supply electricity for 15 years. Residential electrical rates in Belize tend to be very high at an average of 44¢/kWh. BEL is currently applying for a rate increase to 50¢/kWh. BEL sites the high costs of diesel fuel at 50¢/kWh, the Mexican rate
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of imported energy at 30¢/kWh, and the cost of domestic hydro at 18¢/kWh as the reason for this rate increase [3]. The Public Utilities Commission of Belize oversees the tariff-making structure in the country [4].
CDM portfolio None
Special challenges and opportunities The prospects for CDM in Belize are not optimistic given that the country has not yet set up a Designated National Authority (DNA) office and there are no renewable energy incentives for Belize. This slow movement, despite Belize’s ratification of the Kyoto Protocol in 2003, could be a result of the lack of opportunities for CDM project development because of the country’s small industrial sector and closed, state-run electricity market. The large amount of hydro and imported electricity, which are both counted as zero for emission factor calculation purposes, could cause Belize to have a low emission factor that would not make renewable energy development worthwhile. Since no CDM projects exist at this point, no one has calculated the country’s average emission factor.
Summary Belize shows potential for CDM opportunities because of its high prices of electricity, but the monopolistic nature of the state-run utility prevents development from occurring. The 15-year licence to allow BEL to operate the system should expire in 2008, allowing the marketplace to be open to private investment. Given the lack of CDM interest in the country, however, the prospects for CDM development are currently not very promising.
References 1
2
3 4
Synergy de la Comunidad Europea (2005) ‘Metodologías para la implementación de los mecanismos flexibles de Kioto: Mecanismo de Desarrollo Limpio (MDL) – Guía Latinoamericana del MDL’, Guidebook, available at www.cordelim.net/extra/html/pdf/library/olade.pdf World Bank (2003) ‘Benchmarking data of the Electricity Distribution Sector in the Latin American and Caribbean Region 1995–2005’, available from http://info.worldbank.org/etools/lacelectricity/, accessed 1 March 2008 Sampson, D (2008) ‘BEL applies to PUC for a 15 per cent average rate increase following Threshold Event’, press release, 14 March, Belize Electricity Limited Sampson, D. (2007) ‘Approved electricity tariff structure’, press release, 1 July, Belize Electricity Limited, available from www.bel.com.bz/press_releases/ 27062007-1.pdf, accessed 1 March 2008
12 Bolivia
Vital statistics Portfolio mix: 65 per cent thermal (natural gas, coal, petroleum); 35 per cent hydro; <1 per cent other renewables [1] Emission factor: 0.581 tonnes of CO2/MWh [2] Average price of electricity: 6.1¢/kWh residential; 4.3¢/kWh industrial [3] Privatized electricity market: yes Existence of spot market: yes Capacity payment: Yes, and penalty of $1500/MWh for non-delivery [3 and 4] Market manager: Comité Nacional de Despacho de Carga (CNDC) Policy maker: Viceministro de Electricidad y Energías Alternativas, within the Ministerio de Hidrocarburos y Energía Regulator: Superintendencia de Electricidad (SE) Environmental permits: El Ministerio de Desarrollo Rural, Agropecuario y Medio Ambiente (MDRAyMA)
Background and privatization In 1968, the electrical sector was regulated with the Code of Electricity (D.S. 08438), which supported the vertical integration of the sector and created the Empresa Nacional de Electricidad (ENDE). Then, the Electricity Law (1604) of 1994 sought to improve efficiency in the sector by introducing competition and supporting investments. This market consists of a spot market that inputs dispatch based on least-cost generation and allows large consumers to create Power Purchase Agreements (PPAs) with generators [5]. With this restructuring, ENDE was privatized, creating three new companies called Corani, Guaracachi and Valle Hermoso. Until 1999, it was only these companies that could by law operate in the new market [6]. Now, these companies control 70 per cent of the total generation and five other private companies have begun generation [5].
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Bolivia has two major grids, the central national grid (SIN) and several isolated, distributed grids (Aislado). Companies within SIN must be vertically unbundled, but those that serve the isolated areas can provide generation, transmission and distribution [5]. The country’s topography makes it difficult to serve all of its citizens and the population in the northern and western parts of the country are served by these isolated grids or do not have electricity. The country’s electrification rate is one of the lowest in the region at 67 per cent. Eighty-seven per cent of urban dwellers have electricity while only 30 per cent of rural populations have access [7]. The country could face a dire capacity shortage soon since the generation capacity reserve is predicted to be inadequate by 2009. There has been a lack of new capacity additions because of the political and economic instability of the country [5].
Renewable energy laws There are no specific laws to support renewable energy in Bolivia. Because of the large portion of the population without electricity, there have been several state and aid organization programmes to provide better coverage, primarily through the use of renewable energy. The state programmes include the National Rural Electrification Programme (PRONER), Plan Bolivia para Energía Renovable (PLABER) and the Rural Electrification Decree of 2005. Under current president, Evo Morales, the Common Fund for Universal Access to Public Electricity Service (FOCO) and Electricity for Living with Dignity were two initiatives started in 2006 [8 and 9]. The effort to spread renewable energy to rural populations is so common in Bolivia that the plethora of solar home systems that have been installed as a result of these rural electrification programmes have necessitated installation guidelines and rules (Norma 1056) to ensure quality performance [10].
Number of projects
4
3
2
1
0
Hydro
Wind
Geothermal
Landfill methane capture
Non-landfill methane capture
Biomass
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April
Figure 12.1 Projects registered or in validation in Bolivia
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CDM portfolio The CDM portfolio in Bolivia is currently limited. The graph above shows the projects that are in the process of validation or already registered. The registered projects consist of a landfill gas capture project called Santa Cruz and a bundled run-of-river hydro project called Rio Taquesi. A rural electrification project that would have replaced low-voltage diesel generators with renewables was rejected for registration because it began operations before the Marrakesh Accords creating the CDM occurred. Also, the baseline methodology used for this project was inappropriate [11]. As of April 2007, there were several projects, including five hydro, five forestry, two landfill gas, one geothermal, one biomass for burning the shell of Brazil nuts, one cogeneration and one wastewater methane capture, that were in the preliminary steps of the CDM [12]. Beyond these compliance projects, an NGO called the Centro de Desarrollo de Energía Solar (CEDESOL) has a project known as Kyoto Twist that seeks both private and public sector participation through the purchase of Voluntary or Verified Emission Reductions (VERs) [13].
Special challenges and opportunities Local DNA office The Bolivian Designated National Authority (DNA) office (Oficina de Desarrollo Limpio (ODL)) is unique in that it is located outside of any governmental department. It is privately-run, but overseen by the Inter-Institutional Council on Climate Change in the Ministry for Sustainable Development under the Vice-Ministry for Natural Resources and the Environment. Initially, when it was active from 2002 to 2005, it operated on money donated by the United Nations Environment Programme (UNEP), the Dutch Embassy and Risø’s Capacity Development for the CDM [14]. Now, it derives its operating budget from taxing CER revenues. The idea of taxing CER revenues was born in a National Strategy Study for CDM in Bolivia sponsored by the Ministry of Sustainable Development and Planning and the World Bank [15]. The study says ‘CDM host governments are encouraged to ensure that part of the CDM surplus is retained in the host country. For this reason, as a complementary way to credit-sharing arrangements, a taxing regime analysis, which could offer major advantages to both host countries and investors, is presented instead’ [15]. Bolivia has heeded this National Strategy Study recommendation and is creating a decree that regulates the taxes of CERs. Leaders are considering taxing the CERs of large-scale projects between 15 and 35 per cent. However, Bolivia is considering waiving this tax for small-scale projects [16]. Forty per cent of these taxes go to cover the costs of approving the project and operations of the CDM office. Sixty per cent of these taxes go to mitigation and adaptation activities in Bolivian communities [17]. The ODL’s website is highly developed with a library, CDM-related events bulletin, project list and guide for developers [18].
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Other domestic institutional support A few institutional support networks other than the national CDM office exist for renewable energy project developers. CINER (Centro de Investigation de Energía Renovable) is based in Cochabamba and has a library of material for developers, publishes a monthly renewable energy magazine and offers courses and seminars for developers. The International Finance Corporation and Transportadora de Electricidad of Bolivia sponsored a wind map of the country [19]. Also, the Vice-Ministry of Electricity and Alternative Energy created a wind map of the country in April 2008 [20]. The aforementioned governmental programmes, meant to help increase rural electrification rates, are complemented by participation from a variety of international groups such as the Global Village Energy Partnership, Intermediate Technology Development Group, Inter-American Development Bank, the World Bank, Global Partnership on Out-Based Aid, the German Agency for Technical Cooperation and the Corporación Andina de Fomento.
Carbon brokers There is one carbon broker called Natsource that has a small office in the country, but the main mission of the office is not to develop CDM projects domestically. Instead, Natsource’s core business in carbon trading is to aggregate CERs and resell them. The CDM projects that have been developed in the country have been contracted by outside firms like C-Trade Comercializadora de Carbono Limited from Rio de Janiero, which wrote the Project Design Document (PDD) for the existing hydro project, and Grontmij Climate & Energy BV of The Netherlands, which completed the successfully registered landfill gas PDD.
Renewable energy potential The wind energy map completed by the International Finance Corporation and the Transportadora de Electricidad of Bolivia showed excellent wind potential in the southeast corner of the country with average speeds of 7–8.8m/s [19]. Otherwise there have been few studies to assess potential. Information from Bolivia’s neighbors, Peru and Chile, suggests that there are both excellent solar and hydro resources in the Andes.
Unique experiences and situations The most overwhelming barrier to project implementation in Bolivia is the carbon tax imposed by the national government. The amounts taken are significant and will discourage project developers. However, allowing the DNA office to exist outside of the government is helpful in that it could promote projects in a more timely fashion and avoid the institutional rigidities imposed by the government. Having the office earn a portion of the CERs provides a natural incentive for the office to be efficient and promote activities. However, this natural incentive also creates a conflict of interest since the DNA office is meant to be not only promotional, but also regulatory. Since it is in the interest
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of the office to accept projects and earn a portion of the CERs generated, it may apply lax sustainable development criteria. Beyond the inability to earn the full value of the CERs produced, the country’s volatile political and economic past further discourages investors. Most recently, the country’s president, Evo Morales, nationalized hydrocarbon extraction. This decision caused waves in the private sector because of its strong participation in country’s huge natural gas extraction industry, which was 466 billion cubic feet in 2006 [1]. Bolivia may extend this nationalization to the electrical sector. Like Ecuador, Bolivia is in a position of insufficient capacity because of a lack of private investment. Morales may follow Ecuador’s president, Rafael Correa, in making moves to renationalize the sector with the hope of installing large hydro dams backed by the government. Or, Morales may realize the huge potential in using natural gas to supply the electrical sector and invest in combined-cycle gas installations that have low initial investment costs. Already, the natural gas usage in the country has increased from 25 per cent in 2005 to 37 per cent in the electrical sector in 2005 [1]. Nationalizing the sector would discourage private investors and CDM development. Bolivia’s economic and political risk makes the country have a C rating for loans, which suggests that there is a high likelihood that the loan will not be repaid. This rating makes lenders such as the World Bank, International Finance Corporation, Corporación Andina de Fomento and the Inter-American Development Bank hesitant to make investments in the country. When loans are awarded, there are often qualifiers and restrictions on the funds they provide. These restrictions are onerous for project developers to meet [3]. Hydro and other renewable energy generation projects with high first costs face a disadvantage in the marginal cost dispatch of the Bolivian grid. Building incremental natural gas additions to existing plants incurs low first costs. These generators can then bid an energy price in the auction that is below the average cost of new hydro generation, which incorporates the capital intensive dambuilding costs. In this way, natural gas generators have assured dispatch, and hydro developers find it difficult to compete. The capacity payment that the Bolivian government pays is not high enough to compensate hydro generators for these low energy payments [3]. Bolivia has an advantage for CDM development over most other South American countries because it utilizes hydroelectricity for only 35 per cent [1] of its generation. The higher level of fossil fuels in the portfolio mix than in that of its neighbours yields more emission reductions. In comparison to other countries in the region, however, Bolivia has a low average residential tariff of 6.14¢/kWh. The Latin American region’s average residential tariff is 11.5¢/kWh [21]. Therefore, independent power producers (IPPs) in Bolivia, in general, could not expect to earn as much for their generation [3]. While there are currently few social problems with hydro development, future installations could face opposition because of Bolivia’s tumultuous
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history with the privatization of water rights. During the wave of privatization of all industries in the late 1990s in Latin America, the city of Cochabamba relinquished its role in providing water to households and businesses. A local company, owned primarily by California-based Bechtel, developed a project that increased customer rates by double and triple. Cochabamba citizens rioted and forced the company out of the country [22]. This type of mobilization of Bolivian citizens against private companies’ participation could portend a gloomy future for IPPs unless they work closely and collaboratively with communities to ensure project success. Beyond these potential social problems, the dramatic topography of the country makes it difficult to access hydro sites and transmission lines [3].
Summary Bolivia has not yet experienced much CDM activity because of the high taxes proposed on CERs, the climate of political and economic instability which complicates the process of qualifying for loans, and the low price of energy because of the country’s plentiful natural gas reserves. It could show growth if the CER tax is lowered or eliminated, the current capacity shortage becomes dire and the grid emission factor continues to grow as more natural gas is utilized for electrical production.
References 1 2 3
4
5
6
7
8
Energy Information Agency (2006) Country Analysis Briefs: Bolivia, available from www.eia.doe.gov/cabs/Bolivia/Background.html C-Trade (2006) Rio Taquesi Hydroelectric Power Project Design Document, UNFCCC, 15 September World Bank (2005) ‘Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005’, available from http://info.worldbank.org/etools/lacelectricity/ Tardio, M. (2006) ‘Asignación de pagos por capacidad en sistemas hidrotérmicos’, Superintendencia de electricidad, presentation at the Fifth Congreso Latinoamericano y del Caribe de Gas y Electricidad, Buenos Aires, 15–18 May Unidad de Analysis de Políticas Sociales y Económicas de Bolivia (2005) ‘Sector Eléctrico (2000–2004)’, November, report available at www.udape.gov.bo/ diagnosticos/documentos/Documento%20Sector%20Electrico.pdf Barja, G. and Urquiola, M. (2003) ‘Capitalization and privatization in Bolivia: An approximation to an evaluation’, report for Centre for Global Development, Washington, DC Ministerio de Obras Publicas Servicios y Vivienda Viceministerio de Electricidad y Energías Alternativas (2007) ‘Programa “Electricidad para vivir con Dignidad”’, año 1, no 3, September, report for UNDP and Global Opportunities Fund, available at www.hidrocarburos.gov.bo/Noticias/Publicaciones/publicacion3.pdf ESMAP (2007) ‘Latin America and the Caribbean Region (LCR): Energy sector – retrospective review and challenges’, 15 June, Energy Sector Management Assistance Programme, World Bank, Washington, DC
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Programa Electricidad de Ministerio de Hidrocarburos y Energía (2008) ‘Electricidad para vivir con dignidad’, April, www.hidrocarburos.gov.bo/07_PLAN/plan.php, accessed 10 March 2008 Programa Electricidad de Ministerio de Hidrocarburos y Energía (2008) ‘Normativa’, April, www.hidrocarburos.gov.bo/07_NORMATIVA/normativa.php, accessed 10 March 2008 CDM UNFCCC Project Search, 1 May 2008, http://cdm.unfccc.int/Projects/projsearch.html Trujillo, R. (2007) Interview with R. Trujillo, DNA of Bolivia, 22 April CEDESOL (n.d.) ‘Solar cooking is a salvation for us’, Newsletter, Centro de Debarrollo en Energía Solar, www.cedesol.org/, accessed April 2008 Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An assessment of DNAs in Latin America and the Caribbean’, report for Inter-American Development Bank, Washington, DC National Strategy Studies Program (2001) ‘National Strategy Study for the participation of Bolivia in the CDM’, report for Ministry of Sustainable Development and Planning and World Bank, Washington, DC Trujillo, R. (2008) Interview with R. Trujillo, Designated National Authority of Bolivia, 16 April Jáuregui, S. (2003) ‘Elementos fundamentales de la norma para la regulación del comercio de emisiones en Bolivia (Ley del Carbono)’, Oficina de Desarrollo Limpio, May Oficina de Desarrollo Limpio, www.odl.gov.bo, accessed 3 April 2008 Viceministro de Electricidad y Energías Alternativas (2008) ‘Mapa Eólico de Bolivia’ (Wind Map of Bolivia), available at http://www.hidrocarburos.gov.bo/ vmeea/index.php Business News Americas (2008) ‘VMEEA releases country’s 1st wind map: Bolivia’, 16 April World Bank (2003) ‘Benchmarking Data of the Electricity Distribution Sector in the Latin American and Caribbean Region 1995–2005’, http://info.worldbank.org/etools/lacelectricity/, accessed 15 April 2008 Watson, C. (2003) ‘Sell the rain: How the privatization of water caused riots in Cochabamba, Bolivia’, newscast, Canadian Broadcasting Centre Radio, 4 February
13 Brazil
Vital statistics Portfolio mix: 83.8 per cent hydro; 4.2 per cent other renewable; 3.7 per cent nuclear; 3.6 per cent natural gas; 3.2 per cent coal; 1.5 per cent oil [1] Emission factor: 0.262 tonnes of CO2/MWh [2] Average price of electricity: 14.3¢/kWh residential; 8.68¢/kWh industrial [3] Privatized electricity market: yes Existence of spot market: power pool Capacity payment: no, obligation to contract [4] Market manager: Operador Nacional do Sistema Elétrico (ONS) Policy maker: Council of Management of the Electric Energy Crisis (Câmara de Gestão da Crise de Energia Elétrica (GCE) Regulator: Agência Nacional de Energia Elétrica (ANEEL) and Comitê de Monitoramento do Setor Elétrico (CMSE) and Empresa de Planejamento Energético (EPE) (monitors the new power pool) Environmental permits: Ministério do Meio Ambiente (MMA)
Background and privatization Brazil’s electrical sector was privatized in 1997 with the Petroleum Investment Law, which restructured the electrical and energy sectors. Part of the impetus for this bill was to stimulate domestic and foreign investments in new capacity additions [5]. In 2008, 28 per cent of generation companies were privately owned. The state-run utility, Centrais Elétricas Brasilieras (Electrobras) owns 60 per cent of the installed capacity. Tractebel Energia is the largest privately owned company with about 10 per cent of the country’s installed capacity [6]. Brazil’s electrical grid is made up mainly of hydro resources. This situation makes the country susceptible to major electrical power shortages in times of drought. During 2000–2001, a major drought struck the country and caused the government to implement a rationing programme. A special organization called Câmara de Gestão da Crise de Energia Elétrica was formed to handle
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this situation and reduced electricity consumption by 20 per cent through an education campaign and by implementing penalties for excess consumption and incentives for energy savings [7]. In 2000, because of this power shortage, the government also implemented the Thermoelectric Priority Plan for 17GW of new thermal capacity to provide backup for the hydro generation on the grid. This plan included a take-or-pay contract, stipulating that the distributors must pay for the generation whether or not they need it. This plan therefore favoured the thermal generation companies. The aforementioned energy reduction programme and grid improvements resulted in excess supply that negatively impacted some nonthermal generation companies and distributors since they were not needed in the dispatch [2]. Despite the supply excess in the early 2000s, the country’s high demand growth, which averaged 5.4 per cent annually between 1980 and 2000, mandates frequent new capacity additions [7]. The Ministry of Mines and Energy predicts that natural gas, coal and nuclear generation will increase by 297 per cent, 300 per cent, and 150 per cent respectively while hydro generation will decrease by 15 per cent by 2015 [2]. In 2004, a new model for the electricity sector based on a power pool, known as Ambiente de Contratação Regulado (ACR) was passed by Congress. The goal of this new power system is to reduce price fluctuations for market participants and consumers and allow the system to better predict needed capacity additions. This system consists of distribution companies estimating their demand and contracting it for three to five years. A newly formed committee will then determine how much additional capacity will need to be built and will contract that amount from generators. In this way, the model represents a hybrid between a publicly and privately owned sector. The government shares the risk with multiple buyers in this situation. The price that participants of this distribution pool receive will be stable and long term, and will not vary between companies. Large consumers can continue to make Power Purchase Agreements (PPAs) with generators outside of this pool [7]. Time will tell the impact that this new system has on distributors and generators, and how well the committee predict future demand requirements.
Renewable energy laws Brazil’s Incentives Programme for Alternative Sources of Electric Energy (PROINFA) supports new hydro under 30MW, biomass and wind development through two phases of implementation. The current feed-in tariff is set at an average of $74(135 reais)/MWh for hydro and $76(140 reais)/MWh for biomass and wind. The exact feed-in tariff a developer will receive depends on the capacity factor of the site for development; those sites in less favourable wind regimes earn higher tariffs [8]. Under PROINFA, wind developers also get a 20-year PPA for installations and special loan rates for 80 per cent of the project costs [9].
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Table 13.1 Summary of Brazilian renewable energy mandate (PROINFA) Amount required Phase I
Phase II
1422MW wind, 1191MW small hydro, and 685MW biomassa 10% generation
Incentive structure
Target dates
PPA length
% of components sourced locally
Feed-in tariff
2008
20 yrs
60%
Proposed rate increase of 0.5% per year
2022
15 yrs
Proposed 90%
Note: a These are revised, not original, PROINFA capacity requirements. Source: Feitosa, E. A. and Carla, A. (2006) ‘Brazilian Wind Energy Programme: Status and perspectives’, presentation at the Fifth World Wind Energy Conference, New Delhi, 6–8 November
The Phase I amounts had to be revised after it was found that they were unattainable for biomass generators. The capacity requirements shifted from 1100MW of each type of technology to weigh more heavily on the hydro and wind portions with the new required additions of 1422MW wind, 1191MW small hydro and 685MW biomass [8]. There are several rural electrification programmes in Brazil. The US and Germany began an initiative in 1993 to install 1500 solar home systems. Since 1994, the Brazilian government has implemented four programmes (CRESESB, PRODEEM, PAEPRA and Luz para Todos) for electrification of rural areas with renewable energy [10 and 4].
CDM portfolio Overall, the Brazilian Clean Development Mechanism (CDM) market has been a success with 71 per cent of Latin American reductions derived from projects 100 90
Number of projects
80 70 60 50 40 30 20 10 0
Hydro
Wind
Geothermal
Landfill methane capture
Non-landfill methane capture
Biomass
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April
Figure 13.1 Projects registered or in validation in Brazil
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in Brazil [11]. The large agro-industry and many developed cities provide it with ample opportunities for methane capture. Hydro and biomass projects, which were not new to Brazil, have also enjoyed much CDM success. The PROINFA legislation has stimulated much new growth in the wind energy sector. The main interested wind parties in Brazil are Elecnor/Enerfin, Enerbrasil/Iberdrola, Petrobras, Central Nacional de Energia Eólica (CENAEEL), a Brazilian private wind developer, Companhia Energetica do Ceara (COELCE), Companhia Paranaense de Energia (COPEL) and Centrais Elétricas de Santa Catarina SA (CELESC) [12].
Special challenges and opportunities DNA Office The Brazilian Climate Change Programme was initiated in 1996 with grants for $1.5 million by the Global Environment Facility and $400,000 from the ‘US Country Study Program’. It has been sustained by funding from national entities such as the National Electrical Energy Agency, Electrobras and the Brazilian Institute for Environment and Natural Renewable Resources [13]. In July of 1999, this programme was upgraded to an Inter-Ministerial Commission called Comissão Interministerial de Mudança Global do Clima (CIMGC) and works in conjunction with the General Global Climate Change Coordination (GCCC) [11 and 13]. Brazil was instrumental in helping to develop the CDM. During the third Ad Hoc Group on Berlin Mandate in 1997, the Brazilian negotiators recommended the creation of a Clean Development Fund where penalty fees from entities with reduction obligations would go towards funding climate change mitigation and adaptation activities in developing countries [13 and 14]. The Designated National Authority (DNA) office is located in the CIMGC of the Ministério da Ciência e Tecnologia (MCT). It has determined that its mission is exclusively regulatory and considers project promotion to be the duty of the private sector. However, it has made presentations, hosted seminars and has written an ‘Orientation Guide for CDM’ [13]. The process by which projects earn national approval includes an analysis of the sustainable development component of the project by reviewing the Project Design Document (PDD) and validation report in Portuguese. The office considers local environmental sustainability, labour conditions and net job generation, income distribution, technological and capacity building development, and regional integration as factors to determine sustainable development [13].
Other domestic institutional support There are a multitude of other institutional support networks available for project developers. The DNA office’s hands-off policy on promotion activities is not indicative of all governmental programmes. The country’s aggressive ethanol programme called Pró-Álcool in the 1970s was heavily subsidized by
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the government when fossil fuel prices preventing it from competing with market prices. Now, the government is supporting methane capture and avoidance projects [13]. Brazil plans to be one of the first countries to submit a Programme of Activities (PoA) methane capture project [15]. National efforts for biofuels and renewable energy include the following: IBAMA (Brazilian Institute for Environment and Natural Renewable Resources), Brazilian Centre for Wind Energy of the University of Pernambuco, Brazilian Reference Centre on Biomass (CENBIO), Brazilian Centre on Biofuels (CERBIO), National Centre of Hydroelectric Energy (CENEH), Brazilian Centre on Thermosolar Development (Green Solar), the Renewable Energy Development Centre (NACER) and the Alternative Energy Development Group (GEDAE). Most of these groups are housed in national universities [16]. National efforts for methane capture are being led by CETESB (Companhia de Tecnologia e Saneamento Ambiental) for methane from sewage and EMBRAPA (Empresa Brasileira de Pesquisa Agropecuária) for avoided methane from non-flooded rice fields [13]. Also, a Federal and São Paulo State Forum on Climate Change was formed to create a social conscience about climate change and facilitate communication between the public and private sectors. The NGO sector has been involved by creating the Observatório do Clima, which will attempt to impact Brazilian climate change negotiations and policy as well as promote CDM activities [17]. The Brazilian Mercantile Exchange (BM&F) Carbon Facility was created by the Brazilian Ministry of Development, Industry and Foreign Trade. It attempts to ‘foster the interest of Brazilian entrepreneurs in the development of CDM projects by providing them with an efficient mechanism through which they can publicize their projects, and by creating a facilitating online environment where carbon credit trades can be carried out in the future’ [18]. There is also a strong private sector initiative, especially within the landfill, small hydro and sugarmill industries, to promote and develop CDM projects [13]. Numerous conferences and seminars like the annual ‘Carbon Markets’ in São Paulo are meant to accomplish these goals.
Carbon brokers The private sector has taken a strong hold in Brazil, realizing its huge CDM potential. A variety of consultants are active in the country and have local offices. Some of the carbon brokers with offices in the country include Ecosecurities, Econergy International, MGM International and C-Trade Comercializadora de Carbono Ltda. A host of other carbon consultants are interested in pursuing other projects there.
Renewable energy potential The renewable energy potential in Brazil is enormous. There are 9794MW of developable hydro potential with 3936MW of this potential already primed for development since Agência Nacional de Energía Eléctrica (ANEEL) has granted permits for its use. The biomass potential within the sugarcane indus-
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try is 3852MW, and 1772MW of this potential has been authorized for development. The wind industry has 143GW of total potential and 30GW of developable potential. Already, 6GW of wind farms have been given permits for development [19].
Unique experiences and situations Private sector power participants have been frustrated by the extensive requirements and process for national approval. Also, the office struggled to define an approval process for a long time, which annoyed first-mover project developers. This type of environment is ripe for bribes and according to Christiana Figueres’ assessment of DNAs in 2004, ‘Some private sector representatives have resorted to political pressure to get their projects considered’ [13]. Another frustration for renewable energy project developers in Brazil until May 2008 was the inability of Brazilian authorities to make a decision on how to calculate the grid carbon intensity. The Brazilian grid is divided into four distinct parts, each of which has a unique emission factor. The northern two grids are more clean-burning while the southern grids rely more on fossil fuels. In 2007–2008, Brazil proposed creating four separate emission factors for renewable energy projects to use. Then, in May 2008, the DNA decided to use one national grid emission factor. This decision will impact the number of Certified Emission Reductions (CERs) that each project will earn, allowing more for northern projects and less for southern projects. However, project developers and carbon brokers are just glad that the emission factor will be available, since they have been backlogged as developers waited until they could calculate the emission factor for CDM registration [20]. Brazil’s PROINFA makes great strides towards promoting renewable energy projects by guaranteeing capacity additions, but its local component requirement has limited the amount of development that can occur. The only local turbine manufacturer, Wobben Windpower (100 per cent owned by German Enercon), has two domestic factories that make three models of turbines and is so busy that it cannot keep up with the orders it receives [12]. IMPSA of Argentina is moving into the country with a factory in the Brazilian state of Pernambuco that will be able to produce 200 1.5MW turbines per year [21]. In addition to having difficulty sourcing local parts, wind developers had difficulty acquiring environmental permits and land deeds by the original PROINFA 2006 deadlines. For that reason, the deadline was extended to 2008 [1]. The constant revision of the PROINFA to have dates extended and MW capacity requirements changed may make it lose validity and stringency in the eyes of developers. It is a clear example of the trial-and-error energy policy experimentation in the region. One more complication from the PROINFA legislation is that it could complicate the issue of regulatory additionality, which stipulates that the CDM project was not required by law. Also, the financial incentive given through a
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feed-in tariff for these projects could prevent project developers from showing that projects are financially additional.
Summary Brazil has tremendous CDM potential because of its plentiful natural resources, developed industries and constant demand growth. The private sector, with little help from the DNA office, and a host of capacity building institutions, has promoted CDM successfully. Brazil now dominates the region with regard to emission reductions produced. Its recent PROINFA legislation should continue to open the landscape for CDM projects as long as projects can continue to prove additionality.
References 1
Porto, L. (2005) ‘Renewable energies in Brazil’, Ministry of Mines and Energy of Brazil, Presentation, available at www.si3ea.gov.co/Si3ea/Documentos/ciure/ Documentos/Mexico/FNCE%20en%20Brasil.pdf 2 São João Hydro Power Plant (2007) São João Hydro Power Plant Project Design Document, UNFCCC, 29 May 3 World Bank (2005) Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/ 4 World Bank (2007) ‘Latin America and the Caribbean Region (LCR): Energy sector – retrospective review and challenges’, Energy Sector Management Assistance Programme report, 15 June 5 Kingstone, P. (2004) ‘Critical issues in Brazil’s energy sector: The long (and uncertain) march to energy privatization in Brazil’, The James A. Baker III Institute for Public Policy of Rice University, Houston, TX 6 International Energy Agency (2006) World Energy Outlook, International Energy Agency, Paris 7 Organisation for Economic Co-operation and Development (2005) ‘Regulation of the Electricity Sector’, OECD Economic Survey of Brazil 2005, OECD, Paris 8 do Valle, C. (n.d.) ‘Renewable Energy Policy: Brazil’, presentation at Centro Clima: Centre for Integrated Studies on Climate Change and the Environment, available through Renewable Energy Policy Network for the 21st Century at www.ren21.net/pdf/WorkShop_Presentations/do-Valle_Renewable%20Energy% 20Policy%5B1%5D.ppt 9 Feitosa, E. A. and Carla, A. (2006) ‘Brazilian Wind Energy Programme: Status and perspectives’, presentation at the Fifth World Wind Energy Conference, New Delhi, 6–8 November 10 World Resources Institute (n.d.) ‘Brazil: Luz para todos’, available at http://projects.wri.org/sd-pams-database/brazil/luz-para-todos, accessed on 10 March 2009 11 Synergy de la Comunidad Europea (2005) ‘Metodologías para la implementación de los mecanismos flexibles de Kioto: Mecanismo de Desarrollo Limpio (MDL) – Guía Latinoamericana del MDL’, Guidebook, available at www.cordelim.net/extra/html/pdf/library/olade.pdf 12 Lopes, E. (2008) Interview with E. Lopes, Project Development for Wobben Windpower, 15 March
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13 Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An assessment of DNAs in Latin America and the Caribbean’, report for Inter-American Development Bank, 2 June 14 Lawrence Berkeley National Laboratory (n.d.) ‘Clean Development Mechanism’, International Energy Studies, http://ies.lbl.gov/node/370, accessed 10 May 2008 15 Figueres, C. (2008) Interview with C. Figueres, Principal Climate Change Adviser to ENDESA Internacional and Vice President of the Bureau of the UN Framework Convention on Climate Change, 6 April 16 Altomonte, H., Cuevas, F. and Coviello, M. (2004) ‘Fuentes renovables de energía en America Latina y el Caribe: Situacion y propuestas de politica’, commissioned by CEPAL and GTZ and prepared for the delegates of the Second World Renewable Energy Forum in Bonn, Germany, 29–31May 2004, 19 May, available at www.funtener.org/pdfs/Lcl2132e.pdf 17 Sales, R. and Sabbag, B. K. (2006) ‘Legal compliance with environmental requirements impacting assessment and demonstration of additionality in Clean Development Mechanisms: A legal review under the UNFCCC, the Kyoto Protocol and the Brazilian Legal Framework on Climate Change’, report for Baker & McKenzie’s Brazilian Environmental and Climate Change Practice Group, January 18 Rio de Janiero Stock Exchange, ‘Carbon Market: BM&F Carbon Facility’, www.bvrj.com.br/mbre2/banco_projetos/conheca.asp, accessed 15 April 2008 19 General Electric (2006) ‘Renewables: The future of energy’, GE Energy Latin America, 12 January presentation at Institute of the Americas Conference. Once available at www.iamericas.org/pdfs/Presentations/Energy/ 2006BrazilRenewableVideoConf/GERenewables.pdf – no longer available 20 Point Carbon (2008) ‘Brazil emissions measurement to “increase CER Production”’, Carbon Market News, 13 May 21 Guiñazú, H. (2008) Interview with H. Guiñazú, Director of IMPSA, 13 March
14 Chile
Vital statistics Portfolio mix: 33 per cent petroleum; 19 per cent natural gas; 10 per cent coal; 18 per cent hydro; 14 per cent biomass [1] Emission factor: 0.3581 tonnes of CO2/MWh [2] Average price of electricity: 10.9¢/kWh residential; 8¢/kWh industrial Privatized electricity market: yes Existence of spot market: yes Capacity payment: yes, based on theoretical margin of reserve [3] Market manager: Centros de Despacho Económico de Carga (CDEC) Regulator: Superintendencia de Electricidad y Combustible (SEC) Policy maker: Comisión Nacional de Energía (CNE) Environmental permits: Comisión Nacional del Medio Ambiente (CONAMA) Rural electrification: Committee within CNE
Background and privatization Chile was a leader in electrical sector privatization for the region. The 1982 Electrical Act returned the state-owned companies, which were made public during President Salvador Allende’s term from 1970 to 1973, back to their private owners. Allende’s experiment with making these companies public led to inflation, high fuel prices and price controls. The reprivatization of the sector involved splitting up the large state-owned company, Endesa, into 14 different generation and distribution companies. This restructuring was a success and led to strong free market participation in new capacity additions from 1990 to 1998 [4]. Generators can participate in the spot market, Power Purchase Agreements (PPAs), or accept node prices based on the average cost of generation at the distinct node site in the grid where the generation is inserted [5]. Also, generation dispatch in Chile is based on a merit order
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dispatch whereby the least-cost generators are selected first until demand is met by an independent authority known as the Economic Dispatch Centres (Centros de Despacho Económico de Carga (CDEC)) [6]. Restructuring worked well until 1998 when a severe drought caused by La Niña drew the country’s attention to its 57 per cent dependency on hydro generation [7]. Reservoirs were not able to supply the needed electricity and blackouts and rationing ensued. Generators in PPAs could not supply the promised generation. This situation, along with low prices for node-point connections and an average demand growth of 4.6 per cent each year since 1990, led to a lack of capacity installation from 1998 to 2004 [8 and 9]. To reduce Chile’s dependence on hydro resources, those new applications that were built in the late 1990s were natural gas plants, which could be operated fairly cheaply with gas from Argentina. Another disruption in the Chilean electrical sector occurred in 2002 when the Argentine gas supply was reduced. This supply cut happened for two reasons. Firstly, the Argentine peso devaluation led to a halt in new gas exploration, so Argentina began rationing its gas for domestic use. Secondly, the Argentine gas contracts were fixed to the dollar, which made the international contracts suddenly worth one-third as much after the devaluation [10]. Therefore, Argentine gas suppliers could get more for their product if it was sold domestically. In response to this shortage, Chile began switching its natural gas power plants to accept fuel oil and has begun construction on a regasification facility on the coast to receive liquefied natural gas from other countries. In November 2007, only 1 per cent of the gas/petroleum plants, which make up 30 per cent of Chile’s overall generation, were burning natural gas. Bolivia has also been reluctant to sell to Chile as it hopes to secure a Pacific port on the border between Peru and Chile in exchange for sales of natural gas [10]. Because Chile has few hydrocarbon reserves, with just 150 million barrels of oil and 3.5 trillion cubic feet (tcf) of gas [4], the recent high international prices of petroleum have caused the spot price for electricity in Chile to surge from $40/MWh in April 2004 to $100/MWh in November 2007 and $250/MWh in March 2008 in the central transmission region that serves Santiago. High oil prices, together with a summer drought in 2008 that left hydro reservoirs empty, caused this situation. Rationing is expected for 2008 and 2009 until major projects are added in 2010. The dire need for new capacity guarantees high prices for new generation sources [10]. This recent change in fuel mix from natural gas to petroleum has had implications on Chile’s emission factor, making it higher and allowing Clean Development Mechanism (CDM) projects to earn more reductions [8]. Also, some CDM projects that involved switching petroleum-burning plants to accept natural gas have lost their CDM potential as they have had to be reconverted back to accept a liquid fuel with a higher carbon intensity [10].
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Renewable energy laws In response to these electrical supply disruptions, the country passed two laws to promote new renewable energy capacity additions that will not be susceptible to droughts or foreign supply lines. In 2004, Short Law I (Ley 19,940) was passed to help better promote renewable energy less than 20MW. This law provided exemption from transmission and distribution charges for projects under 9MW. Generators between 9 and 20MW pay increasing charges for transmission and distribution that are based on the system’s size. This law also provides guaranteed access to the grid, and the ability for generators to sell in the spot market [11]. In 2005 Short Law II (Ley 19,657) was passed to require distributors serving residential customers to source 5 per cent of their energy from renewable energy sources, which includes hydro under 20MW, by the year 2010. In order to make Chile less susceptible to drought, only dams under 20MW are eligible to fulfil this 5 per cent mandate [12]. These smaller dams can spread out the impact of drought, which may hit different regions of the country. Currently, 2.6 per cent of Chile’s capacity comes from 327MW of qualifying resources [9]. The Short Law II will require 200MW of new capacity additions by 2010 and 1400MW by 2020 [13]. The extra cost burden of this renewable generation will be averaged throughout the country to ensure that it does not disproportionately affect regions with poor renewable energy resources. The penalty for not complying with the mandate is $27/MWh or $40/MWh after a distributor has failed three years in a row to complete the requirement [13]. A third renewable energy law, referred to as Short Law III (Law 20,257), was passed by Congress in March 2008 and requires both generators and distributors to continue to comply with Short Law II and source 10 per cent of their energy from renewable energy sources by 2024 [14]. There is also a proposal by the current president, Michele Bachelet, to have 15 per cent of the growth in energy generation capacity coming from renewable sources by 2010 [15]. As previously mentioned, generators currently have the option to sell within a PPA or the spot market, or accept the node price at the closest connection point to the grid. This node price is determined by a formula that takes into account future fuel price forecasts. However, Short Law I eliminates the node price option since in recent years it was set too low and stifled new capacity additions [8]. Therefore, the penalty that generators who do not source 5 per cent of their energy from renewable sources by 2010 and 10 per cent by 2024 will have to pay should translate into higher prices, negotiated through PPAs, for renewable generators. If Short Law III is passed, the price for renewable generation may increase even more as generators with contracts with large consumers will be held responsible for fulfilling the mandate. Penalties, instead of incentives like production tax credits or feed-in tariffs, were chosen to promote these renewable energy laws because of Chile’s strong neoliberal tendencies. The hope was that the penalties would push the market to provide the cheapest generation with minimal subsidies.
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CDM portfolio 16 14 Number of projects
12 10 8 6 4 2 0
Hydro
Wind
Geothermal
Landfill methane capture
Non-landfill methane capture
Biomass
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April
Figure 14.1 Projects registered or in validation in Chile Chile is very advanced with regard to its landfill development because it is an industrialized country with population centres served by several lined landfills that lend themselves well to methane capture. Also, the biomass sector is developed because of the production of energy from wood and wood scraps at lumber mills in the Lake District and Patagonia. The hydro sector is developed because this is an area that generators in the country were familiar with prior to CDM and now are taking advantage of additional revenues for this generation. These projects may have difficulty proving additionality in the future because of their prevalence. With regard to wind, Chile is underdeveloped given its potential and stable investment climate. Endesa has led the way for large wind development in Chile with their 18MW ‘Canela’ wind farm that is under construction with Vestas 1.65MW turbines in Region IV. Other large companies like Pacific Hydro are monitoring two sites for the possibility of putting in farms, but were waiting during the autumn of 2007 to see if Short Law III passed before investing heavily in wind in the region. For now, the growing demand necessity and Chile’s experience with hydro make this the most attractive option. Colbún, Chile’s second largest generator, is also putting its efforts into more hydro with six projects that will total 500MW and coal-burning generation with a 700MW plant. A local bottle-making company, Cristalería Toro of Chile, is ‘greening’ its image by installing 3.45MW of capacity on the coast of Chile in Region VIII. Cristalería Toro also hopes to install 8.65MW more for a total of 12MW in the second stage of the project. Cristalería Toro has already benefited from CORFO funds for a feasibility study, purchased turbines, and hoped to install the first stage of the project in January of 2008. For this small project, turbines
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were difficult to source; two used turbines of 600kW from Germany and two new 780kW turbines from Chinese manufacturer ZheJaing Huayi Wind Energy Development will be used. These turbines were selected based on their low cost and immediate availability [16].
Special challenges and opportunities DNA office Chile’s governmental environmental office, Comisión Nacional del Medio Ambiente (CONAMA), is well organized, but the Designated National Authority (DNA) portion of this office is not very developed. Perhaps due to a lack of resources, the office has a basic webpage with a dearth of information, and the author was not able to meet with the DNA or anyone related to the topic of climate change while in the country for ten days [17]. The lack of resources allocated to this office seems inconsistent with the recent interest in renewable energy of the federal government, and efforts may soon be bolstered. The office claims to help project developers determine baselines, decide which CDM methodologies to use, and offer international seminars on CDM. The DNA office requires that the project be environmentally additional and that the programme participant be voluntary for national approval. This second criterion of voluntary participation may prevent projects that qualify for the country’s renewable mandate from earning national approval. No CDM projects have yet attempted to qualify for both.
Renewable energy potential The incentives of Short Laws I, II and III have made investors take note of Chile’s excellent estimated potential for renewables, with 600MW for minihydro, 10,000MW for wind [9], 4000MW for geothermal and 300MW for biomass development [18]. Chile’s Atacama Desert and areas in the Andes are known for their excellent solar resources, but few studies have been done to quantify the potential there. The Foundation for Technology Transfer and the Universidad de Chile completed a wind energy potential study, but it only covers Regions III–V (of Chile’s 15 regions) [19].
Other domestic institutional support and barriers The Climate Protection Programme of German GTZ (Deutsche Gesellschaft für Technische Zusammenarbeit) prepared a National Strategy Study for the CDM in Chile in March of 2003. This study pointed out that the strong economy and many opportunities in the energy and forestry sectors make the country ripe for CDM development [20]. The Chilean Economic Development Agency (CORFO) has offered funding for feasibility studies and Project Design Document (PDD) support for wind, biomass, geothermal and hydro small-scale under 20MW. Thus far, 57 hydro, 64 wind, 24 biomass and 6 geothermal projects have gained CORFO financing for feasibility studies. These 151 projects are a significant effort to
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promote renewable development in the country [21]. The funding for these projects stems from a Memorandum of Understanding in 2005 that CORFO and the National Energy Commission (CNE) signed in order to facilitate the promotion of non-conventional renewable energy via partial funding of feasibility studies for small-scale renewable energy through grants for pre-investment studies and specialized financial support [21]. The amount of the grant for feasibility studies, which applies to investments between $400,000 and $2 million, is up to 50 per cent of the cost and 2 per cent of the estimated investment, with a maximum of 5 million Chilean pesos per company (around $10,000). For investments over $2 million, the grant has a maximum of $60,000 or up to 50 per cent of the costs, per company. After three calls for projects, CORFO is allocating $4.5 billion to feasibility studies. A total of 800MW and $1.7 billion of funds would be invested if all of the feasibility studies led to projects. Also, CORFO is offering soft loans, developer/investor matchmaking sessions, and equity funds to support renewable energy development in Chile [22]. CORFO’s grants for feasibility studies could help distributors meet the 10 per cent renewable energy mandate by 2024 by stimulating the development of new renewable energy sources. Both domestic and international companies are encouraged to apply for funds. CORFO also hopes to promote rural off-grid systems with these funds, but as of November 2007, none have applied. A diverse group of generators from large companies to small start-ups have received and applied for funds [21]. The PDD component of this funding is offered jointly by CORFO and Todochile, which also attracts foreign investment to the country. Selected projects would get up to 50 per cent of the PDD costs (maximum of $12,500) covered for hydro, biomass, solar and geothermal projects under 20MW [23]. This opportunity has tremendous potential to support small-scale CDM projects, but this portion of the CORFO funding has not been widely advertised and could face informational barriers to being utilized.
Carbon brokers Despite Chile’s relatively long project list and potential for more development, there is not one carbon broker that has dominated the market for CDM project cycle work. Many of the current projects have developed their own PDDs. Also, the World Bank was involved in two hydro projects. Ecosecurities has one hydro and one landfill gas project in the country. Deuman is a local firm that has partnered to work on the PDDs and Project Idea Notes (PINs) for several prospective Chilean projects. None of the big market competitors such as MGM International, Ecoinvest, Ecosecurities or Econergy have offices in the capital, though. As a result, Chile may be a market ripe for carbon consultants. The head of the small-scale renewable energy division of Colbún, Chile’s second largest generator, admitted that he had not been approached by anyone to help with the CDM development of planned projects [8].
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Unique experiences and situations Despite the CORFO initiative and the other advantages for project development in Chile, there are a few pitfalls to development there. For large hydro developers, there is huge social and environmental resistance to dams like Endesa and Colbún’s proposed 2750MW dam in Aysen. Many of these large dams are being sited in picturesque areas of the Lake District and Patagonia where tourism and ecosystems would be affected [24]. Also, hydro above 20MW now requires an extra process of approval and World Commission on Dams guidelines to be utilized in the EU Trading Scheme. Just getting the water rights for a hydro project can also be problematic as the current water law in Chile allows a bidding war to determine the price developers pay [25]. Another complicating factor in Chile is that the country has four transmission grids that are separate and have distinct generation mixes. Therefore, if there are excellent renewable resources in the south of the country such as wind or hydro potential in Patagonia, there is no way to get electricity from these resources to where it is most needed – the Central Interconnected System, where Santiago and the port city of Valparaíso are located. Also, each of these grids has a unique generation mix, which will affect the number of Certified Emission Reductions (CERs) a project can expect in each region. For example, a project developer could expect a high number of CERs if developing a project in the northernmost grid since that is almost purely served by thermal resources. For this reason, using Chile’s average grid emission factor to calculate expected CERs is not particularly useful [26]. Chilean developers were dissatisfied with the number of CERs that they were able to glean from creating projects in the Central Interconnected System, which is served by 53 per cent hydro capacity [27]. Therefore, developers of a hydro plant called Chacabuquito formulated a new methodology (Approved Methodology (AM) 0026) for Chile that would take into account how Chile uses the water in its dams and provide more CERs. The preferred gridconnected renewable energy CDM methodology to calculate the operating margin of the baseline formula for finding emission reductions requires developers to look at the last 10 per cent of generation dispatched on the system. Then the CERs are calculated based on the emission factor of this last 10 per cent of generation. In Chile, shadow pricing is used to value the water in dams. And the dispatchable nature of the water in a dam maintains a high price for the value of the water that causes other, cheaper sources of electricity to be utilized first. After the drought of 1998, the price of this water increased to the point where the hydroelectric plants were almost always dispatched last since the value of the water is so high. Therefore, few CERs were calculated in Chile since the last 10 per cent dispatched almost always came from hydroelectric, an emissionfree source [28]. Chacabuquito developers proposed a new methodology to the UNFCCC CDM Executive Board for calculating an operating margin baseline in Chile and other countries with a merit order dispatch [29]. The proposed methodology (New Methodology 0076) was not accepted as written, but
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changed and, according to those proposing the methodology, failed to capture the real functioning of a merit order dispatch system and its implications for creation of an operating margin emission factor [6]. (More details about AM 0026 can be found in Chapter 7, ‘UNFCCC Procedural and Methodological Barriers’.)
Summary The electricity supply crisis, new renewable energy legislation, CORFO initiative and safe investment climate of Chile make it an ideal place for project developers. The natural gas supply shortage from Argentina and recent domestic droughts have prompted aggressive renewable energy legislation that promotes small hydro and other renewable sources of energy. However, the large hydro portion of the nation’s portfolio mix and project developers’ inability to get an advantageous Chilean-specific exact proposed methodology passed limits the number of CERs that can be generated per project. Social and environmental problems with large dams and the four different disconnected transmission grids further limit renewable potential.
References 1
2 3
4
5
6
7
8 9
Comisión Nacional de Energía de Chile (2004) Balance de Energía 2004: Consumo de Energías Primaria/Total País, www.cne.cl/fuentes_energeticas/f_primarias.html, accessed 15 March 2008 UNFCCC (2007) MGM International, La Cascada 2.3MW Hydroelectric Project Project Design Document, 10 January Watts, D. and Ariztía, R. (2002) ‘The electricity crises of California, Brazil and Chile: Lessons to the Chilean market’, paper presented at Large Engineering Systems Conference on Power Engineering, Halifax, Nova Scotia, Canada, 26–28 June Center for Energy Economics (2006) ‘Results of electricity sector restructuring in Chile’, Jackson School of Geosciences, University of Texas at Austin, 26 March, www.beg.utexas.edu/energyecon/new-era/case_studies/Results_of_Electricity_ Sector_Restructuring_in_Chile.pdf, accessed 3 March 2008 Millán, J. (1999) ‘The electrical sector in: Chile’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC Synex: Ingenieros Consultores (2006) ‘Determination of the operating margin when a CDM project displaces a reservoir hydro power plant’, report, 25 July, available at http://cdm.unfccc.int/UserManagement/FileStorage/ D721E2UMVYQ4OHIDJOA6Y0EPMKJS7X Arango, S., Dyner, I. and Larsen, E. (2006) ‘Lessons from deregulation: Understanding electricity markets in South America’, Utilities Policy, vol 14, no 3, September, pp196–207 Morales, C. (2007) Interview with C. Morales, Gerente de Proyectos Especiales de Colbún, 19 November, Santiago, Chile Tokman, M. (2007) ‘Situación actual y política energética ERNC’, presentation at CORFO Chile Invest forum, 16 November, Santiago, Chile
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10 Frias, C. A. (2007) Interview with C. A. Frias, Especialista Area Ingenieria, 18 November, Santiago, Chile 11 Ministerio de Economía Fomento y Reconstrucción (2004) Ley Corto I: Regla Sistemas de Transporte de Energía Eléctrica, Establece un Nuevo Regimen de Tarifas para Sistemas Eléctricos Medianos, y Introduce Adecuaciones que Indica a la Ley General de Servicios Eléctricos, 13 March, Diario Oficial de la Republica de Chile 12 Ministerio de Economía Fomento y Reconstrucción (2005) Ley Corto II: Modifica el Marco Regulatorio del Sector Eléctrico, 19 May, Diario Oficial de la Republica de Chile 13 Iglesias, R. (2007) ‘Proyecto de ley para el desarrollo de las energías renovables no convencionales’, presentation at CORFO Invest Chile Conference, 16 November, Santiago, Chile 14 Ministerio de Economía Fomento y Reconstrucción de Chile (2008) Ley Nº 20.257, Comisión Nacional de Energía de Chile, 1 April, Diario Oficial de la Republica de Chile 15 Australian Embassy in Chile (2007) ‘Opportunities in renewable energy’ www.chile.embassy.gov.au/sclecastellano/Hola1art2E.html, accessed 15 May 2008 16 Faundez, P. (2007) Interview with P. Faundez, Engineer for Ecoingenieros, 14 November, Santiago, Chile 17 CONAMA (n.d.) Cambio Climático, www.conama.cl/especiales/1305/ propertyvalue-14612.html, accessed February 2008 18 Programa Chile Sustentable (2006) ‘Desarrollo energético sustentable: Impacto de los Patrones Energéticos y Opciones Alternativas’, presentation at Seminario Internacional Seguridad Energética: America Latina: Reflejo de las contradicciones de la globalización, 21–22 June, Santiago, Chile 19 Muñoz, R., Garreaud, R.,Gallardo, L., Cabello, A. and Rosenbluth, B. (2003) ‘Mejoría del conocimiento del recurso eólico en el norte y centro del país’, Fundación para la Transferencia Tecnológica and Departamento de Geofísica de la Universidad de Chile, report for Comisión Nacional de Energía 20 Sanhueza, E., Maldonado, P. and Neuenschwander, A. (2003) National Strategy Study for the CDM in Chile, Climate Protection Programme, Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ), Eschborn, Germany 21 Garcia, J. (2008) Interview with J. Garcia, CORFO Renewable Energy Projects, Chilean Economic Development Agency, 5 January 22 Chilean Economic Development Agency (2007) ‘Project’s Directory for Renewables and CDM in Chile: Investment opportunities and project financing’, paper prepared for CORFO Invest Chile Conference, 16 November, Santiago, Chile 23 CORFO (2007) ‘Programa de preinversión en energías renovables no convencionales (ERNC)’ in Guía de Instrumentos de Fomento Productivo de la Región Metropolitana 2008, written by the Government of the Metropolitan Region, 1st Edition, April 2008 24 Fromin, L. (2007) ‘Ecologistas iran tras los accionistas de Transelec en Canada’, La Tercera, 18 November, Santiago, Chile 25 Weisner, R. (2007) ‘Water rights and hydro run-of-river projects’, presentation at CORFO Invest Chile Conference, 17 November, Santiago, Chile 26 Sanhueza, E. (2007) Interview with E. Sanhueza, Consultant for CEPAL on Renewable Energy, 12 November, Santiago, Chile 27 Comision Nacional de Energía de Chile (2007) ‘Capacidad Instalada de Generación de SIC’, July, www.cne.cl/estadisticas/anuario/electricidad/php_electricidad-01.php, accessed 20 March 2008
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28 Garcia, J. (2007) Interview with J. Garcia, CORFO Renewables Coordinator, 16 November, Santiago, Chile 29 Manuel, J. (2007) Interview with J. Manuel, Hydromaule Project Developer, 16 November, Santiago, Chile
15 Colombia
Vital statistics Portfolio mix (by installed capacity): 64 per cent hydro; 27 per cent gas; 5 per cent coal; 0.1 per cent wind; 3.4 per cent other [1] Emission factor: 0.358 tonnes of CO2/MWh [2] Average price of electricity: 9.8¢/kWh (residential and commercial) [3] Privatized electricity market: yes Existence of spot market: yes Capacity payment: $5.25/kW [4] Market manager: Centro Nacional de Despacho (CND) Regulator: Comisión Regulatoria de Energía y Gas (CREG) Policy maker: Ministerio de Energía y Minas Future planning: Unidad de Pleanación Minerio Energética (UPME) Environmental permits: Ministerio del Medio Ambiente Vivienda, y Desarrollo Territorial Rural electrification: Instituto de Planificación y Promoción de Soluciones Energéticas (IPSE)
Background and privatization The Colombian electrical sector began to fail in the late 1980s when the staterun Colombian electrical company could not provide sufficient capacity due to cost overruns and subsidized tariffs [5]. Large new projects were delayed, and in 1992 a La Niña event caused a drought that led to shortages all over the country [6]. The upshot of this crisis was twofold; it created an emergency Power Purchase Agreement (PPA) signing time when PPAs were signed by distributors for generation at unfavourable terms, and it led to Colombia privatizing the electricity sector with the Law of Public Services (142) and the Electricity Law (143) in 1994 [7].
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Prior to privatization, ISA (Interconneción Eléctrica SA) did all generation and transmission. The laws of 1994 prevented vertically integrated companies and ISA broke into ISAGEN for generation and ISA for transmission. ISA is now the largest transmitter throughout the Andean region, but within Colombia, any company can enter the transmission business. A few state-run companies, like Empresas Públicas de Medellín which controls about 15 per cent of the generation and distribution markets, are still vertically integrated, but hold separate accounts for the two market sectors [8]. No single generator or distributor can control more than 25 per cent of the market. In 2003, the private sector owned 56 per cent of generation and 47.5 per cent of distribution [9]. Generators earn a fixed capacity charge as well as energy payments and compete for new capacity additions through a least-cost bid process [10 and 11]. Generators in Colombia receive payments based on the prices settled in a bidding process. The generators offer a price for their generation that may not depend on the cost of producing the energy. The Colombian market manager (Centro Nacional de Despacho) then decides on dispatch according to the merit order and takes into account system limitations. This model was adopted from the UK, but all other power markets in South America are cost-based, where generators offer their energy based on how much it costs to produce it. Then, the least-cost generation is selected first and the price that all generators receive is set by the cost of the last generation that enters the system. The Colombian model is meant to stimulate more market participation, but depends on the market being full of many generators and not dominated by a few who could collude on prices offered [4]. For all users that require less than 0.5MW of power, the regulatory agency (Comisión Regulatoria de Energía y Gas) controls tariffs. A cross-subsidy between members of the top three most affluent groups of people applies to the bottom three groups, allowing about 25 per cent of the electricity bills of lowincome customers to be paid by the more affluent groups. A portion of the tariff is reserved for covering unexpected grid losses due to guerrilla activity that cuts supply to a line. Large power consumers can directly negotiate their power prices with distributors or generators [12]. Colombia is interconnected with Ecuador to the south, supplying on average 10 per cent of Ecuador’s electricity. Colombia is also interconnected with Venezuela and handles its Andean transactions through the Andean Electric Market (Mercado Eléctrico Andino) [4]. And the Puebla Panama Plan proposes interconnecting Panama and Colombia with a line that could carry 300MW from Colombia to Panama and 200MW in the reverse direction [13].
Renewable energy laws In order to help promote investment in new capacity additions for renewable technologies, the government passed Law 697 in 2001. Decree 3683 of 2002 spelled out the exact incentives and benefits that this Law 697 provided. In
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short, it allows renewable generators to be exempt from paying tax on importations and if a project is a ‘first-of-its kind’, it can exempt taxes on salaries, research equipment and all other project costs [14 and 7]. More recently, in 2007, an income tax waiver for 15 years applies to generation projects that give 50 per cent of their CERs to the sustainable development of the community where the project is located. Sustainable development is defined by the Designated National Authority (DNA) office and is based on various economic, political and social criteria [15].
CDM portfolio 7
Number of projects
6 5 4 3 2 1 0
Hydro
Wind
Geothermal
Landfill methane capture
Non-landfill methane capture
Biomass
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April
Figure 15.1 Projects registered or in validation in Colombia The Clean Development Mechanism (CDM) movement was started mainly by the Public Utility of Medellín (Empresas Públicas Medellín (EPM)) with a 19.5MW wind project and a hydro project. There are plans for several large hydro applications including Calderas (26MW), Transvase Guarinó, Amoyá River (80MW), Manso (27MW), Porce III (660MW) and Quimbo (400MW) [16]. How many of these projects will be able to earn CDM credit is uncertain since hydro power is a common energy application in the country. There is an interesting effort in Colombia to aggregate 32 palm producers under the industry association of Fedepalma to create Certified Emission Reductions (CERs) through methane capture from the wastewater of the palm oil process.
Special challenges and opportunities DNA office Colombia’s DNA office is not one of the strongest in the region because of its designation as temporary. Unlike Peru, Ecuador and Chile, it has not been
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divided into promotion and regulatory arms. The office resides in the Ministry of Environment, but does not have permanent status. The direction of the office sways depending on the priorities set by the staff in the ministry, who tend to change with each presidential election. Therefore, its workers are temporary as they often work on a contract basis. While staffed with eager, young people in the autumn of 2007, it cannot attract many experienced folks in the field because of the low pay that the government offers in comparison to the private sector. The staff is divided into carbon reduction potential categories and assesses barriers to development in each sector. The office has considered taxing CERs from projects in order to provide better capacity development, but is wary of stifling project development. Currently, the office responds to requests for informative lectures, but does not market CDM opportunities. Also, the office is in the process of restructuring its website to make it more accessible for project developers [17]. Critics of the office say that it has taken up to seven months to process a request for national approval. According to Resolution 0453 of 2004, a request should take only 45 days to process [18]. But carbon brokers have experienced delays since the approval process must first pass science, then planning, and finally, climate change committees. All committees must be in agreement to allow the project to pass. Usually more information is requested in order to exempt the committee from the time constraint. Developers claim that the DNA office is considering technical, legal and environmental analyses of the project when this is not within the scope of their work [19].
Other domestic institutional support Colombia has several institutional support networks with studies and initiatives from a broad variety of sectors. The National Strategic Study for CDM Implementation in Colombia of 1999–2000 was supported by the government of Switzerland and the World Bank’s National Strategic Studies (NSS) Programme and estimated the emission reduction potential at 22.9 million tonnes of CO2 per year from the electric power, cement, sugarcane and agroforestry sectors. The study also determined how to maximize the potential benefits of the CDM in Colombia. The Hydrology, Meteorology and Environmental Research Institute (Instituto de Hidrología, Meteorología y Estudios Ambientales (IDEAM)) with funding from the Global Environment Fund (GEF) is planning to put together a plan to catalogue the country’s anthropogenic greenhouse gases emissions. The Colombian Ministry of the Environment and Canadian Research Institute created a marketing tool for CDM promotion in 2001. GEF is funding an effort in the Ministry of the Environment, Housing and Territorial Development to develop improved capacity development for CDM. The country’s National Development Plan for 2002–2006 incorporated CDM as it set a goal of earning of $30 million from Emission Reduction Purchase Agreements (ERPAs) for eight projects. The National Environment Council formulated a plan to mitigate climate change threats; part of the council’s strategy is promotion of CDM projects. The Social
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and Economic Policy Council (Consejo de Política Económica y Social (CONPES)) set projects that reduced greenhouse gas emissions as a national goal in 2003 and provided specific provisions to achieve this goal [20]. The country has some permanent capacity building institutions for CDM like the UPME (Unidad de Pleanación Minerio Enérgetica), which has developed a simplified small-scale baseline to stimulate project development of projects that are 15MW or less. UPME also has plans for creating solar, hydro, biomass, ocean and geothermal atlases of the country. In 2006, UPME completed a detailed wind atlas for the country [21]. It also plans on identifying, characterizing, giving priority to and disseminating the emission reduction opportunities in the sector, aiming at promoting and facilitating the preparation and execution of CDM eligible projects [20]. Also, the University of Antioquia is working on developing the Project Design Document (PDD) for a landfill gas capture project near Medellín. However, these efforts tend to be disparate and poorly connected or communicated [22]. A study by the World Bank’s Energy Sector Management Assistance Programme (ESMAP) showed that the country’s wind potential alone could cover the current domestic electrical needs [16]. And Empresas Públicas de Medellín paved the way for developers by modifying the country’s existing hydro permit process to apply to wind projects. As a result, ISAGEN and two other companies have expressed interest in developing wind in the country, but have not taken aggressive steps to pursue this wind potential [23]. The Public Utility of Medellín (Empresas Públicas de Medellín (EPM)) has broken the mould of the typical state-run utility that is hesitant to involve itself in CDM projects. It has pursued three CDM projects, and successfully registered the first wind project in the country and a small-scale hydro. It is also pursuing several more CDM projects that would involve methane capture from wastewater treatment plants that they operate. The current laws promoting renewable energy allowed EPM to receive close to $20 million in tax exemptions for the 19.5MW wind farm it developed in the region of La Guajira. Carbon revenues from this project, even with the low price of under $5 per CER offered by the World Bank, will total about $2.8 million during the first 15 years of operation [24]. This state initiative should help less experienced developers with fewer resources follow suit [25].
Carbon brokers Colombia has additional opportunities for project capacity building as it is home to CAEMA (Centro Andino para la Economía en el Medio Ambiente), which is a carbon consultant that strives to act on the side of project developers to provide fair market price for CERs by keeping them informed of carbon market updates [26]. Another global leader in carbon consulting, MGM International, has a strong presence in the country with an office in Medellín. Colombia is home to a national Designated Operational Entity (DOE) called Instituto Colombiano de Normas Técnicas y Certificación (ICONTEC), which can be contracted for less than international DOEs.
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Renewable energy potential There is interesting potential in the areas of biomass and geothermal development. The aforementioned ESMAP survey also found that there are over 16,000MWh of unused energy potential in biomass crops and agricultural residues [16]. This ESMAP survey found several areas of interest with high potential for geothermal resources and, in December 2007, ISAGEN began requesting proposals for geothermal prospecting in the country after it received a US Trade and Development Agency grant for $500,000 [27]. The country has an average solar resource of 4.5kWh/m2 per day, but some areas like the Guajira Peninsula boast 6kWh/m2 per day of radiation [16]. The Guajira Department is also rich in wind resources, with average wind speeds between 5 and 11 metres per second throughout the year [21]. All together, there are 21GW of estimated installed capacity just in this department. The Andes create an ideal environment for hydro potential. Large hydro potential is now at 93GW and small hydro at 25GW of installed capacity [16].
Unique experiences and situations Overall, the investment climate in Colombia has improved significantly in the last four years under President Álvaro Uribe’s leadership. However, investors may still be wary of investing in a country with such a tumultuous past, and with present guerrilla warfare due to cocaine production. Also, the somewhat inexpensive electricity at an average of 9.7¢/kWh is a deterrent to independent power producers (IPPs) and provides few opportunities of high internal rates of return on generation projects in a country with such high perceived risk. Large hydro projects with capital costs that have been paid and low operating costs account for 64 per cent of the country’s generation capacity and are the cause of this relatively cheap electricity [17]. The guerilla groups of Colombia occasionally interrupt the electrical sector of the country by stealing substation parts or disabling generation stations. This activity impacts the placement of renewable energy power stations. Sometimes thermal generation is needed where it would not otherwise be sited because it can provide grid support during disruptions to the system [12]. Excellent renewable energy sources in the mountains are sometimes in areas that are unsafe for travel or would be susceptible to attack. Empresas Públicas de Medellín was interested in developing hydro sites that were found to be undesirable because of their proximity to guerilla groups [11]. Because of these power disruptions, syncing systems with the national grid could prove challenging since the average number of outages per customer in 2005 was 185.7 and totalled 66 hours, which is far above the regional average of 13 interruptions and 14 hours per year without electricity [3]. The country’s tariff calculation for energy payments to generators has been changed a few times and was unclear for some project developers [28]. Because of the large hydro component in the Colombian grid, the country’s grid emission factor is fairly low at just 0.358 tonnes of CO2/MWh, even with the Simple Adjusted Operating Margin baseline methodology that is designed
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especially for countries like Colombia with 50 per cent of their grid run by least-cost, must-run resources like hydro [2]. Colombia’s dispatch rules can either help or hurt generators depending on their size. Low operating cost, must-run resources like wind that are under 20MW receive automatic dispatch onto the grid. This rule explains why the size of 19.5MW was chosen for Jepirachi, the country’s only wind farm [29]. Systems under 10MW must sell directly to the distributor, who is not obligated to buy the electricity. In this system, small generators can get a maximum of the spot price and the distributor can go as low as possible for the price in the negotiations. This huge disincentive for small systems has stifled development in this area [12]. Colombia’s experience with developing landfill gas projects is varied due to a social problem of scavengers who live on the sites in some areas of the country. Private landfill operator Interaseo is successfully bundling four small landfills in one PDD with CAEMA [30]. MGM, however, found that scavengers on a landfill in Barranquilla prevented the project from going through [19]. The local environmental authority told project developers that the Barranquilla project could not go through unless the firm provided an alternative income stream for the trash sorters. MGM has proposed using a portion of the CERs derived from the project to build a formal recycling centre for the landfill where the people would work. Interaseo, on the other hand, is not providing any community benefits as they cite Decree 1713 of 2002 to show that scavenging of trash at landfills and dumps is unlawful [31].
Summary A relatively low emission factor and price of electricity, combined with fear of operating in guerrilla warfare territory, has discouraged project development in Columbia. However, if the recent economic growth and political stability continue, and carbon brokers maintain a presence in the country, it will most likely be an area of CDM project growth.
References 1
2 3
4
Ministerio de Minas y Energía and Unidad de Planeación Minero Energética (UPME) and Colombia Minera, Sistema de Información Minero Colombiano, Boletin Estadistico de Minas y Energia 2002–2007, available at www.simco.gov.co/Portals/0/archivos/Boletin%20estadistico.pdf UNFCCC (2007) MGM International, La Cascada 2.3MW Hydroelectric Project Project Design Document, 10 January World Bank (2005) Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/ Arango, S., Dyner, I. and Larsen, E. (2006) ‘Lessons from deregulation: Understanding electricity markets in South America’, Utilities Policy, vol 14, no 3, September, pp196–207
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Portal XM (2009) ‘Descripción del Sistema Eléctrico Colombiano’, Información operativa y comercial, available from www.xm.com.co/Pages/Descripciondel SistemaElectricoColombiano.aspx, accessed on 10 March 2009 Pombo, C. (2001) ‘Regulatory reform in Colombia’s electric utilities’, The Quarterly Review of Economics and Finance, vol 41, no 5, pp683–711 Cardonas, A. (2007) Interview with A. Cardonas, Administrator Ministerio de Energía y Minas, 10 October, Bogota, Colombia Millán, J. (1999) ‘The power sector in: Colombia’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC Millán, J. and Ayala, U. (2003) ‘Colombia: Coping with reform crisis’, in J. Millán and N.-H. M. von der Fehr (eds) Keeping the Lights on: Power Sector Reform in Latin America, Inter-American Development Bank, Washington, DC Harvey, C. R. (2002) ‘Endesa Chile’, unpublished case document for students, Fuqua School of Business, Duke University, Durham, NC Garizábal, C. (2007) Interview with C. Garizábal, Departamento de Planificación Empresas Publicas Medellín, 15 October, Medellín, Colombia Soto, G. C. (2007) Interview with G. C. Soto, Administrator for Comision Regulatoria de Energía y Gas, 10 October, Bogota, Colombia Plan Puebla Panana (n.d.) Initiative Mesoamericana Energetica, available from www.planpuebla-panama.org/proyectos.php?iniciativa=5&componente=0& pagina=4&estado=nada&proyecto=42, accessed 25 May 2007 Unidad de Planeación Minerio Energética (2003) Decreto No 3683, 19 December Ministerio del Interior y Justicia (2003) Decreto 2755, 30 September, Diario Oficial 45,326 Vargara, W. (2007) Review of Policy Framework for Increased Reliance on Renewable Energy in Colombia, World Bank Energy Sector Management Assistance Programme, project information available at www.esmap.org/filez/activity/227200722948_LACColombiarenewable.pdf. Bettelli, P., Garcia, A. and Graviator, S. (2007) Interviews with P. Bettelli, A. Garcia and S. Graviator, Designated National Authority en la Unidad de Cambio Climatico de Ministerio del Medio Ambiente, Vivienda, y Desarrollo Territorial, 12 October Ministerio de Ambiente Vivienda y Desarrollo Territorial de Colombia (2004) Boletín del Grupo de Mitigación del Cambio Climático, vol 1, no 3, May Gonzalez, M. (2007) Interview with M. Gonzalez, Carbon Consultant for MGM International, 19 October, Medellín, Colombia Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An assessment of DNAs in Latin America and the Caribbean’, report for Inter-American Development Bank, Washington, DC Posada, C., Daza, M., Murcia, J., Piderahita, C., Hernández, A. and Lesmes, H. (2006) Atlas de Viento y Energía Eólica de Colombia, Instituto de Hidrología Meterología y Estudios Ambientales (IDEAM) and Unidad de Planeación Minero Energética (UPME), available at www.upme.gov.co/Docs/MapaViento/PROLOGO.pdf Zapata, H. J. (2007) Interview with H. J. Zapata, Renewable Energy Coordinator UPME, 10 October, Bogota, Colombia Vargara, W. (2007) Review of Policy Framework for Increased Reliance on Renewable Energy in Colombia, World Bank Energy Sector Management Assistance Programme, project information available at www.esmap.org/filez/ activity/227200722948_LACColombiarenewable.pdf
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24 Coviello, M. F. (2007) ‘Renewable energy sources in Latin America and the Caribbean: Two years after the Bonn Conference’, report, United Nations Economic Commission for Latin America and the Caribbean, April 25 Vélez, O. L. (2007) Interview with O. L. Vélez, Empresas Publicas de Medellín, Subdirección Medio Ambiente, 18 October, Medellín, Colombia 26 Black, T. (2007) Interview with T. Black, Executive Director of CAEMA, 9 October, Bogota, Colombia 27 US Trade and Development Agency (2007) ‘USTDA grant supports the development of geothermal energy in Colombia’, press release, 20 September, www.ustda.gov/news/pressreleases/2007/LAC/Colombia/ColombiaGeothermal_09 2007.pdf 28 Castillo, M. P. (2007) Interview with M. P. Castillo, Corporación Andino de Fomento Project Developer and former DNA for Colombia, 9 October, Bogota, Colombia 29 Sandoval, A., Colorado, F. and Aramburo, J. (2007) Interviews with A. Sandoval, F. Colorado and J. Aramburo, Empresas Públicas de Medellín, 18 October, Medellín, Colombia 30 Gonzalez, J. (2007) Interview with J. Gonzalez, Project Developer for Interaseo, 16 October, Medellín, Colombia 31 Minsterio de Desarrollo Economico (2002) Decreto 1713, in Diario Oficial, 6 August
16 Costa Rica
Vital statistics Portfolio mix: 75.54 per cent hydro; 15.12 per cent geothermal; 8.04 per cent thermal; 1.3 per cent wind [1] Emission factor: 0.18 tonnes of CO2/MWh [2] Average price of electricity: residential 3.79¢/kWh; industrial 3.86¢/kWh Privatized electricity market: yes, partially Existence of spot market: no Capacity payment: no Market manager: Instituto Costarricense de Electricidad (ICE) Regulator: Autoridad Reguladora de los Servicios Públicos (ARESEP) Policy maker: Ministerio de Ambiente y Energía (MINAE) Future planning: Ministerio de Planeficación (MIDEPLAN)
Background and privatization In 1949, Instituto Costarricense de Electricidad (ICE) was created as an autonomous state institution by the government [3]. Prior to 1990, the ICE was in control of all transmission, distribution and generation except for small pockets of generation provided by cooperatives and municipalities. In 1990, Law 7200 permitted private generators to enter the market and produce 20MW each. All together these private generators were allowed by Law 7200 to make up 15 per cent of total generation [4]. There is no electricity market in Costa Rica. In most cases, generators must accept the price that ICE offers for energy generation since they are the only buyer. The energy prices paid are based on the cost of generation. Private generators cannot export to the Central American regional grid by Law 7848 [5]. Power Purchase Agreements (PPAs) are rare, but ICE will engage in 20year contracts for hydro over 20MW [6]. Laws 8345 and 7593 do allow independent power producers (IPPs) to sell to cooperatives and municipalities
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and structure joint generation ventures with these entities in territories outside of ICE’s control, but few IPPs know of these laws and take advantage of them [7]. In 1995, the electrical market was opened slightly with Law 7508 which allowed up to 30 per cent of the total market to be made up of private generators with projects up to 50MW per private installation. Also, this law stipulated that a competitive bid process for new capacity additions occur. Under this law, private generators are required to transfer their plant to ICE after 18 years of operation [7]. ICE is a well-run organization that has provided 98 per cent of the country’s citizens with electricity. This rate far surpasses that of its close neighbours Honduras and Nicaragua with rates of just about 50 per cent. The country’s grid is so hydro intensive because the country backed these initially costly installations with the understanding that the investment would be recovered over the installations’ long lives. However, new debt limits set by the International Monetary Fund have led to a capacity shortage as ICE has not been able to invest in costly new additions. Instead, ICE was forced to open up the electrical sector to private investment in the early 1990s to avoid an emergency situation for new capacity [8]. A lack of private sector involvement has led to ICE having to rent thermal generation units and pay high prices of 19–30¢/kWh because of the high cost of fuel [8]. At two of ICE’s thermal plants, bunker fuel used grew by 23.7 per cent in 2007 [9]. Overall, customers still pay very little for electricity because the bulk of it comes from hydro installations that cost almost nothing on a per kWh basis to continue running. ICE tries to avoid paying for this rented generation by having an elicitation process for new capacity when it is needed. However, if competitive bids are not submitted, then ICE must rent [10]. ICE is able to get PPAs for this expensive thermal generation approved by the country’s regulator (ARESEP) because of the incredible demand growth the country is facing; the country is expected to double its demand in just ten years. And it is already experiencing shortages. In April and May 2007 there were blackouts throughout the country that had never before occurred in ICE’s proud history [10]. ICE is also able to contract this expensive temporary generation because it has plans to implement huge hydro installations, which would supply generation for many decades in the future. The longevity of hydro energy cancels out the high capital costs, making the average (levelized) price of electricity over the lifetime of the hydro installation quite low in comparison with other forms of electricity. Therefore, ICE is hesitant to contract permanent generation from more expensive sources like wind energy that would impact tax payers for longer than the current expensive thermal generation. However, according to many private developers, this plan is not realistic because of the social resistance to large hydro applications like the 300MW Boruca project, which has had three name changes in the planning process and faces major opposition. ICE planned to fulfil future demand from 2001 to 2016 with 875MW of hydro
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projects, 20MW of wind and 27.5MW of geothermal [11]. ICE’s expansion plan assumes that these applications will be online much sooner than they could actually be since the permitting and construction time for dams is lengthy. In this way, ICE is retaining control of the generation sector, paying expensive per kWh prices for rented thermal generation, and rejecting new renewable generation that is more expensive than the predicted future hydro prices [8].
Renewable energy laws Costa Rica created a feed-in tariff that paid small renewable generators ICE’s avoided costs of generation in Law 7200 of 1990. These feed-in tariffs were paid through 20-year PPAs with ICE. The programme increased participation of independent renewable generators to 12 per cent of the 2005 installed capacity, but is no longer active for new developers [12]. Law 7508 of 1995 precludes ICE from buying privately generated energy from anyone but renewable sources and requires a 35 per cent Costa Rican ownership of these renewable sources [4, 6 and 8]. The Law of Peace with Nature (Ley de Paz con la Naturaleza) and Agenda 2021, which aim to make the country carbon neutral with regard to transport and electrical generation, put the regulatory additionality of projects in question. If renewable energy is outlined as a means to achieve the national policy for carbon reduction, then renewable energy projects could not qualify for Clean Development Mechanism (CDM) projects as this would constitute double-counting by allowing a project to earn both national and international credit [13]. Costa Rica is also undergoing Phase I of a National Off-Grid Electrification Programme based on renewable energy sources, developed by the United Nations Development Programme, the Global Environment Facility and ICE, that may open doors to small-scale off-grid CDM projects in the country. The goals of the programme are to both electrify off-grid sites and reduce carbon emissions. Two million dollars have been dedicated to this cause, and Phase II will dedicate $19 million [14]. Confusion over who should give the water permits for private hydro generation has stalled new private generation and caused the closure of 25–30MW of generation from generators who cannot obtain a renewal permit. The issue of who has the jurisdiction to issue these permits has been debated for two years in the National Assembly and will be the subject of pending legislation [15]. Some consultants and developers claim that the issue of who should issue water permits was brought to light by ICE in order to slow private investment in the sector. Since the hydro industry has the largest energy potential, the question over these permits has almost completely halted the private sector [16].
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CDM portfolio 2.5
Number of projects
2.0
1.5
1.0
0.5
0
Hydro
Wind
Geothermal
Landfill methane capture
Non-landfill methane capture
Biomass
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April
Figure 16.1 Projects registered or in validation in Costa Rica There are just two hydro projects that have been registered and used arguments of small technological breakthroughs to prove additionality. The one wind project (La Tejona) registered was developed by Instituto Costarricense de Electricidad and the World Bank, with a unique ownership structure that ensured ICE did not take on too much debt. A few other wind developers, such as Econergy International and Grupo Corporativo SARET, are interested in wind farms near the Arenal volcano. A large geothermal application called Miravalles has been in the plans for over ten years and may not be able to get Certified Emission Reductions (CERs) because of its presence in the planned expansion. A landfill gas capture and electrical generation plant near San José is seeking registration.
Special challenges and opportunities DNA office Costa Rica was involved early on in the international climate discussions. It, along with Brazil, was instrumental in helping form the CDM. Brazil proposed the Clean Development Fund, which would take penalty fees from European countries that did not meet their reduction goals or taxes from European Union Allowances (EUAs) and put it towards offsetting and climate change adaptation projects in the developing world while Costa Rica embraced the Norwegian idea of Activities Implemented Jointly (AIJ), the precursor to CDM that involved tradable emission permits derived from projects in the developing world [17]. In 1994 Costa Rica formed the Joint Implementation Programme, and set up an office for its promotion in 1995. By 1998, the country had registered ten projects [18]. Several projects were developed under this scheme, but
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they were later not supposed to be able to qualify for CDM (although some like La Tejona wind farm did). The AIJ projects were not allowed to qualify for CDM because the project requirements did not yet mandate that the project be additional nor was there a sustainable development criterion. During these negotiations, Costa Rica also submitted a potential baseline calculation for future CDM projects [19]. When the Joint Implementation projects that Costa Rica registered and the baseline calculation it submitted were not recognized as part of the CDM, folks involved in the process became frustrated and somewhat bitter towards the Mechanism altogether. The final rules of the CDM were not favourable to the country because they consider the grid’s current fuel mix in order to calculate emission reductions. Members of the climate change discussions in Costa Rica see the work they have done as first-movers to combat rising temperatures as detrimental to their ability to register projects. Instead of being rewarded for their effort, they feel as though they have been penalized [19]. The Joint Implementation office was located in MINAE, but now the DNA office is located in the National Meteorological Institute (Instituto Meteorológico Nacional) under the National Climate Change Programme (El Programa Nacional de Cambio Climático).
Other domestic institutional support The Climate Change Consultative Committee (OCIC), consisting of representatives of the government sector, academia and NGOs, helps promote dialogue and synchronize activities between diverse interests involved in the climate change debate. A Costa Rican Association for Joint Implementation was formed to work with OCIC to promote CDM in the public and private sectors [17]. The Biomass Users Network (BUN-CA), which operates in the entire region of Latin America, but is based in San José, Costa Rica, has taken an active role in identifying the barriers to renewable energy by writing reports on this topic. BUN-CA, along with Green Stream Network, helped create a Central American Carbon Finance Guide [20]. An industry association called Asociación Costarricense de Productores de Energía (ACOPE) has also championed private generator’s interests and kept track of relevant policies [13].
Carbon brokers Ecosecurities has a representative in the country, but this person’s interest is more in other countries in Central America because of their higher emission factors and less state control of energy sectors [21]. Econergy International has been involved in the development and CDM registration of a wind farm in the country. Climate Focus helped ICE complete the La Tejona CDM process. Otherwise, the country has little active pursuit of CDM projects on the part of carbon brokers because of the many barriers it faces.
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Renewable energy potential The country has many renewable resources given its small size. There are 600MW of unused wind potential. While it has used 1271MW of its hydro resources, there are 4531MW more that could be exploited. Wind has a unique possibility to complement the large amount of hydro on the grid because the best wind resources tend to be available when it is the dry season. Costa Rica has installed 145MW of geothermal capacity and has the potential for 90MW more. There is most likely more cogeneration that could be developed as there is only a total of 12MW of capacity at two facilities in the country [6].
Unique experiences and situations There are many barriers to market entry for CDM project developers in the country. The most obvious problem is that the country has so much hydro power. This situation means that the grid’s combined margin emission factor is only 0.18 tonnes of CO2/MWh, which results in few CERs as very little fossil fuel-based electricity is displaced [2]. Hydro developers also face challenges proving that new hydro projects are first-of-a-kind, technologically innovative and not common practice since the bulk of the grid is made up by this technology. Because of this low emission factor, some developers and carbon consultants considered selling their emission reductions on the voluntary market as Verified Emission Reductions (VERs) that do not require such a strict baseline calculation based on the country’s national grid emission factor. They hoped that after the country’s grid emission factor increased from additional fossil fuel applications being brought online they could register these projects and attempt to convert the VERs to CERs. This strategy worked until 31 March 2007 when projects could achieve registration even after generation had begun in a previous year. But, after this date projects had to achieve registration before beginning generation or be in the registration process when generation commenced in order to earn CERs [16]. The other large hurdle for CDM development in the country is the control that ICE has on the market, prohibiting private generators from comprising more than 30 per cent of the market and having installations above 50MW. Those renewable generators that do want to penetrate the market have the limitation of being owned at least 35 per cent by Costa Ricans. Also, the lack of a competitive market means that private generators in Costa Rica must wait until new capacity is solicited. Then, they can offer a bid, but it must be accepted by ICE before they are assured that their generation will be bought. ICE is not required to accept this generation [21]. The offer that the generator gives to potential customers in power purchase agreements (PPAs) must be competitive and therefore comparable to ICE’s avoided cost of generation, which is approximately 5.4¢/kWh [19]. This price is so low because it is the average or levelized cost of energy from a dam with a long life. Generators in Costa Rica cannot earn better sale prices by selling directly to large consumers or the Central American grid (SIEPAC) [22].
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Early project developers that considered earning CERs from renewable energy projects prior to 2005 were discouraged by the UNFCCC’s CDM Methodological Panel’s decision that renewable energy installed in Costa Rica could not fulfil both the country’s mandate and earn CERs. Therefore, few projects were developed that were able to retroactively claim CERs between 2001, when the Marrakesh Accords passed were, and 2005, when the Kyoto Protocol came into effect. This preclusion of participation discouraged project developers and continues to create confusion as to whether or not they will be able to prove additionality even though the Methodological Panel has reversed its decision [17]. Private generators also face complications from uncertain laws dictating their operations. The tariff calculation that determines how much private generators will get paid for energy has changed three times since the 7200 Law in 1990. Initially, this calculation was based on ICE’s avoided cost of generation. Then, the regulator decided on the tariff. Now, it is more closely based on cost of generation [15]. Generators are not able to get a good sense of how much they will be able to earn since transparency in this process is lacking and the way that ICE predicts future fuel costs is unclear. Investors are further confused by the current situation, which makes it unclear who allocates hydro permits [8]. These areas of regulatory uncertainty have made investors hesitant to become involved in generation projects. Not only is it difficult for the private sector to participate in CDM because of these barriers, but ICE also has difficulties because of laws that dictate its operations. ICE is obligated to pursue the generation that is the least-cost for the sake of providing the lowest rates for their customers. If renewable energy is found to be the cheapest option, it will be pursued in a business-as-usual situation, and it would be hard to demonstrate additionality for the CDM. CDM revenues are not allowed to be factored into the financial analysis to make renewable energy cost-competitive with other sources of generation because these revenues are considered uncertain. Therefore, it is almost impossible for ICE to initiate CDM projects. However, ICE was able to structure one successful CDM wind project by negotiating a unique arrangement that involved a private company called Norteco owning 75 per cent of the farm. ICE now has the option of buying the installation over five years. This arrangement and the upfront money for CERs from the Dutch CERUPT fund allowed ICE to avoid having to ask permission to make an investment, which may have been denied, and ultimately led to the development of La Tejona wind farm. However, this rare purchase agreement has not been replicated [10]. Costa Rica, like other countries in the region, faces problems with the social integration of hydro projects. Although dams are commonplace in Costa Rica, the booming tourism industry in the country has raised questions about new dams because they can diminish the natural beauty of rivers and prevent tourists from rafting and kayaking. In order to prevent these problems, some hydro projects have begun using ISO 14001 standard to appease concerns about the environmental impacts of their operations [13].
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Despite these challenges, there is an interesting possibility for Costa Rica to be more involved in the CDM in the future. The Central American Electrical Interconnection System (SIEPAC) will connect all Central American countries and later possibly Colombia and Mexico with a 230kV line that is nearly double the current capacity. The interconnection of the Central American countries could allow large projects like the proposed 1520MW Boruca hydro plant in Costa Rica that would have flooded any one country’s market with excess capacity to be feasible [23]. If Costa Rica were selling significant amounts of energy to a variety of countries and this transmission line allowed for multiple fluid transactions between countries, then perhaps a national baseline would be adopted. Costa Rica would benefit from a much higher emission factor that incorporated the fossil fuel-intensive energy sectors of its neighbours.
Summary Costa Rica has fewer CDM projects than one might expect given its stable investment climate and need for new capacity additions. The underperformance of the Mechanism in this country is due to the strong presence of ICE and barriers to market entry it presents, the country’s low emission factor, and the low price that ICE will offer for generation.
References 1
Instituto Costarricense de Electricidad (ICE) (2006) ‘Datos relevantes sector electricidad’, December 2006, available at www.grupoice.com/esp/ele/planinf/ docum/datosgenerales_ele04.pdf 2 Climate Focus (2006) Tejona Project Design Document, UNFCCC, December 3 Instituto Costarricense de Electricidad (ICE) Creación del Instituto Costarricense de Electricidad, http://www.grupoice.com/esp/ele/infobase/cre_ice.htm, accessed 15 March 2008 4 Millán, J. (1999) ‘The power sector in: Costa Rica’, Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC 5 La Asamblea Legislativa de La Republica de Costa Rica (1997) Decreta 7848: Abrobacion del Tratado Marco del Mercado Electrico de America Central y Su Protocolo, Direccion Sectoral de Energía, 11 July 6 CEPAL and GTZ (2004) ‘Fuentes renovables de energía en America Latina y el Caribe: Situacion y propuestas de politica’, 19 May 7 Millán, J. (1999) ‘The power sector in: Costa Rica’, Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC 8 Broide, A. (2007) Interview with A. Broide, Development Manager for Mesoamerica Energy, 26 September, San José, Costa Rica 9 Business News Americas (2008) ‘ICE diesel, bunker use up in 2007’, newsbrief, 12 March 10 Cordero, F. and Mayorga, G. (2007) Interviews with F. Cordero and G. Mayorga, Strategic Business Unit of Instituto Costarricense de Electricidad (ICE), 25 September, San José, Costa Rica
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11 Synergy de la Comunidad Europea (2005) ‘Metodologías para la implementación de los mecanismos flexibles de Kioto: Mecanismo de Desarrollo Limpio (MDL) – Guía Latinoamericana del MDL’, Guidebook, available at www.cordelim.net/extra/html/pdf/library/olade.pdf 12 World Bank (2007) ‘Latin America and the Caribbean Region (LCR): Energy sector – retrospective review and challenges’, Energy Sector Management Assistance Programme report, 15 June 13 Alvarado, M. (2007) Interview with M. Alvarado, President of Asociacion Costarricense de Productores de Energía (ACOPE), 25 September, San José, Costa Rica 14 Global Environment Facility (2002) ‘Cover note: Costa Rica: National off-grid electrification programme based on renewable energy sources’, Project Number 1322, 8 March, available at http://gefweb.org/Documents/Council_Documents/ GEF_C20/CC_-_Costa_Rica_-_National_Off-grid_Electrification.pdf 15 Villa, G. (2007) Interview with G. Villa, Director of Energy within Ministerio de Ambiente y Energía, Costa Rica, 27 September, San José, Costa Rica 16 Coto, O. (2007) Interview with O. Coto, CDM Consultant, 1 October, San José, Costa Rica 17 Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An assessment of DNAs in Latin America and the Caribbean’, report for Inter-American Development Bank, 2 June 18 Leonard, A., Mintzer, I. and Michel, D. (1999) ‘Climate change, capacity building, and the AIJ experience’, in R. K Dixon (ed) The UN Framework Convention on Climate Change Activities Implemented Jointly (AIJ) Pilot: Experiences and Lessons Learned, Kluwer Academic Publishers, Dordrecht, pp209–238 19 Manzo, P. (2007) Interview with P. Manzo, Director General de Instituto Meteorológico Nacional (Costa Rica’s Designated National Authority), 27 September, San José, Costa Rica 20 Tynjälä, T. (2004) ‘Central American Carbon Finance Guide’, presentation at Bioenergy Forum of Energy and Environment Partnership with Central America, 19 March, Antigua, Guatemala, available at www.eep-ca.org/forums/ documents/foro%20IV/ca_carbon_finance_greenstreambunca.pdf 21 Castro, M. (2007) Interview with M. Castro, Carbon Consultant for Ecosecurities, 26 September, San José, Costa Rica 22 Sandoval, J. (2007) Interview with J. Sandoval, Grupo Cooperativo SARET of Costa Rica, 1 October, San José, Costa Rica 23 Gomez, T., Enamorado, J. C. and Vela, A. (1994) ‘Feasibility studies of a power interconnection system for Central American countries: SIEPAC Project’, Power Engineering Review, vol 14, no 6, June, pp11ff
17 Dominican Republic
Vital statistics Portfolio mix: 43 per cent fuel oil #6; 18 per cent fuel oil #2; 16 per cent natural gas; 14 per cent hydro; 9 per cent coal [1] Emission factor: 0.7061 tonnes of CO2/MWh [2] Average price of electricity: 13.9¢/kWh residential; 14.6¢/kWh industrial [3] Privatized electricity market: partial Existence of spot market: yes Capacity payment: n/a Market manager: Organismo Coordinador (OC) Regulator: Superintendencia de Electricidad (SIE) Policy maker: Comisión Nacional de la Energía (CNE) Environmental permits: Secretaría de Estado de Medio Ambiente y Recursos Naturales
Background and privatization The economy of the Dominican Republic was strong in the late 1990s, leading to an annual electrical growth rate of 7.5 per cent from 1992 to 2001. The state power producer, Corporación Dominicana de Electricidad (CDE) could not keep up with this growth and blackouts were common. In a time of desperation, the government began to sign Power Purchase Agreements (PPAs) with independent power producers (IPPs). These contracts tended to benefit the IPPs and paid high prices for electricity [4]. In 1998–1999, the power sector was privatized with the unbundling of CDE and the reform of Public Enterprises Law 141 in 1997 [5]. Then, in 2001, with the Electricity Law (125-01), a new holding company called Corporación Dominicana de Empresas Eléctricas (CDEE) took over the operations of the CDE thermal plants that had been unbundled. CDE was then in charge of just one hydro production company, the transmission company, and the contracts
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with the IPPs that it solicited in the 1990s. This law also created the requisite regulator, market manager and policy maker for the new market [6]. The privatization of the market helped reduce the blackouts by increasing capacity by 43 per cent. Distribution losses were also lowered and rural populations were better served as the number of people without electricity fell from 40 per cent in 1991 to 11 per cent in 2002 [7]. The generation sector was 86 per cent privately owned in December of 2005 [8]. Despite these gains, the government decided to renationalize distribution companies in 2003 because rising oil prices had negatively affected the sector. High non-technical distribution losses of 42 per cent (52 per cent including technical losses) and frequent blackouts had returned, impacting the general well-being of the country and prospects for tourism [3]. In 2001, the government sought to plan blackouts in an organized way so as to subsidize and ensure delivery of some reliable electricity to customers in poor neighbourhoods, but this Blackout Reduction Programme (PRA) failed because of a lack of metering systems, an absence of incentives for distribution companies to service these areas and a culture of non-payment for electrical services [6]. In 2002, the National Programme to Support the Eradication of Electricity Fraud (PAEF) under Decree No 748-02 attempted to eliminate fraud, but did little to complete its objective until 2007 when the Electricity Law was modified to make penalties for infractions more severe [9]. The PRA programme and other national subsidization programmes for users that consume up to 700kWh/month have tried to compensate for the high recent prices of fossil fuels, on which the Dominican Republic relies heavily for its generation mix. However, distribution companies have felt the brunt of these subsidized rates as they do not receive full payment for generation sold. Since the government repossessed the distribution companies, they have transferred the money that would have gone into health and education into the operations of these companies. A cross-subsidy programme taxes heavy electricity users over a certain kWh usage in order to help subsidize minimal-use customers. Also, the subsidization rate is being changed from customers who use 700 to those who use 200kWh/month, a more reasonable amount that will result in fewer governmental payouts [10]. The insecure energy supply since the 1990s prompted many customers to purchase diesel generators and other self-generation devices that are expensive to run, but provide a more secure source of energy that allows businesses to continue to operate. Of the projects considered for fulfilling future demand growth, 11 per cent are hydroelectrics and 89 per cent are thermal [2]. The high demand growth of 7.5 per cent continued until 2004 when it suddenly decreased about 10 per cent annually from 2004 to 2006 [11].
Renewable energy laws Hydrocarbon Law 112 of 2000 included a special fund for renewable energy and energy efficiency. This fund consisted of 2 per cent of hydrocarbon taxes
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and increased 1 per cent each year until it reached 5 per cent of the total taxes [12]. The General Electricity Law of 2001 provided priority dispatch and purchase preference for renewables if they are competitive with conventional energy. Ten per cent of the penalties paid for not complying with this law go into a fund to support renewables [13]. Companies that generate electricity with renewable sources are exempt from taxes for five years [5]. Also, Presidential Decree 139 of 2003 provided tax exemptions for the purchase of solar panels and wind turbines [5]. The major piece of renewable energy legislation that has the potential to impact the CDM market in the Dominican Republic is the Law on Incentives for the Development of Renewable Energy Sources and its Special Regimes (Law No 57-07) which passed in May 2007. It is applicable to a distinct group of renewable energy producers including hydro under 5MW, wind under 50MW, concentrating solar thermal under 120MW, photovoltaic systems of any size, biomass under 80MW, solar thermal for hot water of any size, biofuels production of any size and ocean resources of any size. Its main provisions give renewable energies subsidized financing for ten years for installations, 100 per cent exemption from import taxes on equipment and tools, ten-year exemption from income tax, tax incentives for self-suppliers and dispatch priority. Houses or industries that self-produce from renewable energy can use up to 75 per cent of the investment in the equipment as an income tax credit. It also provides a favourable interest rate for 75 per cent of the cost of equipment for communities that install small-scale renewable energy and cogeneration projects below 5MW [14].
CDM portfolio
Number of projects
4
3
2
1
0
Hydro
Wind
Geothermal
Landfill methane capture
Non-landfill methane capture
Biomass
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April
Figure 17.1 Projects registered or in validation in the Dominican Republic
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Although only one wind farm had been registered as of April 2008, two others were in the validation process, as shown by the chart above. The registered project is the 65MW El Guanillo wind farm being developed by Parques Eólicos del Caribe, SA, owned primarily by Gamesa. Other developers interested in wind potential for the island include Canadian AXOR, York Caribbean Windpower, Spanish Union Fenosa, local Consorcio Energético Punta Cana Macao (CEPM), ACRES International and TROC International [5].
Special challenges and opportunities DNA office The Dominican Republic Designated National Authority (DNA) office is located in the Secretariat of Environment and Natural Resources (Secretaría de Estado de Medio Ambiente y Recursos Naturales). Early in its existence, it created relationships with Japan, Canada and the World Bank for creation of Clean Development Mechanism (CDM) projects. It necessitated that an additionality requirement be fulfilled for national approval. The folks from the DNA office identified a lack of public awareness, capacity building, financing and technological expertise as the major barriers to CDM implementation [15].
Other domestic institutional support An analysis of the challenges and opportunities for CDM development in the Dominican Republic was completed by two CDM experts and published in Global Magazine and presented at a carbon conference in Santo Domingo with the support of CAF (Corporación Andina de Fomento and La Fundación Global Democracia y Desarrollo [16].
Carbon brokers Camco International Group helped develop the El Guanillo Wind Farm Project Design Document. There has been no movement to create carbon broker offices or aggressive pursuit of projects by one particular firm.
Renewable energy potential There are an estimated 10GW of wind potential that can produce 24GWh of electricity per year [17 and 18]. There is a high solar radiation factor of approximately 5kWh/m2/day in the country. There are 500MW of undeveloped hydro potential available. Fifteen to 60 million tonnes of biomass per year could be utilized for electrical production from current and former lands used for sugarcane production [5].
Unique experiences and situations The Dominican Republic suffers from having a low financial rating of CCC for international loans, which complicates the prospect of getting hold of loans for development [2]. The country also has a limited market for IPPs since the
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island is small and new capacity additions would have to be sized accordingly. A legacy of past corruption in the operations of the electrical sector could discourage investors. Also, the high rate of subsidization of electricity users has left distribution companies in dire straits and caused them to be renationalized by the government. Private generators may fear non-payment from distributors given this situation.
Summary New renewable energy legislation in the Dominican Republic could portend a bright future for new installations. However, a corrupt electrical sector, high rates of subsidization, a low financial rating and a small overall electrical market will create challenges for CDM development.
References 1
Superintendencia de Electricidad de la República Dominicana (2006) ‘Capacidad instalada por tipo de combustible’, December 2006, www.sie.gov.do/estadisticas.php, accessed 10 March 2009 2 Gamesa Energía (2006) El Guanillo Wind Farm Project Design Document, UNFCCC, 6 May 3 World Bank (2005) Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/ 4 World Bank (2007) ‘Dominican Republic power sector program: Second generation reforms’, 16 March, available at http://web.worldbank.org/external/ projects/main?pagePK=64283627&piPK=73230&theSitePK=40941&menuPK= 228424&Projectid=P082712 5 Portorreal, M. E. (2007) ‘Country or region: Dominican Republic renewable energy overview’, report for US Commercial Service of the US Department of Commerce, April 6 Krishnaswamy, V. and Stuggins, G. (2007) ‘Closing the electricity supply–demand gap’, World Bank and Energy and Mining Sector Board, Paper 20, January 7 Superintendencia de Electricidad de la República Dominicana (2006) ‘Potencia no servida (MW)’ www.sie.gov.do/estadisticas.php, accessed 12 February 2008 8 Superintendencia de Electricidad de la República Dominicana (2005) ‘Capacidad instalada por planta por empresa a Dic-05’, www.sie.gov.do/estadisticas.php, accessed 20 February 2008 9 Ministerio Publico: Procuraduría General de la República (2006) ‘Memoria annual de las ejecuciones del Programa Nacional de Apoyo a la Eliminacion del Fraude Electrico (PAEF)’, available at www.procuraduria.gov.do/PGR.NET/ Dependencias/PAEF/Documentos/memoria%20anual%20de%20las% 20ejecuciones%20del%20PAEF.pdf 10 World Bank (2006) ‘Dominican Republic country economic memorandum: The foundations of growth and competitiveness’, Report Number 35731-DO, Caribbean Country Management Unit Latin America and the Caribbean Region, September 11 Superintendencia de Electricidad de la República Dominicana (2006) ‘Demanda máxima abastecida (MW)’, www.sie.gov.do/estadisticas.php, accessed 20 February 2008
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12 Congreso Nacional de La República Dominicana (2000) Ley de Hidrocarburos 112-00, law 13 Congreso Nacional de La República Dominicana (2001) Ley General de Electricidad Ley No 125-01, law 14 Congreso Nacional de La República Dominicana (2007) Ley No 5707 sobre Incentivo al Desarrollo de Fuentes Renovables de Energía y de sus Regímenes Especiales, May 15 Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An assessment of DNAs in Latin America and the Caribbean’, report for Inter-American Development Bank, Washington, DC, 2 June 16 Figueres, C. and Álvarez, M. (2006) ‘Retos y oportunidades para la República Dominicana’, Global, April, available at http://figueresonline.com/publications/ Retos_y_Oportunidades_final.pdf 17 CEPAL and GTZ (2004) ‘Fuentes renovables de energía en America Latina y el Caribe: Situacion y propuestas de politica’, report prepared for the delegates of the Second World Renewable Energy Forum in Bonn, Germany, 29–31 May 2004, 19 May, available at www.funtener.org/pdfs/Lcl2132e.pdf 18 Elliott, D. (1999) ‘Dominican Republic Wind Energy Resource Atlas development’, presented at SATIS ’99 Conference, San Juan, Puerto Rico, 25–27 August
18 Ecuador
Vital statistics Portfolio mix: 50 per cent hydro; 29 per cent petroleum; 9.1 per cent imported; 6.6 per cent internal combustion engines; 3 per cent natural gas; 1 per cent biomass [1] Emission factor: 0.64 tonnes of CO2/MWh [2] Average price of electricity: 9.7¢/kWh residential; 7.4¢/kWh industrial [3] Privatized electricity market: yes, with limited success Existence of spot market: yes Capacity payment: $5.7/kW (payment also takes into account the capacity factor (percentage of time generation occurs) of resource) [1] Market manager: Centro Nacional de Control de Energía (CENACE) Policy maker: Ministerio de Electrificación y Energía Renovable Regulator: Consejo Nacional de Electricidad (CONELEC) Environmental permits: Ministerio del Ambiente
Background and privatization The Ecuadorian electrical sector is a complex story that stems partially from the black losses in the system, as energy is lost in transmission and distribution or stolen, and partially from the controlled price of electricity sold to consumers below cost. Normal transmission and distribution losses for an inefficient system total about 7–8 per cent. However, an average of 23 per cent losses are experienced as people from both rich and poor neighbourhoods illegally split electrical lines and draw electricity for their own uses. Current rates are structured to recover 14 per cent of these black losses, but some individual companies are losing up to 42 per cent of their energy in this way and going into irrecoverable debt [4]. One may think that the problem is isolated to poor neighbourhoods, but it is equally as prevalent in rich, gated communities. The phenomenon of stealing
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electricity in Ecuador in rich neighbourhoods can be equated to the way some North Americans split cable lines and access cable television without paying for it. However, the problem in Ecuador is much larger. Other black losses that occur in less fortunate neighbourhoods are full of people who have migrated from the countryside to the city for more job opportunities. Large settlements of sprawling houses hook into lines that are headed to or from the city. When utility representatives attempt to enter neighbourhoods where this theft is occurring, they are met with armed resistance from inhabitants. The problem has escalated to the point where even the police are not adequately armed to enter these areas with the hope of disconnecting the electricity; national army personnel are assigned to these tasks [5]. Surrounding countries, such as Colombia and Peru, had similar problems as the culture of paying for electricity had not been instilled in the public. However, aggressive campaigns to promote a culture of electrical bill payment, install better metering devices and improve old transmission and distribution corridors had dramatically reduced losses from close to 25 per cent in 1995 to 16 per cent in Colombia and 11 per cent in Peru by 2005 [6 and 7]. Some of their tactics to encourage bill payment included providing free professional soccer tickets for a percentage of those who paid their bill in a timely fashion [5]. Corporación Andino de Fomento (CAF) was working on a programme to decrease these losses, but the loan for this programme never came through. The market regulator, called Consejo Nacional de Electricidad (CONELEC), has a programme in place to address these losses, but has not yet executed this programme [1]. This problem of black losses has led to a situation where distributors cannot pay generators. Typically, generators will only receive 85 per cent of what they are due. Then the generator will have to petition to get the remaining 15 per cent and typically experiences long delays in payment [8]. Machala Power, a privately operated natural gas installation, has sued a distribution company for non-payment, pointing to generation contracts with Colombia, which are pre-paid, and claiming that Colombian generators receive preferential treatment [5]. The situation is exacerbated by the fact that the distributor cannot, by law, raise customer rates to compensate for these losses. Therefore, these companies cannot make the requisite upgrades in their system to avoid distribution losses and provide better metering. Given their limited resources, the Ecuadorian government had to set up a pay order, which stipulated that Colombian generators that export energy into Ecuador would be paid first while domestic generators would be paid with the remaining funds [9]. This underpayment situation to domestic generators would lead one to believe that generators prefer to structure Power Purchase Agreements (PPAs) with large consumers in order to ensure payment for electricity generated, but ironically most still prefer the spot market. Prices for energy in the spot market vary based on the cost of the last dispatched energy on the system, but generators typically can earn three to four times as much as they can in PPAs.
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Long-standing, state-run hydroelectric applications that were transferred to privately run generation facilities have paid off the capital costs of the system and now are able to generate electricity for approximately 1–2¢/kWh and sell it in PPAs for about 3¢/kWh [8]. The inability of new private generation to compete with these existing hydro facilities in PPAs necessitated an executive decree that established the formation of the Fondo de Solitaridad to oversee contracts between state generators and state distributors. It makes sure that costs get covered and a bit of profit is made and ensures that generators have to sell to distributors, not large consumers in PPAs [1 and 5]. The lack of money that private generators are able to earn through PPAs and difficulty earning payments through distributors because of the black losses has meant that the privatization of the electrical sector in 1996 with Law R.O.S. 43 (Ley de Regimen del Sector Eléctrico) has not stimulated the private sector interest expected. Only one natural gas and three private hydro developers entered the Ecuadorian market between 1996 and 2007 [10]. And 17 of the 18 distribution companies are still of state origin. The lack of capacity added to the system has led CONELEC to contemplate incentives that stimulate new capacity additions. Some of these incentives for renewable energy are described in the following section. However, electric rates cannot be impacted too much by the introduction of these incentives since that would jeopardize citizens’ ability to pay their bills [1]. As a result of this situation, the grid currently imports approximately 10–14 per cent of its energy from Colombia. Transelectric, the Ecuadorian national transmission company, built a 220MW line to connect the countries and is starting a line to double this capacity in February of 2008. This energy comes primarily from the San Carlos reservoir in southern Colombia and is not always secure. Its delivery depends on water levels and guerilla activity as the line is in an area that is susceptible to attack [5]. The remainder of the grid consists of 44 per cent hydro and 46 per cent thermal generation that comes primarily from domestic oil and gas. Therefore, Ecuador has a high emission factor of 0.64 tonnes of CO2/MWh [2]. The government has begun to pursue long-term solutions to the current capacity shortage by creating a new Ministry of Electrification and Renewable Energy in 2007. The goal of this new ministry will be to take advantage of the supposed 35,000MW of the country’s hydro resources, of which only 3000MW has been developed. The trend is to build big, new hydro projects, such as the Coca Codo Sincallres (~1500MW), Sopladora (~400MW), Minas la Union (~300MW) and Pilaton (~200MW) [11]. These large hydro plants would necessitate a movement away from privatization and back to the state as they would require huge capital costs and loans that private investors would not risk. This movement of generation going back to being owned by the state is consistent with the current president’s attempt to nationalize subsurface minerals [1].
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Renewable energy laws In order to stimulate more capacity additions and insulate customers from volatility in fossil fuel prices, the government provided general incentives for new capacity under the Organic Law of Guarantees to Promote New Electricity Generation and aggressive renewable energy incentives in the form of feed-in tariffs in 2004 under Regulation 004 [12]. Renewable energy is defined by this law as hydro under 10MW, and wind, solar, biomass and geothermal up to 15MW. Larger renewable energy applications can be built, but the installation will only receive the feed-in tariff for the portion of the system that is within the size limit [13]. The feed-in tariffs are reset every two years based on international prices of generation from each type of technology. See the table below for current feedin tariff prices. Generators are guaranteed the current feed-in tariff prices for 12 years from the date of their plant’s first day of generation. Also under this regulation, qualifying renewable energy gets guaranteed dispatch and, under a revision submitted by President Nebot in 2005, developers are exonerated from import and income taxes [14]. These feed-in tariffs apply as long as renewable energy constitutes less than 2 per cent of the country’s generation. Most of the qualifying renewable energy generation that is fulfilling this 2 per cent quota comes from sugarcane producers who are burning the husks of their crop to produce electricity that sustains their operations and is fed into the grid. While Ecuador has been meeting the 2 per cent limit for several years, the 3 per cent of annual electrical demand growth has prevented the feed-in tariff from disappearing, as 2 per cent of the country’s generation continues to grow [13 and 15]. These incentives are meant to help renewable energy compete with firm capacity, which is always available, since thermal generators receive capacity payments that are almost high enough to cover the first cost of a gas turbine [1]. Thus far they have already begun to instigate development, with five new sugarcane bagasse combined heat and power projects and three wind projects under contract and in the process of licensing by the end of 2006 [16]. Table 18.1 Feed-in tariff prices Generation source
Price (¢/kWh) in continental territory
Price (¢/kWh) in Galapagos Islands
Wind Photovoltaic Biomass and biogas Geothermal Hydro up to 5MW Hydro 5–10MW
9.39 52.04 9.67 9.28 5.8 5
12.21 57.24 10.64 10.21 6.38 5.5
Source: Neira, D., Van Den Berg, B. and De la Torre, F. (2006) ‘El mecanismo de desarrollo limpio en Ecuador: Un diagnostico rapido de los retos y oportunidades en el Mercado de Carbono’, report for Banco Interamericano de Desarrollo and Ministerio del Ambiente and Corporación Interamericana de Inversiones
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CDM portfolio 10 9
Number of projects
8 7 6 5 4 3 2 1 0
Hydro
Wind
Geothermal
Landfill methane capture
Non-landfill methane capture
Biomass
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April
Figure 18.1 Projects registered or in validation in Ecuador Ecuador’s Clean Development Mechanism (CDM) portfolio has shown tremendous growth from 2006, when only three were registered, to 1 April 2008, when 16 projects were either registered or in validation. The existing wind project is in the Galapagos Islands. There are a few wind projects in Loja such as Villonaco (15MW) and Huascachaca (30MW) in the pipeline. The 15MW wind farm called Salinas was able to get all permits, but development was stalled because it was not of a capacity that was big enough to attract the attention of international turbine manufacturers during a time of high turbine demand. A few more sugarmills (Ingenio Azucarero del Norte and Ingenio Monterrey) are interested in developing biomass projects. Some local developers like Alquimiatec are interested in geothermal extraction. Alquimiatec wants to pursue extraction of shallow geothermal sites like Chalupas just 90km from Quito that would lend themselves to hot rock extraction where water is injected in the ground and then used to heat methanol when it returns to the surface. This technique allows for electrical generation even from more shallow perforation holes that do not require such high capital costs [8]. Also, Ecuador has plans to greatly expand capacity with new hydro applications including Coca Codo Sinclair (1.5GW; $1.59bn investment), Sopladora (400MW, $400mn), Minas Jubones (335MW, $552mn), Toachi Pilatón (228MW, $452mn); Chespi (167MW, $275mn), Baeza (60MW, $105mn), Quijos (50MW, $87.5mn) and Ocaña (26MW, $36.7mn). The government began work on Coca Codo and Sopladora on 7 April 2008 [17].
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Special challenges and opportunities DNA office Ecuador followed Peru’s lead in establishing separate promotion and regulatory offices to handle CDM projects in 2001. It was one of the first CDM offices because Ecuador was involved in the CDM precursor known as Activities Implemented Jointly (AIJ) that Costa Rica and other Latin countries became involved with in during the late 1990s. The Corporación Andina de Fomento (CAF)’s Latin American Carbon Programme (PLAC) first funded the office’s activities [18]. The promotion arm is handled by CORDELIM (Oficina Nacional de Promoción del Mecanismo de Desarrollo Limpio) and runs on grants from United Nations Environment Programme, Banco Interamericano de Desarrollo, Corporación Interamericana de Inversiones, Risø National Laboratory of the Technical University of Denmark, and others. Like the Peruvian promotion office, having the operating budget met by grants means that the office is in constant jeopardy of being closed as funds may dry up. However, in its operation time, CORDELIM, which is divided into four sectors that address renewable energy, urban development, industrial development and forestry, has helped create a national baseline for easier calculations within Approved Consolidated Methodology 0002, grid-connected, renewable energy methodology and the small-scale, grid-connected renewable energy methodology. It has also completed a lengthy study in Spanish entitled ‘The Clean Development Mechanism in Ecuador: A Rapid Diagnostic of the Risks and Opportunities in the Carbon Market’ [19]. The regulatory arm of the Designated National Authority (DNA) office takes 20 per cent of the former UNFCCC registration costs in order to process projects and to determine whether or not they fulfil the country’s goals for sustainable development. This cost turns out to be 3–6 per cent of the overall CDM revenues. Smaller projects with lower capacities are taxed more since processing these projects requires the same amount of effort, but they generate fewer Certified Emission Reductions (CERs). This cost could be a deterrent in the future for smallscale project development. This office uses that money to visit project sites and evaluate the information they submit in order to achieve registration. However, the DNA office does not have any set matrix for assessing these projects [20].
Other domestic institutional support Ecuador launched a programme in 2002 called PROMEC (Power and Communications Sector Modernization and Rural Services Project), financed by the International Bank for Reconstruction and Development and Global Environment Fund, to serve off-grid electrical needs with private sector renewable generators that could qualify for CDM revenues [18]. The new Ministerio de Electrificación y Energía Renovable could provide additional support and funding for renewable energy projects. Thus far, as previously mentioned, the office’s focus is on large hydro to meet the country’s growing demand and shortage of independent power producer (IPP) interest.
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Carbon brokers No major carbon brokers have their offices in Ecuador. MGM International and Ecosecurities are active in the country, but do not have plans to establish fixed offices.
Renewable energy potential Current detailed studies of renewable energy potential for Ecuador do not exist. CONELEC is interested in updating studies completed in the 1990s. INECEL (Instituto Ecuatoriano de Electrificación), which existed until the sector was restructured in 1996, completed a study showing that there are 21,520MW of economically and technically viable small and medium hydro sites for development in Ecuador. Various coastal and Andean sites have been measured for wind potential and show promising average wind speeds between 4.4 and 7.9 metres per second. Ecuador receives an average of 2.98kWh/m2 of solar radiation per day. Some sites in the Andes and Galapagos Islands have even better average insolation values of close to 5kWh/m2 per day, making them very interesting for development. Biomass from crop residue such as sugarcane, bananas, corn, rice, palm and fruits could potentially generate 4300GWh annually and 2155GWh if converted to biogas. Municipal solid waste and animal carcasses could generate 3966GWh of electricity annually or 1249GWh if converted to biogas. In 2001, CONELEC did a study that identified 534MW of installed capacity for geothermal potential at three sites in the Andes and found 17 other sites of interest that merit further study [12].
Unique experiences and situations Ecuador is a difficult place for foreign investment because of a very unstable economic environment. The country has suffered from military coups and corrupt presidents, which has led to the position of president being held by six different people between 1998 and 2007. In this year, the local currency was devalued so much that the country eventually abandoned its currency in 1999 and adopted the US dollar. In this transition, 23 banks went bankrupt and foreign and domestic investors lost holdings [21]. Spaniards and Canadians were involved in a hydro project at the time and backed out after $500,000 for the project was frozen in the bank. Ecuador’s economy has begun to recover from the 1998 crisis, but now that the dollar is used, developers have noticed that machinery, which primarily comes from Europe, is very expensive since the US dollar is weak in comparison to the euro [10]. The most overwhelming barrier to renewable energy project development currently in Ecuador is the resistance to hydro projects from local communities, who are often supported by NGOs. The root of this conflict is found in a Water Law of 1972 that gave all water rights to the state in order to prevent conflicts between landowners over irrigation rights. When the law was written, privately owned hydro developments were not considered. Now, these installations exist and have created complications as they give developers a legal argument for taking water from locals [22]. As a result of this law, Ecuador,
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like many other countries in the region, has had a wealth of hydro development that was considered unfavourable by indigenous groups and NGOs. In Ecuador, Paute (1075MW), Daule Peripa (213MW) and Agoyan (160MW) flooded much land and displaced local people [23]. Hydro developers claim elected local authorities are siding with locals and preventing project development in order to earn votes. Then, when developers do gain permission to develop the project, they are sometimes extorted by the community for unreasonable demands [10]. Environmental groups like Acción Ecológica are supporting the resistance to hydro development of all types, claiming that they fight on behalf of communities that have had their own, vital water rights taken away because of the national rules for allocating water rights, which are sold to private developers. This opposition is particularly strong now that the government is favouring new large hydro installations to fulfil demand. This NGO and other indigenous movements are trying to change the law to transfer the water rights from the state to the provincial or municipal level [10]. Acción Ecológica assesses the Environmental Impact Statement provided by developers and explains the effects of the dams to the communities in order to ensure that the community understands the full effects of the development [24]. One hydro developer has eliminated social problems by allowing the community to own 25 per cent of the project through an agreement with a ‘Canje de Deuda’ or debt exchange in Spain. This agreement gives the locals partial ownership of the project, covering $2.2 million of community equity, and cancels $2.2 million of debt Ecuador owes to Spain in exchange for Spain having the first rights to buy the CERs from the hydro project at the market price. The community’s profits from the project will go into a trust fund for projects that are mutually decided upon by a committee of community leaders and the hydro project owners. As a result of this joint ownership, the community is not opposing the development [25].
Summary Ecuador has enormous potential for renewable energy development because of its plentiful natural resources suitable for development and dire need for more capacity. The aggressive feed-in tariffs also provide a strong incentive for developers. However, a tumultuous political history and black losses that prevent distributors from making timely payments to generators slow developers’ momentum. And recent social conflicts have complicated new hydro development.
References 1 2
Bustamente, M. M. (2007) Interview with M. M. Bustamente, Administrator for CENACE, 26 October, Quito, Ecuador Corporación Andino de Fomento(2006) Ecoelectric-Valdez bagasse cogeneration plant Project Design Document, UNFCCC, 16 June
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CONELEC (2004) ‘Cargos tarifarios para el consumo eléctrico de clientes regulados’, www.conelec.gov.ec/, accessed 30 March 2008 CONELEC (2006) ‘Pérdidas de energía de las empresas eléctricas distribuidoras’, www.conelec.gov.ec/, accessed 5 April 2008 Castillo, D. (2007) Interview with D. Castillo, President of ERD Consultants, 1 November, Guayaquil, Ecuador World Bank (2005) Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/ Ministerio de Energía y Minas de Peru (2005) ‘Capítulo 7: Pérdidas de energía eléctrica’, available at www.minem.gob.pe/archivos/dge/publicaciones/ anuario2005/cap7.pdf Zeller, R. (2007) Interview with R. Zeller, President of Alquimiatec, 24 October, Quito, Ecuador Melendez, E. (2008) Interview with E. Melendez, Former CENACE employee, 10 April Duran, L. (2007) Interview with L. Duran, Equigener Project Developer, 24 October, Quito, Ecuador Oliva, P. and Moreno, A. R. (2007) Interviews with P. Olivia and A. R. Moreno, CONELEC Administrators in the Unidad de Gestion Ambiental, 26 October, Quito, Ecuador Neira, D., Van Den Berg, B. and De la Torre, F. (2006) ‘El Mecanismo de Desarrollo Limpio en Ecuador: Un diagnostico rapido de los retos y oportunidades en el Mercado de Carbono’, report for Banco Interamericano de Desarrollo and Ministerio del Ambiente and Corporación Interamericana de Inversiones Carrión, R. (2007) Interview with R. Carrión, CONELEC Administrator in Planning, 26 October, Quito, Ecuador Registro Oficial Ecuador (2005) Ley de Beneficios Tributarios para Nuevas Inversiones Productivas, Generacion de Empleo, y Prestacion de Servicios, 18 November CONELEC (2006) ‘Balance de la energía total producida e importada’, www.conelec.gov.ec/, accessed 12 April 2008 Coviello, M. F. (2007) ‘Renewable energy sources in Latin America and the Caribbean: Two years after the Bonn Conference’, report for United Nations Economic Commission for Latin America and the Caribbean, April Business News Americas (2008) ‘Ocaña, Sopladora works start, Coca Codo due late April’, newsbrief, 7 April Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An assessment of DNAs in Latin America and the Caribbean’, report for Inter-American Development Bank, 2 June Núñez, A. M. (2007) Interview with A. M. Núñez, CDM Coordinator in CORDELIM, 23 October, Quito, Ecuador Cornejo, J. (2007) Interview with J. Cornejo, Designated National Authority of Ecuador in the Unidad del Cambio Climático de la Comisión Nacional del Medio Ambiente, 25 October, Quito, Ecuador The Heritage Foundation and The Wall Street Journal (2008) ‘Index of Economic Freedom’, www.heritage.org/index/country.cfm?id=Ecuador, accessed 14 April 2008 Ministerio de Energía y Minas de Ecuador (1972) Ley de Aguas, 30 May, www.mineriaecuador.com/leyes/LAguas.htm
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23 Noboa, I. (2006) ‘Investing in renewable energy in Ecuador: An investor’s opinion’, presentation 29 November, for the Sustainable Energy and Climate Change Initiative (SECCI) of the Inter-American Development Bank, available at http://grupobid.org/secci/documents/Isabel-Noboa-Laminas.pdf 24 Reyes, D. (2007) Interview with D. Reyes, Acción Ecológica Director of Hydro Project, 26 October, Quito, Ecuador 25 Muñoz, F. (2007) Interview with F. Muñoz, Hidrovictoria Project Developer, 28 October, Quito, Ecuador
19 El Salvador
Vital statistics Portfolio mix (by installed capacity): 37 per cent hydro; 50 per cent conventional thermal; 12 per cent geothermal [1] Emission factor: 0.725 tonnes of CO2/MWh [2] Average price of electricity: 13.8¢/kWh residential; 10.28¢/kWh industrial [3] Privatized electricity market: partial Existence of spot market: yes Capacity payment: no, obligation to contract [4] Market manager: Unidad de Transacciones (UT) Regulator: Superintendencia General de Electricidad y Telecomunicaciones (SIGET) Mercado de Contratos, and el Mercado Regulador del Sistema (MRS) Policy maker and future planning: Dirección de Energía Eléctrica (DEE) in Ministerio de Economía (MINEC) Environmental permits: Medio Ambiente y Recursos Naturales (MARN) Rural electrification: Fondo de Inversión Nacional en Electricidad y Telefonia (FINET)
Background and privatization In 1945, the state-run utility, Comisión Hidroeléctrica Ejecutiva del Río Lempa (CEL), was formed to ‘develop, conserve, administer, and use’ the natural energy resources of the country [2]. El Salvador’s electrical grid was privatized in 1996 with the Electricity Law (Decree No 843). Prior to this decree, CEL provided all generation, transmission and distribution services. CEL sold its thermal business and retains control of its transmission and hydropower. Now there are five private generators that connect to the main grid and make up 60 per cent of the country’s capacity [5]. Eight other companies generate electricity and hook into distributed transmission grids. These generation companies
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can, by law, be vertically integrated, providing distribution and transmission as well, but the accounting of each component must be separate [6]. Also, these companies cannot own shares in Empresa Transmisora de El Salvador, currently the only transmission company [7]. Decree 843 also created a wholesale market. CEL remains the primary seller of electricity in this market, allowing for little competition. Interconnections with Guatemala added new players, and when the SIEPAC transmission line is complete, Honduras should also add competitors. The wholesale market also includes contracts between large consumers and generators. These contracts are not regulated and involve the physical delivery of electricity based on agreed-upon volumes. Non-contracted energy is exchanged on the Mercado Regulador del Sistema (MRS). Price and volume bids and offers drive this market, which is overseen by the Unidad de Transacciones (UT). Generators can sell directly to customers, or retailers can be involved in the sale of electricity. There has been market activity in this commercialization sector on the part of retailers [8]. Despite El Salvador’s attempt to create a highly privatized market with no restrictions of the wholesale and retail competition, the system was too small to allow for effective competition. Few generators participated because of fluctuating electricity prices, and insufficient incentives caused a lack of competition on the spot market. Therefore, this original market model of 1996 has been revised to allow for safeguards and more closely resembles other markets in Central America [4]. Overall, the Salvadorian grid is quite efficient compared with others in the region; its average losses are only 3–4 per cent [9]. The country has a high electrical growth, averaging 7 per cent annually in the 1990s and 6.4 per cent projected for 2000–2010 [8]. However, since the overall grid capacity is just over one gigawatt, generators have to wait until sufficient capacity is needed if they are going to add a large application to the grid. The National Energy Council was created in 2006 to analyse El Salvador’s energy situation and offer recommendations for new actions and strategies. It has a special focus on renewable energy and energy efficiency to avoid El Salvador being impacted greatly by high oil prices. This focus on renewables is a result of high oil prices, which hit El Salvador particularly hard since it relies on conventional thermal generation for 50 per cent of its energy portfolio. The rest of El Salvador’s grid consists of 37 per cent hydroelectric and 12 per cent geothermal for a total of 1312MW [1].
Renewable energy laws A 2007 National Energy Policy set objectives for the energy sector with a special focus on renewable energies and predicted the addition of 50MW of wind, solar, biomass and mini-hydro generation in the next ten years. Also, in November 2007, a Fiscal Incentives Law for the Promotion of Renewable Energy was passed. This law provides an exoneration of taxes on renewable
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energy projects below 10MW for ten years. Projects of 10–20MW are exempt from taxes for five years. These projects do not have to pay taxes on Certified Emission Reduction (CER) revenues from projects. In order to achieve the goal of 50MW of new renewable generation, there is an earmark for investments in new, small renewable generation [10]. Projects below 5MW have streamlined procedures for earning concessions for development [5]. A fund for renewable energy that would help provide soft loans, which have below-market rates of interest, and make up the price difference between conventional and renewable energy in Power Purchase Agreements (PPAs), called the System for the Promotion of Renewable Energies in Small-Scale Projects (SIFER), has been discussed for years, but ultimately was not included in this law [11]. This fund is being developed by El Salvador’s Ministry of Environment and Natural Resources and the government of Finland’s Energy and Environment Partnership (EEP) with Central America or Alianza en Energía y Ambiente (AEA) con Centroamérica. This fund would provide partial guarantees for loans and funding for feasibility studies, facilitate stable energy price payments for ten years and offer a guarantee of financial compensation for the price difference between producing conventional and renewable energy. It would also have a Revolving Guarantee and Stabilization Fund (FOGES), which would provide soft loans for renewable generators for ten years and guarantee special generation prices. Although there has been much talk about implementing these incentives and it may happen in the future when the funds’ financing is resolved, they were not incorporated in the 2007 renewable energy law [12].
CDM portfolio Geothermal projects have had success in El Salvador even though a portion of the grid’s needs were filled with these resources prior to the Clean 2.5
Number of projects
2.0
1.5
1.0
0.5
0
Hydro
Wind
Geothermal
Landfill methane capture
Non-landfill methane capture
Biomass
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April
Figure 19.1 Projects registered or in validation in El Salvador
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Development Mechanism (CDM). The LaGeo geothermal plant run by a division of the state-run company has achieved registration. Also, an extension of the Berlin power plant owned by Geotérmica Salvadoreña (Gesal), which added 40MW to the existing plant with ten new perforation holes, has been registered [13].
Special challenges and opportunities DNA office The country’s CDM office is located in the Ministerio de Medio Ambiente y Recursos Naturales (MARN). It completed a baseline study of the average grid factor for small-scale projects with the financial support of the government of Finland though the World Bank’s Prototype Carbon Fund. The average calculated, 0.725 tonnes CO2/Wh, portends a high potential for energy-related CDM projects [1]. Other goals of this office include identifying CDM projects, facilitating involvement from various industrial sectors in CDM, promoting international cooperation to reduce transaction costs, and completing a greenhouse gas inventory. The Designated National Authority (DNA) office was slow to come up with concrete sustainable development criteria and a series of six steps for project developers to follow when navigating the process, which should take no more than 45 days [5].
Other domestic institutional support There is interest from the Universidad Centroamericana ‘José Simeón Cañas’ to apply the CDM in El Salvador. MARN partially funded a study with participants from this university that accessed the potential for the CDM in the country. This study outlined the following barriers to project development: the lack of long-term PPAs, the absence of renewable incentive laws, the dearth of beneficial financial mechanisms for renewable energy projects, little reliable information on available resources or CDM opportunities and slow permit processes for small-scale generation projects [5]. Technical assistance in identifying six microhydro sites in the country was provided by the NGO La Asociación Saneamiento Básico, Educación Sanitaria y Energías Alternativas (SABES) and the Energy and Environment Partnership with Central America (EEP) of the government of Finland. El Salvador has also created two technical governmental committees to help promote the CDM. They helped with the baseline study and creation of national sustainable development criteria [5]. Turning to institutional barriers, some critics of the El Salvadorian electrical structure in general believe the privatization policies implemented with Decree 843 contain some obstacles to development. A study commissioned by the Inter-American Development Bank found that the institutional framework fails to provide a defined body that will formulate policies for the sector, and doesn’t establish a
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coordinating entity for the energy sector at large. Moreover, no entity is assigned to perform system-planning functions, indicative or otherwise. [8] Furthermore, the vertical integration allowed under the current law could reduce competition as natural monopolies form to serve customers of certain geographic areas. These market flaws could deter private generators from entering the market as they fear it will be poorly regulated and administered.
Carbon brokers There are few carbon brokers involved in the country. The CDM project cycle for most projects has been taken on by development banks or the project developer.
Renewable energy potential There are 1742MW of developable hydro potential in El Salvador and only 422MW are developed. Of this hydro potential, 286MW are small hydro [5]. The Solar and Wind Energy Resource Assessment (SWERA) maps cover El Salvador but show that there is little potential in the country except for at a few sites on the northern coast. There are three cogeneration units, with an installed capacity of 48MW, or 1.6 per cent of the country’s generation. Each year, the sugarcane harvests for each sugarmill increase, which provides CDM opportunities to make generation and heat production more efficient [5]. El Salvador takes advantage of its geothermal potential of 161MW with a 95MW plant called Ahuachapán and a 66MW one called Berlin, but there is another 171MW of potential geothermal resources that could be utilized [2]. An expansion of the Berlin plant for CDM credit and a new plant called Cuyanausul combined add 64MW [1]. In the country, only two landfills are plastic-lined and suitable for CDM development. One of them, La Nejapa, has already been developed, and only Pasaquina remains for development [5].
Unique experiences and situations The lack of renewable energy incentives prior to 2007 has led to more thermal generation, which has a quick payback time. The most commonly used thermal generation is bunker fuel #6, which has led to an increase in greenhouse gas emissions of 13.4 per cent between 2000 and 2005 [5]. Civil war through the 1970s and 1980s damaged much of the country’s transmission system [8]. This occurrence, along with devastating natural disasters such as Hurricane Mitch in 1998 and an earthquake and landslide in 2001 have hindered the electrical sector and scared off some potential foreign investors [14].
Summary Benefits to CDM development in El Salvador include an open electrical market,
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a high grid emission factor due to thermal generation, and some institutional support for projects. Also, the government has begun to favour renewable generation with a new set of incentives that could spur development. Weak regulatory institutions that guide and regulate energy policy could be an obstacle for development. Finally, the country’s violent history could deter investors.
References 1
Synergy de la Comunidad Europea (2005) ‘Metodologías para la implementación de los mecanismos flexibles de Kioto: Mecanismo de Desarrollo Limpio (MDL) – Guía Latinoamericana del MDL’, Guidebook, available at www.cordelim.net/extra/html/pdf/library/olade.pdf 2 Altomonte, H., Cuevas, F. and Coviello, M. (2004) ‘Fuentes renovables de energía en America Latina y el Caribe: Situacion y propuestas de politica’, commissioned by CEPAL and GTZ and prepared for the delegates of the Second World Renewable Energy Forum in Bonn, Germany, 29–31 May 2004, 19 May, available at www.funtener.org/pdfs/Lcl2132e.pdf 3. World Bank (2005) Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/ 4 World Bank (2007) ‘Latin America and the Caribbean Region (LCR): Energy sector – retrospective review and challenges’, Energy Sector Management Assistance Programme report, 15 June 5 Sanchez, I. A. (2006) ‘Estudio sobre la aplicación del mecanismo para un desarrollo limpio en El Salvador’, report for Ministerio de Medio Ambiente y Recursos Naturales, La Cooperación Internacional de Japón and Universidad Centroamericana, June 6 Ministerio de Economia Gobierno de El Salvador (n.d.), ‘Energía Eléctrica: Centrales Generadores’, www.minec.gob.sv/default.asp?id=97&mnu=66, accessed 20 December 2007 7 Empresa Transmisora de El Salvador (n.d.), ‘Quienes somos’, www.etesal.com.sv/mercado.asp, accessed 20 December 2007 8 Millán, J. (1999) ‘The power sector in: El Salvador’, Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC 9 Unidad de Transacciones (2001) ‘Perdidas de transmisión’, Informe Estadistico, http://216.184.107.60:8080/c/document_library/get_file?folderId=10271& name=DLFE-125.pdf, accessed 12 January 2008. 10 Coviello, M. F. (2007) ‘Renewable energy sources in Latin America and the Caribbean: Two years after the Bonn Conference’, report for United Nations Economic Commission for Latin America and the Caribbean, April 11. Red de Oficinas Económicas y Comerciales de España en el Exterior (2007) ‘El Salvador aprueba una Ley con incentivos para inversiones en Energía Renovable’, notice in La Prensa Gráfica, 10 November, available at www.oficinascomerciales.es/icex/cda/controller/pageOfecomes/ 0,5310,5280449_5282927_5284940_4030184_SV,00.html 12 Matute, L. J. (2006) ‘Incentivos a las energías renovables en Centroamerica’, presentation for Alianza Energía y Ambiente con Centroamerica, 15 February, San Salvador, available at www.eep-ca.org/forums/documents/forovii/ incentivos_energia_matute.pdf
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13 UNFCCC (2006) Corporación Andina de Fomento, LaGeo, SA de CV, Berlin Geothermal Project, Phase Two Project Design Document, 6 February 14 Pollack, R. (2006) ‘El Salvador: The makings of Gangland’, Public Broadcasting Systems, Wide Angle, 11 July, available at www.pbs.org/wnet/wideangle/episodes/ 18-with-a-bullet/photo-essay-el-salvador-the-makings-of-a-gangland/1393/
20 Guatemala
Vital statistics Portfolio mix: 41.3 per cent hydro; 1.8 per cent geothermal; 56.9 per cent thermal [1] Emission factor: 0.824 tonnes of CO2/MWh [2] Average price of electricity: residential 15.14¢/kWh (2003); industrial n/a [3] Privatized electricity market: yes, partially Existence of spot market: yes Capacity payment: yes, tended to favour generators and increased 2.4–3.3 per cent until 2006 [4] Market manager: Administrador del Mercado Mayorista (AMM) Policy maker: Dirección General de Electricidad of Ministerio de Energía y Minas (MEM) Regulator: Comisión Nacional de Energía Eléctrica (CNEE) Environmental permits: Ministerio del Medio Ambiente y Recursos Naturales (MARN)
Background and privatization The Instituto Nacional de Electrificación (INDE), a state-run, semiautonomous and decentralized organization, was formed in 1959 to electrify the country and develop energy sources. In 1997, the power sector was reformed with the General Electricity Law because of INDE’s inability to serve the growing demand. This law caused INDE and EEGSA (Empresa Eléctrica de Guatemala), the country’s largest distribution company, to be debundled. A market regulator (Comisión Nacional de Energía Eléctrica (CNEE)), policy maker (Ministerio de Energía y Minas (MEM)), and market manager (Administrador del Mercado Mayorista (AMM)) were created to run the newly formed privatized market. The restructured market included a spot market that began operations in 1998 and aimed to lower electricity costs by transferring
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the risk involved in Power Purchase Agreements (PPAs) to private investors from taxpayers. PPA prices fluctuated based on international oil prices and foreign exchange risk [4]. The reform worked, and $535 million of new investment entered the country between 1997 and 2000. However, as oil prices rose between 1999 and 2000, the government began covering price fluctuations in PPAs with subsidies. The portfolio mix of generation has changed in the country over time. While in the 1980s it used to be close to 80 per cent hydro and 20 per cent fossil-fuel based, now that ratio is reversed because of demand and drought [5]. Guatemala also has a high annual demand growth, with an average during the last few years of 8 per cent. A 5 per cent demand growth is predicted annually in the short term for the coming years [6]. Despite this high demand growth, up until 2003 distributors did not have to make solicitations for new capacity as the 1997 law specified. In fact, EEGSA even had excess capacity between 1997 and 2003 [4].
Renewable energy laws The support for renewable energy in Guatemala has a longer history than Latin American countries. In 1986, a law promoting renewable energy was implemented and stayed in effect until 2003. In 2003, the Guatemalan Congress passed Law 52 for the Incentives of Renewable Energy Development [7]. This law exempts the import tax on system parts, and generators do not have to pay income tax on the project for the first ten years of operation. This renewable energy law also changes some of the obligations of market players to allow renewable generators to receive the best price for their electricity. In Guatemala, retailers and distributors buy electricity from generators who sell to small and large consumers. The law requires retailers to buy all energy from renewable generators if those generators choose to sell it to the retailer. Guatemala also has laws to promote cogeneration projects by prioritizing the purchase of electricity from petroleum and bagasse burning facilities [8]. Guatemalan law recognizes the tremendous potential in small-scale projects because of its many hydro and other renewable resources, which are plentiful, but dispersed. These small inputs of new capacity also provide manageable incremental new additions that do not overwhelm or flood the market. Distributors previously worked with large customers while retailers bought from smaller generators, but this new legislation allows projects above 5MW to sell to the distributor, not just retailers. Having the option to sell to both of these entities allows the generator to get a more competitive price for the electricity. There is also a benefit for applications under 5MW in that operators do not have to apply for generation permits [9]. Prior to October 2007, projects that were less than 5MW could not connect to the grid. A new law allows for inclusion of these applications by requiring distributors to purchase renewable energy from small applications if they are available. However, it is unclear who will actually pay for the line from the grid to the
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point of generation since this law has not yet been tested and completely formulated [10]. There are several laws that are being considered for future energy legislation. Currently, 79 per cent of the population, which uses less than 300kWh per month, have energy prices subsidized. This high percentage of subsidized energy prevents the Instituto Nacional de Electrificación from having money to invest in transmission upgrades and extension. A proposal to lower the level at which the subsidy applies to those who use less than 100kWh per month would free up money for investments in transmission extension to reach remote hydro sites [9]. There is a movement to charge for the right to use water for hydro electricity. Currently, those who want to use water for hydro generation greater than 5MW must request permission for the use of a certain altitude range of a particular waterway from the Ministry of Energy and Mines, but do not pay for the use of the water [11]. Those hydro projects under 5MW must register for the water usage with the ministry [12].
CDM portfolio 10 9
Number of projects
8 7 6 5 4 3 2 1 0
Hydro
Wind
Geothermal
Landfill methane capture
Non-landfill methane capture
Biomass
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April
Figure 20.1 Projects registered or in validation in Guatemala Although there is not yet any wind development in Guatemala, an Israeli engineering group called Tahal is studying the installation of a 45MW wind power generation project in Guatemala. Other small developers are considering a 100MW site, called Piedras, and a 15MW site, called Buenos Aires, in the southwest part of the country [13]. There is also movement to capture methane from hogs at Empacador Toledo farms. These farms already have small cement digesters and want to develop larger applications for their larger sites. They will use Ecoinvest to complete the CDM process.
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Special challenges and opportunities DNA office Guatemala has a long Clean Development Mechanism (CDM) history, having created an Office of Joint Implementation prior to the creation of the CDM in 1996. Its goal was to promote investments in emission reduction projects and establish the requisite legal, political, technical and financial conditions for accomplishment of this goal [6]. Now, the Designated National Authority (DNA) office is located within MARN and consists only of the DNA and his secretary [14]. A partnership of UNEP/Risø and a local NGO called Fundación Solar initiated a study in 2005 to create a ‘fully operational CDM entity … a set of clear and consistent rules … and a well-studied … and established market of CDM projects’ [15].
Other domestic institutional support In Guatemala, there are a variety of organizations that support renewable energy. As a complement to its renewable energy incentives, the government’s Ministerio de Energía y Minas has created an information centre for renewable energy and a fund to support it. This centre created a guide for renewable energy investors that included a CD-ROM with the laws related to renewable energy, opportunities for its development, energy sector statistics and recommendations [16]. A Cleaner Production Centre (Centro de Producción más Limpia), which is supported by national and international organizations, aims to promote industrial efficiency. It has a strong presence in Guatemala and has attempted to become involved in CDM projects. The centre has two goals in Guatemala with regard to CDM activities: it helps with capacity building and technical assistance. Because of the centre’s mission, it is more involved in energy efficiency and fuel switching rather than renewable energy projects, but it could be a resource of interest for generators in the country who are looking for an affordable CDM consultant. During 2006 and 2007, the Guatemalan centre worked in developing three Project Idea Notes (PINs) for three different companies representing three different industrial sectors. Due to various factors, the process was stopped at the elaboration of the PINs, and Project Design Documents (PDDs) were not prepared [17]. The Cleaner Production Centres are present in various countries of Latin America, and they work as a network. From the centres the author visited, it can be noted that the centre’s interest or active participation in activities related to CDM depend on the country-specific conditions and opportunities. For example, in Nicaragua, the centre has found that the CDM project cycle costs are prohibitively high for involvement, in Guatemala it is actively pursuing CDM projects, and the centre in Ecuador is not even aware of the CDM [18]. There is a regional office of the US-based National Rural Electric Cooperative Association (NRECA), which has its Central American headquarters in Guatemala City and also operates throughout the region and the
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Caribbean. NRECA indirectly supports CDM efforts as it works with people on how to get access to and use electricity, electricity companies to ensure quality and cost of renewable energy, and generators to complete studies and financial analyses [5]. In Guatemala, additional capacity development for CDM exists from the Asociación de Generadores de Energía Renovable, a local trade association that supports geothermal and hydro generation in the country. This entity gives two seminars per year on the potential of CDM, but has more interest in the voluntary market for selling emission reductions [19]. A local NGO, Fundación Solar, works with communities to bring electricity and has taken an active role in promoting CDM by sponsoring studies and giving presentations that explain carbon markets and Guatemala’s potential for utilization of the CDM [10].
Carbon brokers Within the country, there is a general lack of interest on the part of carbon brokers to find projects because the size of industries in the country prevents projects from covering the transaction costs of carbon brokers [19]. Ecoinvest and Ecosecurities have both been involved in sugarmill projects [20]. Ecoinvest is also involved in a biodigester project for the only hog operator in the country that has a critical mass of hogs that is large enough to sustain an industrial size digester. This hog farm operator, Empacador Toledo, chose to work with Ecoinvest because they already had a relationship with Bungi, the larger group that owns Ecoinvest and sells Toledo its hog feed. Another broker called Kyoto Energy is helping INDESA palm company develop a methodology and register a project that would use the palm fruit and wastewater as fertilizer instead of letting this product anaerobically decompose and produce methane.
Renewable energy potential Guatemala has enormous hydro potential of 5000MW, but only has 558MW installed. The geothermal potential is also huge and under-utilized at 767MW and only 33MW installed. It has seven cogeneration projects with a total capacity of 185.2MW [7]. There are 7800MW of wind that could be utilized with only 0.1MW exploited [1]. The solar potential is 5–5.5kWh/m2/day [21]. Some areas of the region have moderate wind potential at 5.5–7m/s, but overall there is not an excellent wind resource in the country [22].
Unique experiences and situations There are several threats to the stability of the electrical sector in Guatemala that provide an uncertain environment for potential investors. The General Electricity Law can be changed at any time with just a simple congressional majority vote. Likewise, the regulations and renewable energy incentives can also be changed easily [23]. The institutions put in place since the market was privatized are weak. The regulator CNEE and market manager AMM are vulnerable to pressures from
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political offices. State-run INDE is also at risk of going into huge debt because of the social tariff it must maintain. The law establishes a retail price cap of 8¢/kWh for customers who use less than 300kWh per month. Since 92 per cent of Guatemalans fall into this category, a large subsidy is given. This subsidy is derived from INDE’s hydro operations, which have small variable costs. However, during dry seasons, INDE goes into debt as it must buy energy at market prices and sell it at the subsidized rate. As rural electrification continues and the number of users who benefit from this subsidized rate increases, INDE will continue to suffer economically [4]. Another weak aspect of the Guatemalan energy sector is that the law prohibiting vertical integration, which prevents the same company from owning generation, transmission and distribution, is easily bypassed. By forming a separate company to handle each separate market segment, the rule against vertical integration can be easily avoided. In this way, new generators entering the market are not immune to monopolistic tendencies and price controls [4]. Beyond these regulatory barriers, Guatemala has a unique barrier to hydro project implementation in that social resistance to projects is high [24]. The root of today’s strong and often well-organized opposition to new hydro development is a large 200MW hydro plant called Chixoy, which displaced many people and failed to work with the community to successfully relocate individuals. Controversy over both mining and hydro projects and the Guatemala Civil War from the late 1960s until the 1990s led to a Peace Agreement of 1996, known as Consulta 179, that required developers to respect the rights of all Guatemalan citizens and has the effect of making developers gain the consent of the people in the area prior to commencement of development [25]. Developers see this law as a barrier and claim it has prevented three hydro projects from being developed. However, they claim that a federal law also exists that allows for the utilization of the resources in the region. The conflict between the two laws becomes a jurisdiction problem and which law is respected depends on who is interpreting it [5]. This Peace Agreement and the CDM requirement of having a stakeholder meeting to assess the community support of the project have been key in blocking development. Rio Hondo I is a 4MW project, created in 1980, that failed to benefit the community around it. As a result, when developers wanted to expand this project from 4 to 30MW and earn CDM credit, the community revolted [26]. The project was very far advanced with the PDD written, but it failed to pass the national approval process and was blocked by the Peace Agreement of 1996 because of the social strife it caused [15]. Now, investors have money tied up in the project, but its development is at a standstill [27]. For the hydro project Tres Ríos, project developers got the requisite permits and did an Environmental Impact Statement, but ultimately could not begin generation because the community near the project was not in support of it [5]. Some project developers see NGOs like Guatemala City-based Madre Selva as instigators of the community problems. Believing that these entities
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support opposition to projects with the hope of a payout, developers contend that the definition of a ‘stakeholder’ should be clearly defined in the CDM comment process in order to prevent non-local forces like NGO groups from abroad from influencing the process. They also contend that elected officials in the area rally citizens and win elections on anti-hydro platforms. If these officials change their position after they have been elected and see the benefits the project could bring to the community, they face the prospect of being accused of accepting bribes and fear violent attacks. Project engineers also suffer from community attacks and have even been kidnapped. The complications that these social problems have caused have required developers to boost the percentage of the project costs that go towards community integration of the project from 1–2 per cent to 12 per cent [27]. These NGOs contend that private investors’ projects rarely benefit the community and often take vital water away from it. These NGOs, such as Fundación Solar and Madre Selva, are in support of hydro projects that are owned by the municipality. The Chel project, which is owned by the municipality and required the labour of community participants in exchange for reduced electricity rates, is a success story that electrified 440 homes [28 and 24].
Summary Guatemala’s open marketplace with private investor participation seems to provide a more favourable environment for investment than some of its neighbouring countries, including Belize, Honduras and Mexico, which have more closed markets. New renewable energy legislation that favours small-scale projects may provide a unique advantage for these otherwise financially questionable projects. However, social strife fuelled by poorly implemented hydro and mining projects puts many of these projects in question.
References 1
2 3
4
5 6
Ministerio de Energía y Minas de Guatemala, Estadísticas Energéticas Subsector Eléctrico, 2001–2007, http://www.mem.gob.gt/Portal/Documents/ImgLinks/ 2008-09/392/INFORME%20ESTADISTICO%202007.pdf, accessed 12 March 2008 Hidroeléctrica Candelaria (2006) Candelaria Hydroelectric Project Design Document, UNFCCC, 9 July World Bank (2005) Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/ Fundación Solar and Rufin C. (2003) ‘Guatemala: Reforms in the balance’, in J. Millán and N.-H. M. von der Fehr (eds) Keeping the Lights on: Power Sector Reform in Latin America, Inter-American Development Bank, Washington, DC Arriaza, H. (2007) Interview with H. Arriaza, National Rural Electric Cooperation (NRECA), 2 September, Guatemala City, Guatemala Synergy de la Comunidad Europea (2005) ‘Metodologías para la implementación de los mecanismos flexibles de Kioto: Mecanismo de Desarrollo Limpio (MDL) –
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7
8 9
10 11
12
13 14
15 16
17 18 19
20 21
22
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COUNTRY MARKET INTELLIGENCE FOR CDM PROJECTS
Guía Latinoamericana del MDL’, Guidebook, available at www.cordelim.net/extra/html/pdf/library/olade.pdf Altomonte, H., Cuevas, F. and Coviello, M. (2004) ‘Fuentes renovables de energía en America Latina y el Caribe: Situacion y propuestas de politica’, commissioned by CEPAL and GTZ and prepared for the delegates of the Second World Renewable Energy Forum in Bonn, Germany 29–31 May 2004, 19 May, available at www.funtener.org/pdfs/Lcl2132e.pdf Congreso de la Republica de Guatemala (2003) Decreto Numero 52-2003, 10 November, p3 Ruiz, O. (2007) Interview with O. Ruiz, Head of the Centre of Information and Promotion of Renewable Energy, Ministerio de Energía y Minas, 7 September, Guatemala City, Guatemala Azurdia, I. (2007) Interview with I. Azurdia, Executive Director, Fundación Solar, 7 September, Guatemala City, Guatemala Castañeda, R. (2007) Interview with R. Castañeda, Designated National Authority of Guatemala, Ministerio del Medio Ambiente y Recursos Naturales, 3 September, Guatemala City, Guatemala Ley, D. (2007) Interview with D. Ley, United Nations Consultant for Economic Commission for Latin America and the Caribbean, 16 August, Mexico City, Mexico Jongezoon, L. (2007) Interview with L. Jongezoon, Developer of Renewable Energy Projects for Ecomina, SA, 6 September, Guatemala City, Guatemala Casteñeda, R. (2007) Interview with R. Castañeda, Designated National Authority of Guatemala, Ministerio del Medio Ambiente y Recursos Naturales, 3 September, Guatemala City, Guatemala UNEP/Risø Centre (2006) ‘CD4CDM Final Country Report: Outline’, 29 November, Fundación Solar Project Ministerio de Energía y Minas de Guatemala y Tiempo de Solidaridad (n.d.) ‘Guia del inversionista de la energía renovables y del subsector electrico’, available at www.mem.gob.gt/Portal/Documents/ImgLinks/2008-09/350/Gu%C3%ADa% 20del%20Inversionista.pdf Porta, M. A. (2007) Interview with M. A. Porta, Executive Director of El Centro de Produccion Mas Limpia de Guatemala, 3 September, Guatemala City, Guatemala Barahona, C. (2007) Interview with C. Barahona, Representative of Centro de Producción Mas Limpia de Nicaragua, 17 September, Managua, Nicaragua Escobar, C. (2007) Interview with C. Escobar, Director of Asociación de Generadores de Energía Renovable (AGER), 5 September, Guatemala City, Guatemala Unda, V. (2007) Interview with V. Unda, Director of Ingenio Trinidad, 5 September, Guatemala City, Guatemala Solar and Wind Energy Resource Assessment (SWERA) (2003) ‘Solar: Annual average global horizontal (GHI) map at 40km resolution for the Caribbean region from NREL’, 11 December, United Nations Environment Programme, available at http://swera.unep.net/index.php?id=metainfo&rowid=44&metaid=146 SWERA (2003) ‘Wind: Wind power density maps at 50m above ground and 1km resolution for Central America from NREL’, United Nations Environment Programme, available at http://swera.unep.net/index.php?id=metainfo& rowid=44&metaid=146 Fundación Solar and Rufin C. (2003) ‘Guatemala: Reforms in the balance’, in J. Millán and N.-H. M. von der Fehr (eds) Keeping the Lights on: Power Sector Reform in Latin America, Inter-American Development Bank, Washington, DC
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24 Villaseñor, C. M. (2005) ‘Chel, a un paso de alcanzar su sueño’, Prensa Libre, 2 October, Guatemala City, Guatemala 25 United States Institute of Peace (1996) Acuerdo de Paz Firme y Duradera, Peace Agreement, Government of Guatemala, Revolutionary National Unity of Guatemala and United Nations, 29 December 26 Conde, O. (2007) Interview with O. Conde, Representative from Madre Selva, 6 September, Guatemala City, Guatemala 27 Riviera, A. (2007) Interview with A. Riviera, CEO and President of Grupo Riviera, 7 September, Guatemala City, Guatemala 28 US Agency for International Development (n.d.) Micro-Hydro Energy for Post War Rehabilitation, Energy: Success Stories, available at www.usaid.gov/our_work/economic_growth_and_trade/energy/publications/ success_stories/guatemala_riverofpeace.pdf
21 Honduras
Vital statistics Portfolio mix: 57 per cent thermal; 36 per cent hydro; 33 per cent biomass [1] Emission factor: 0.74 tonnes of CO2/MWh [2 and 3] Average price of electricity: 8.3¢/kWh residential; 11.3¢/kWh industrial [4] Privatized electricity market: yes Existence of spot market: no; node prices used Capacity payment: yes, for thermal generators. Prices set individually in each contract and range from $11/kW to $19/kW [5]; none for renewables Market manager: Empresa Nacional de Energía Eléctrica (ENEE) Policy maker: Energy Cabinet [6] Regulator: Comisión Nacional de la Energía (CNE) Environmental permits: Dirección de Evaluación y Control Ambiental (DECA) de Secretaria de Recursos Naturales y Ambiente (SERNA) Generation permits: Dirección General de Energía (DGE) de SERNA
Background and privatization The state-run utility Empresa Nacional de Energía Eléctrica (ENEE) was formed in 1957 to electrify the country. The 300MW Francisco Morazán (commonly known as El Cajón) hydro project of 1985 expanded the grid’s capacity by 144 per cent and halted new capacity additions in the early 1990s as capacity far exceeded demand. However, a multi-year drought from 1990 to 1994 led to a dearth of energy and outages. Also, ENEE was in severe debt from the El Cajón project [7]. As a result of these problems in the electrical sector, a sector reform was supported by the World Bank and the Inter-American Development Bank in 1994 with a law (Ley Marco del Subsector Eléctrico – Decree 158-94) that prevented the horizontal and vertical integration of electrical companies [7].
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Prior to this law the only private generators that existed were small cogenerators that produced a total of 9MW, and only used the electricity produced for their own use. ENEE was supposedly unbundled and partially privatized by this legislation. Despite these laws, ENEE still handles most of the generation, transmission and distribution. By 1998, only three private generators had entered the market, and there had been no interest in private transmission and distribution [8]. In 2002, 57.7 per cent of generation was privately owned [9]. In private contracts, generators can sell to ENEE or large consumers in Power Purchase Agreements (PPAs). However, to sell to a large customer, a generator has to be appointed an ‘authorized entity’. ENEE authorized one generator prior to Decree 158-94, but since then no generator has gained authorization [10]. The price arranged in these PPAs must be the node price established by the Comisión Nacional de la Energía (CNE) if the capacity addition is offered by the generator, but not solicited by ENEE. If the capacity addition is solicited by ENEE or sold to a third party, the price is more negotiable. The node price is based on the short-run marginal generation cost for five years into the future and includes transmission losses [10]. Generators can export energy to other countries only if national electricity demands have been met [8]. In practice, this stipulation bars generators from participating in the regional market since transactions do not take place frequently, and it is difficult to estimate when there will be excess generation [5]. The Executive Board of ENEE convenes to determine when energy purchases from outside Honduran borders will be made. These decisions occur so infrequently that they do not reflect the dynamic nature of the spot market; instead, they are made based on the wet and dry seasons [5]. For capacity additions, ENEE must first solicit a request for generation. Generators then compete on the basis of price. Capacity additions tend to be chunky since ENEE has to buy 100 per cent of the generation from individual generators for the developer to be able to secure a loan [5]. If unsolicited generation is offered, it can earn no more than the short-run marginal system costs. If a price below the short-run marginal cost is offered, ENEE must purchase the energy [8]. Even though Honduras was the first country to reform its electrical sector in the Central American region, the law of 1994 did little to immediately transform the energy sector. In 1998, energy-related organizations in the government were reorganized to better facilitate privatization of the electrical sector. In PPA contracts, the government has even assumed most of the project risk in order to stimulate development [8]. Because inadequate capacity additions have been stimulated by the law of 1994, the government has signed last-minute contracts with private investors for capacity additions. In these cases, formal rules for permit processes and environmental impact studies are waived [7]. These additions tend to be from thermal sources and the government pays more than the node price for generation [8]. This price, which was 9–11¢/kWh is subject to fluctuations based on
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fossil fuel prices. Also, it is not recovered in the tariff and leads to debt as the government subsidizes this purchase [10]. The overall Honduran system is characterized by inefficiency. In 2005, there were system losses of 24 per cent [4]. According to a study by the InterAmerican Development Bank, ‘Low worker productivity levels, overstaffing, poor plant operating efficiencies, inadequate maintenance programs … poor quality of service, power shortages, corruption, and poor management’ plague the electrical sector [8]. Ironically, the country touts itself as providing Central Americans with the cheapest form of electricity [5]. However, current prices are only possible because 50 per cent of customers receive subsidies that are putting ENEE in debt [10].
Renewable energy laws When Honduras privatized the electricity sector in 1994, the law prioritized renewable generation in the national planning process. In the least-cost planning process, an expansion plan that includes renewables can be selected instead of one with conventional energy if the cost difference is less than 10 per cent between the two [5]. Later, Decrees 85 and 267 provided the exoneration of income taxes on renewable energy installations and exemption from income taxes for the first five years of operation [11 and 12]. Decree 9 of 2001 guaranteed the state purchase of renewable energy generation [13]. Then Decree 103 of 2003 eliminated administrative problems by streamlining issues like municipal taxes. In October 2007, Decree 70-2007 provided more targeted support for renewables and tied some of the payments to US dollars instead of the local currency, the lempira, in order to provide more economic certainty for developers. The major provisions of this law are provided below: 1
2 3
4
ENEE has to buy renewable energy from generators as long as the national energy plan is not fulfilled. The price ENEE will pay is their avoided cost of generation in the short term for five years plus 10 per cent for renewable energy applications. Previously, ENEE only had to pay up to the avoided cost. Now, that cost plus 10 per cent is the minimum they will pay. Contracts for renewable energy have a 30-year life for hydro plants over 50MW [5]. The maximum inflation rate that will be applied is 1.5 per cent. Transmission costs will be fixed at 1¢ USD/kWh instead of calculated by distance and capacity of lines. Systems under 3MW do not have to have a generating licence. Systems this size are also exempt from doing a full Environmental Impact Statement (EIS); instead, they can just fill out a form describing the environmental impacts. Renewable energy generators will be able to sell directly to the Central American grid (SIEPAC) or large consumers.
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Permits will be issued in a maximum of two months (60 working days). The current process takes six months to two years. If permits cannot be given in two months, the project will receive a waiver by the Law of Simplified Administration (Ley de Simpificación Administrativa). The water price for hydro installations will increase from 2 lempira per 1 horsepower to $0.1/kW installed for the first 15 years of operation and $0.2/kW for each year thereafter [14].
CDM portfolio 10 9
Number of projects
8 7 6 5 4 3 2 1 0
Hydro
Wind
Geothermal
Landfill methane capture
Non-landfill methane capture
Biomass
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April
Figure 21.1 Projects registered or in validation in Honduras Honduras is home of the first small-scale CDM project in the world, a 13MW hydro plant called Río Blanco. And this project and another small hydro in Honduras called La Esperanza were the first projects to be issued Certified Emission Reductions (CERs), which occurred in October 2005. This project was an experiment of the World Bank [15]. Originally, Esperanza project developers were working with the Finnish Industrial Development Fund (FinFund) for the CDM negotiations and sale, but when the price of $1/CER was offered, developers chose to go with the World Bank who gave $4.5/CER and 30 per cent upfront for the project. This project, perhaps like some of the other CDM small-scale hydro projects, was not financially additional. But, because only one type of additionality barrier had to be broken as it is under 15MW, the project was able to prove itself because it was implemented in an area of the country with few hydro installations and many political barriers [16]. A variety of other hydro plants (Río Blanco, Cuyamapa, Cortecito and San Carlos, La Esperanza, Cuyamel, La Gloria, CECECAPA, Yojoa and Zacapa) were able to achieve registration. All of these plants are in 15-year PPA with ENEE and are operated by private generators.
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Honduras hosts one biogas project from palm residues, which is a relatively new and revolutionary project for the region. Only Colombia and Guatemala have a prospective projects like this. Mesoamerica Energy is in the advanced stages of developing a 60MW wind farm and hopes to earn CDM revenues [17].
Special challenges and opportunities DNA office The Designated National Authority (DNA) office for energy-related projects in Honduras is housed in the Sub-Secretariat of Natural Resources and Energy (la Subsecretaría de Recursos Naturales y Energía) of SERNA (Secretaría de Recursos Naturales y Ambiente) and works separately from the Climate Change Office in the National Directory of Energy. Forestry and transport projects are being proposed to be housed in separate organizations. With the change of presidents, most of the administrative staff of the DNA office and the DNA himself were not rehired in 2005. In the autumn of 2007, the projects being considered by this office were the same as those proposed up until February 2005. While the new members of the office learned about CDM and acquainted themselves with the country’s projects, there was a lack of productivity [5]. Former members of the DNA office partially attribute the success of hosting the world’s first CDM project to the dedicated and energetic staff and the country’s early streamlined procedures for project acceptance. The change of administration stalled the headway made by this first team [5]. The current DNA and/or his assistant visit every proposed project to see if it fulfils the country’s definition of sustainable development. These visits are not always very informative since the project is often in the initial stages of construction when it is applying for its national approval [18].
Other domestic institutional support The government has begun to see the potential revenues associated with CDM for its local industries. The Office of Special Projects within the Office of the President of the Republic was created to explore the potential for biofuels by giving support to palm producers to improve their cogeneration efficiency for CDM credit. A governmental grant of $43 million was dedicated to help project owners finance these projects [19]. Critics of the programme claim that large companies with profitable projects should not need the government’s help to capture CDM benefits; instead, small businesses should receive this attention [5]. Honduras also has the support of international organizations. The UN Environment Programme and Fundación Bariloche completed a diagnostic of the country’s policies for renewable energy and energy efficiency and assessed the potential for renewable energy for the Programa de Desarrollo de Energía Renovable in 2002 [19].
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Carbon brokers There is a local CDM broker headed by Suyapa Zelaya, who has been involved in CDM negotiations for years in the country, called Fundación MDL. Ecoinvest and Ecosecurities are well-known consultancies that handle many projects in this area [10]. Project developers tend to trust them to handle the CDM paperwork. The Asociación Hondureña de Pequeños Productores de Energía Renovable (AHPPER) has helped write several of the PDDs for the small-scale hydro projects in the country [15].
Renewable energy potential Honduras has enormous hydro potential with an estimated 4534MW of developable large and small hydro and only 466MW installed. Cogeneration of crop biomass residue, including one African palm plant, only occurs at two factories, with a total capacity of 59.8MW at the end of 2006 [5]. There is a potential of 120MW of geothermal capacity but utilization of this resource is limited by the high costs of the drilling of holes [13]. There are a few excellent wind sites with wind speeds averaging 7–8m/s in Honduras, but they are limited and the permits for these sites are already spoken for as they are government concessions or owned by private companies. There are even better off-shore wind possibilities. The Solar and Wind Energy Resource Assessment (SWERA) maps of the country highlighted these prime wind development spots. The SWERA maps also show solar resource potential of 5.5kW/m2/day [5].
Unique experiences and situations Until 1994, about 99 per cent of Honduras’ grid was based on centralized hydro. The recent thermal generation brought on quickly in a time of capacity shortage to fulfil demand seemed ideal in the late 1990s when it was contracted. At this time, fossil fuel prices were low and these plants required little construction time. This changing grid composition has had an impact on CDM projects. When the first project was registered in 2005, the grid was 80 per cent hydro and 20 per cent thermal from bunker fuel oil #6, which has a high level of carbon emissions when burnt [5]. Now, the grid is closer to 70 per cent thermal, and recently ENEE signed PPAs for 250MW of additional coal-based generation, which will increase the number of CERs that can be expected from CDM projects [1 and 5]. The way the Honduran grid is set up creates barriers as independent power producers (IPPs) must accept the established node prices for generation [8]. The lack of a wholesale market that fluctuates takes away the potential for generators to earn high payments during times of peak demand. Receiving a stable node price, which was close to 7.2¢/kWh in the autumn of 2007, may be favourable for intermittent generation that is often penalized in the payment structure of other countries, but probably does not appeal to generators with high operating costs, hoping for dispatch on command during the peak
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demand [5]. Renewable generators receive only this node price and no capacity payment. The rules that provide preference for renewable generation dispatch and a 10 per cent price premium are meant to put this type of generation without capacity payments on a level playing field with thermal generation [7]. Even with these advantages, private renewable generators have difficulty competing against ENEE since it benefits from preferential treatment in fuel, municipal and sales taxes. When private generators attempt to sell to large consumers in PPAs, they must pay fuel import taxes from which ENEE is exempt [7]. As the government contracts small increments of thermal generation for high prices way above the node price because of the capacity shortage, IPPs are discouraged from entering the market, where they would have to accept a much lower price than this contracted generation [6]. The PPAs that ENEE offers IPPs tend to contain low prices for energy. This situation occurs because the price ENEE can sell the electricity for is fixed by CNE. So, the only way for ENEE to make money is to purchase or produce electricity more cheaply [5]. Also, thermal generators that are contracted for quick start-up by ENEE receive a capacity payment that renewable generators must forgo [5]. Generators of the Honduran Association for Small Producers of Renewable Energy (Asociación Hondureña de Pequeños Productores de Energía Renovable (AHPPER)) have a lack of faith in ENEE and complain that it could collapse. The transmission grid needs upgrades and has little supervision. After Hurricane Felix in August 2007, a transformer went down. There was no recourse for energy generation while the needed replacement part was ordered from Spain. Generators also complain that ENEE has the permits for good hydro sites and is not selling or developing these sites. Thus, these sites are not available for private generators [15]. If a private developer does procure a permit for a site, Honduran law requires a developer with a permit to show construction progress every three months. This law prevents companies from buying up permits, having no intention of developing a project on the site, and then reselling the permits for higher prices. However, it can also place pressure on developers to move along quickly with construction. Clipper held a permit to develop a wind farm, but was audited under this requirement and shown to not have made sufficient movement on the project. It is possible that the development did not occur in a timely fashion because Clipper, formally Enron, was undergoing an ownership change. As a result, Clipper had the project permit taken away, and it was then sold to Mesoamerica Energy, which is planning a 60MW farm [17]. Historically, getting permits for development has been a slow, arduous task. It can take anywhere from three months to two years, depending on the type of permit – that is, water or generation. The new renewable energy law sets a time limit of a maximum of two months to process a permit. If the process takes longer than that, then a waiver is issued and the project is exempt from the permit process [14]. However, allowing the use of this waiver could negate the project’s ability to receive CDM revenues since, according to the
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CDM methodology, the project must assess the environmental impact of the project and have all national permits. The laws related to energy in Honduras can be confusing for developers since they have changed over the years and had varying impacts on renewable energy development. Up until 1998, renewable generation was obligated to give 5 per cent of the tariffs it earns to reforestation projects [8]. Decreto 89-98 ended this rule. Prior to the renewable energy law of 2007, generators would have to accept the node price or lower in PPAs with large consumers and ENEE. Now, the node price is the lowest price that can be established in PPA contracts [5]. In 2002, ENEE required 35 per cent of the CERs generated from independently owned projects to be transferred to ENEE in its PPAs. In 2003 and 2004, ENEE made the decision to stop this practice and retroactively change the PPAs they had signed to exclude this demand [10 and 5]. Keeping up with these changes in rules is cumbersome and creates an unsure environment for investment. Often, as is the case in other Latin American countries, hydro projects can be troublesome. Getting land permits is complicated since people often live on the land, but do not own it. Then, in order to create a project, developers have to pay the owner for the rights to use the land, or buy it, and also pay for the relocation of the people living on the land [5]. This upheaval is controversial as the aforementioned governmental project of El Cajón, a 300MW ENEE project built in 1985, displaced people, and now those living below the dam are suffering from a lack of water [15]. The legacy of these dams has led to hydro resistance and the practice of local villages extorting developers with financial demands. Greenpeace and the Sierra Club have partnered with communities to prevent large hydro projects. Developers claim that even the environmental department at the US Embassy was against hydro development [16]. Both La Babilonia and El Coronado, two prospective small-scale CDM projects, faced the difficulty of complicated community relations. Babilonia also faced challenges from environmentalists since it was located in the buffer zone of a protected area [20]. Poor community relations prevented Pico Bonito, a forestry project, from earning CERs [18]. The difficulty of implementing hydro projects has led developers to prefer very small-scale hydro projects as they instigate less controversy and resistance [16]. Beyond requiring bribes, the social environment in parts of Honduras can sometimes complicate projects since it is not safe for engineers to travel and work without armed bodyguards [20].
Summary Honduras made an early move to privatize the electrical sector, but the way the rules were set for IPPs was not advantageous. The contracts that ENEE can negotiate with IPPs are controlled and have few advantages for private generators. This situation, combined with ENEE’s poor management of the electrical sector and general country risk for CDM development, has been a barrier to
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private investment. Despite these challenges, small hydro development has enjoyed moderate success because of the country’s plentiful resources, the favourable economics of these projects without CDM revenues, and an energetic original DNA office team. The new renewable energy incentives of 2007 may open up the country to new and more varied CDM development.
References 1
2 3
4
5
6
7
8
9 10 11 12 13
14 15
Synergy de la Comunidad Europea (2005) ‘Metodologías para la implementación de los mecanismos flexibles de Kioto: Mecanismo de Desarrollo Limpio (MDL) – Guía Latinoamericana del MDL’, Guidebook, available at www.cordelim.net/ extra/html/pdf/library/olade.pdf Zacapa (2005) Zacapa Mini Hydro Project Design Document, UNFCCC, 28 November Aceitera General Deheza (2007) Bio energy in General Deheza – Electricity generation based on peanut hull and sunflower husk Project Design Document, UNFCCC, 10 February World Bank (2005) Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/ Salgado, G. (2007) Interview with G. Salgado, CDM Consultant, former Designated National Authority of Honduras, 11 September, Tegucigalpa, Honduras Millán, J. (1999) ‘The power sector in: Honduras’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC Walker, I. and Benavides, J. (2003) ‘Honduras: The road to sustainable reform’, in J. Millán and N.-H. M. von der Fehr (eds) Keeping the Lights on: Power Sector Reform in Latin America, Inter-American Development Bank, Washington, DC Millan, J. (1999) ‘The power sector in: Nicaragua’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC AHPPER (Asociación Hondureña de Pequeños Productores de Electricidad Renovable) (2004) Rio Blanco Project Design Document, UNFCCC , 4 November Castillo, G. (2007) Interview with G. Castillo, Jefa de Desarrollo Sostenible de ENEE, 14 September, Tegucigalpa, Honduras Comision Nacional de Energía (1999) Decreto 85-98, in La Gaceta: Diario Oficial de La Republica de Honduras, 1 February, Tegucigalpa, Honduras Comision Nacional de Energía (1998) Decreto 267-98, in La Gaceta: Diario Oficial de La Republica de Honduras, 5 December, Tegucigalpa, Honduras Altomonte, H., Cuevas, F. and Coviello, M. (2004) ‘Fuentes renovables de energía en America Latina y el Caribe: Situacion y propuestas de politica’, commissioned by CEPAL and GTZ and prepared for the delegates of the Second World Renewable Energy Forum in Bonn, Germany, 29–31 May 2004, 19 May, available at www.funtener.org/pdfs/Lcl2132e.pdf Comision Nacional de Energía (2007) Decreto 70-2007, in La Gaceta: Diario Oficial de La Republica de Honduras, 2 October, Tegucigalpa, Honduras Cardona, E. Z. (2007) Interview with E. Z. Cardona, Gerente General de Colegio de Ingenicios Mecánicos Electricistas y Químicas (former director of AHPPER), 10 September, Tegucigalpa, Honduras
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16 Paz, E. (2007) Interview with E. Paz, AHPPER Coordinator and CEO of INVERSA, 14 September, Tegucigalpa, Honduras 17 Broide, A. (2007) Interview with A. Broide, Development Manager for Mesoamerica Energy, 26 September, San José, Costa Rica 18 Aleman, O. (2007) Interview with O. Aleman, DNA Office, 12 September, Tegucigalpa, Honduras 19 Starkman, M. (2007) Interview with M. Starkman, Asesor de Proyectos Especiales de Presidencia de la Republica, 11 September, Tegucigalpa, Honduras 20 Bueso, C. (2007) Interview with C. Bueso, Coronado Hydro Site Engineer for ENERGIZA, 13 September, San Esteban, Olancho, Honduras
22 Mexico
1
Vital statistics Portfolio mix (by installed capacity): 77 per cent fossil fuels; 14 per cent hydro; 4.5 per cent nuclear; 3 per cent geothermal; 0.01 per cent wind [1] Emission factor: 0.6 tonnes of CO2/MWh [2] Average price of electricity: 8.48¢/kWh residential; 8.8¢/kWh industrial Privatized electricity market: partially Existence of spot market: yes Capacity payment: no, and renewable generators must pay CFE a firming charge for supporting their generation [3] Regulator: Comisión Reguladora de Energía (CRE) Policy maker and future planning: Secretaría de Energía (SENER) Environmental permits: Secretaría del Medio Ambiente y Recursos Naturales (SEMARNAT) Energy efficiency agency: Comisión Nacional para el Ahorro de Energía (CONAE)
Background and privatization In Mexico, the electrical sector is primarily still publicly owned by the two state-run companies, Comisión Federal de Electricidad (CFE) and Luz y Fuerza del Centro. Luz y Fuerza owns just 1.3 per cent of Mexican generation and serves Mexico City and parts of the surrounding provinces with distribution [4]. Therefore, CFE with 80.3 per cent of Mexican generation is the main governmentally owned and operated company that serves the country [5]. Within CFE’s portfolio, large hydro makes up 11 per cent of its total generation because hydro is used only for peak demand load instead of for baseload generation. The other non-carbon-intensive fuels, making up a small portion of the total generation portfolio, are geothermal 3 per cent, nuclear 4.5 per cent and wind 0.01 per cent [6]. Attributing 81 per cent of its generation to fossil fuels, Mexico’s national emission factor is relatively high at an average of 0.6
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tonnes of CO2 emitted for each megawatt-hour of electricity generated [7]. Other countries with more dependence on hydro resources, like Costa Rica, have emission factors closer to 0.15 tonnes of CO2 per MWh [8]. Therefore, substituting renewable energy for conventional energy in Mexico has the ability to earn a significant number of emission reductions. The few independent power producers (IPPs) that exist have fought against permit issues and a culture that supports the state-run monopoly. Transmission tariffs and the self-supplier scheme that IPPs must use have stifled the market. These issues will be described in detail in the section that addresses ‘Unique experiences and situations’ in Mexico.
Renewable energy laws Laws passed since 1992 tried to create a more favourable regulatory framework for renewable energy, but succeeded at enticing relatively few IPPs to enter the market. Five different schemes under the 1992 Electric Energy Public Service Law (Ley de Servicio Público de Energía Eléctrica) allow IPPs to exist [9]. These schemes include the following: 1 2
3
4
On-site generation or cogeneration for use at a factory’s facilities to decrease or eliminate external electricity demand. IPP generation for sale to CFE at 85 per cent of CFE’s avoided cost of generation. (Note: in the case of renewables, the sale is for 85 per cent of avoided costs; in the case of firm power, it is 95 per cent.) Cogeneration or small amounts of energy generation for export. This option, known as the self-supply scheme, allows one to sell this electricity to an off-taker; however, the off-taker must own at least 1 per cent of the company’s operations. Only shareholders in the generator’s company can buy the generated amount. The price of generation is negotiated by the shareholder and the electricity generator. In order to entice shareholders to buy generation, the price generators offer is usually slightly less than CFE’s rates. In addition to these complexities and sale of electricity for less than CFE’s rates, the generator has to pay CFE wheeling (transmitting and distributing) and ancillary services charges for using transmission infrastructure. Imported energy to be used at one specific location. The law allows energy to be generated on site when the public grid is interrupted.
While the 1992 Electric Energy Public Service Law allowed IPPs to enter the electrical sector, it did not provide any specific incentives for renewable generation and therefore stimulated little development in this sector since renewables were comparatively more expensive than conventional sources of energy. The Mexican Energy Regulatory Commission approved several regulations from 2001 to 2006 that included service charges and contract models for renewable energy transmission in order to stimulate growth in this sector. These regulations contain the following rules:
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The self-supply scheme, which has proven to be the most economically viable option for IPPs of conventional and renewable energy under the 1992 legislation, allows for the summing of the total amount of energy (kWh) produced over a month. Then, this amount of energy is compared with the energy demand that the off-taker shareholder recorded over the month. Surplus energy produced by the generator can be banked on a month-to-month basis, allowing this extra energy to be allocated to the offtaker in months where production is lower than consumption. Having this longer window of time to ‘bank’ kWh produced allows renewable generators to more closely match the load of their off-takers. Wind developers usually size their plants to produce a total annual amount of energy equal to their off-taker’s demand and the resource available at the site. Given that some months are windier than others, there will be a given number of months in which energy production will exceed energy consumption of the off-taker and vice versa. This ‘bankability’ option benefits renewable energy, effectively helping to compensate for wind’s variable performance. If there is excess energy over the course of several months, the renewable generator is paid at 85 per cent of CFE’s avoided costs for the extra energy placed on the grid. If there is a dearth of electricity generated over the period, the self-supply company pays CFE a penalty for the number of kWh it is short in supplying its off-takers demand. Energy generated at peak demand is considered three to four times more valuable than energy at other times [3]. Renewable generators may take advantage of accelerated depreciation on profits or other investments they may have [10]. If a generator has no other profits or investments, this advantage does not apply. Capacity charges for transmission are tailored for renewable energy as they are based on the average capacity of the generator at the interconnection point [11]. Since renewable energy like wind and solar can have a capacity factor of about 25 per cent, as compared with the typical capacity factor of a fossil fuel-burning power plant of 85 per cent, this type of advantageous transmission structure is significant.
Some local firms, such as COMEXHIDRO and Fuerza Eólica, entered the Mexican market after these regulations were passed. However, these small and medium-sized companies found that not all of the regulations were very beneficial. Fledgling companies with few other investments and no profits quickly discovered that the accelerated depreciation law only benefits established companies. Until a new generator begins earning profits, which can take up to ten years with a hydro project, accelerated depreciation is meaningless. The failure of the 1992 Electric Energy Public Service Law and subsequent regulations to stimulate much renewable energy development in the private sector led the Chamber of Deputies to approve the Law for Utilization of Renewable Energy (Ley para el Aprovechamiento de las Fuentes Renovables de Energía (LAFRE)) in December 2005 [12]. LAFRE has been debated in
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Congress since its passage as a bill, but as of September 2007 was predicted to be signed as a law soon. The bill would significantly increase the benefits for renewable energy, defined as wind, solar, hydro, tidal, wave, ocean thermal, solar pond, biomass and geothermal generation. The following benefits would apply to these technologies under this proposed law: 1
2
3 4 5
6 7 8
The Mexican government, as well as private companies, would assume responsibility for new renewable energy installations. CFE would be able to incorporate renewable energy into its future generation plans by allowing the long-term benefits of renewable energy like stable fuel costs to be incorporated into the least-cost bidding process for this energy. How much renewable energy should be installed and how to achieve these goals will be described. Small projects, defined as projects under 30MW, and a diversity of technologies, instead of just the least-cost type of renewable generation, are prioritized in these goals. A committee will be established to create incentives for local manufacturing of renewable energy equipment. Land with excellent renewable energy resources for future development will be preserved through the creation of programmes to achieve this goal. A $55 million trust to promote renewable energy will be established by a new financial committee [13]. This trust’s funds will support the following: 55 per cent will cover a ‘green fund’ to allow the cost of generation of renewable energy to be competitive with conventional energy; 6 per cent will be allocated to emerging technologies; 10 per cent for rural electrification; 7 per cent for a general fund for renewable energy; 7 per cent for biofuels; and 15 per cent for research and development of technologies. This financial committee will also negotiate CER sales that result from new renewable energy applications that achieve CDM registration. Renewable energy will benefit from first and immediate dispatch. Expedited permit and generation procedures will apply for projects under 0.5MW. If greater than 2.5MW, projects will have to take into account how they affect nearby communities. Hydro greater than 30MW and wind greater than 60MW will have to take special precautions to ensure that they do not detrimentally impact locals, as a committee will be formed to ensure that these projects are developed in a sustainable way and that developers have all of the requisite permits [12].
While LAFRE seems to put in place key elements for successful renewable energy development, it is uncertain whether it will do enough to stimulate growth in the renewables sector in Mexico. The first goal of LAFRE allows the long-term benefits of renewable energy to be considered for CFE’s least-cost bid process, but it does not specify whether or not potential CDM revenues can be considered in this bid process to make renewable energy more cost-competitive. (This point will be described in more detail in the subsequent section of
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this chapter.) Without incorporation of CDM revenues, the other benefits of renewable energy, such as stable or no fuel costs, will be unlikely on their own to be significant enough to allow renewables to compete with conventional energy. Therefore without incorporation of CDM revenues, renewables may not be able to be shown as the least-cost option and be selected for development by CFE, which is bound by law to develop the least-cost option. Ironically, the second part of this law, which provides the renewable energy goals, may make it difficult for projects to earn CDM revenues. Specifically, one draft of LAFRE proposes requiring 12 per cent of Mexico’s energy capacity to come from renewable resources that do not include hydro over 30MW by 2012 [13]. This goal, and attendant money dedicated to achieving it, could cause renewable energy to be deemed ‘business-as-usual’ by the CDM Registration and Issuance Team and put into question the future financial and regulatory additionality of renewable energy projects. Real world examples of how LAFRE changes the economics of renewable energy projects and the ability of projects to achieve CDM registration will be the only way to evaluate its impact.
CDM portfolio 40
Number of projects
35 30 25 20 15 10 5 0
Hydro
Wind
Geothermal
Landfill methane capture
Non-landfill methane capture
Biomass
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April
Figure 22.1 Projects registered or in validation in Mexico The CDM landscape in Mexico as of April 2008 was dominated by methane capture from hog farms, which, when fully operational, will produce 49 per cent of the emission reductions and constitute 92 per cent of the projects in the country [14]. There is room for more development in other hog farms, slaughterhouses and dairy farms, but recent difficulties with the operations of the existing digesters place the economic viability and carbon consultant interest in developing these projects in the future in question [15]. Installed digesters have produced fewer Certified Emission Reductions (CERs) than expected because
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of problems controlling the temperature, pH and quantity of chemicals and antibiotics in the manure. Also, improperly installed cables to ignite pilot lights have reduced the number of CERs generated as flares do not always stay lit, as is explained in more detail in Chapter 2, ‘Technical Barriers’. A recent change in the CDM methodology used for these projects has reduced the number of CERs that could be created and increased project costs, making them less attractive to developers [16]. This methodology change is explained in more detail in Chapter 7, ‘UNFCCC Procedural and Methodological Barriers’. Some of these projects hope to generate electricity from the methane, but it is unclear how much can be produced because of the unexpectedly low levels of methane currently being harvested [15]. Methane capture and use for electricity from landfills is being actively pursued by several landfills, with the support of the Social Development Secretariat (SEDESOL) as a part of its mission to improve the municipal solid waste management. Its support of a project in Monterrey, which is registered under the CDM, helped create a prototype plant that can be replicated by other municipal governments [17]. The wind sector is well developed in Mexico with a series of projects in Baja California and Oaxaca underway. These projects will be elaborated upon in the following section. Also, several irrigation dams are being retrofitted to generate electricity by COMEXHIDRO [18]. There is interest in registering future geothermal projects like Cerro Pieto, but these projects may have difficulty proving additionality since Mexico, with 3 per cent of the country’s generation sourced from geothermal plants, is already a leader in the region for this type of generation and there would be no first-of-a-kind barriers to break. Also, the project would not be able to show financial additionality since geothermal energy is currently cheaper than the diesel or natural gas alternatives for the country [19]. Other types of CDM projects, such as energy efficiency, forestry and transportation, do exist in isolated cases, but evolving methodologies in the forestry and transportation sectors and the lack of an economically viable model for energy efficiency projects create barriers for the development of these projects [20].
Special challenges and opportunities DNA office The Mexican Designated National Authority (DNA) office is located within SEMARNAT, a huge governmental entity dedicated to the environment and natural resources. Given Mexico’s large regional presence in CDM activity and potential for more, the DNA office is severely understaffed with just two people dedicated to the CDM process in August 2007. This situation leaves the country with few people to field questions and direct promotion activities. Despite this situation, the office does have a fairly well-developed webpage that can serve as a guide for developers [21].
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Other domestic institutional support Since 1990, renewable energy efforts of the government have been promoted mainly through the National Commission on Energy Conservation (CONAE). There is also a nationally sponsored Electrical Research Institute (IIE) that has a renewable energy division. The Social Development Secretariat (SEDESOL) promotes landfill-gas-to-energy technologies in landfill projects throughout the country and used a prototype project in Monterrey to kick-start projects [17]. Recently, during the summer of 2007, a Mexican Carbon Fund (FOMECAR) was created. This fund got its start towards beginning of President Felipe Calderon’s administration in the autumn of 2006 and has taken several months to gain momentum. The fund is located within Banco Nacional del Comercio Exterior (Bancomext) and does not have a staff that is dedicated solely to its functioning. Therefore, it can sometimes take a backseat to other, more pressing business. However, it has a healthy budget of $350 million to start its operations, which consist of helping to develop CDM projects by providing initial support to project developers unfamiliar with the process and hosting seminars on the topic [22]. The portion of FOMECAR that promotes new technologies through seminars and other public outreach will be covered by the grants. Another arm of FOMECAR hopes to sustain itself and perhaps even make a small profit by taking a percentage of the CERs from the Project Design Documents (PDDs) it develops. FOMECAR differs from other carbon consultancies who charge a percentage of CERs for their work in that it strives to set a reasonable price or deduct CERs for services payment [23]. Another type of institutional support in Mexico called CESPEDES (Centro de Estudios del Sector Privado para el Desarrollo Sustentable) tries to encourage private sector participation in projects. However, to this point CESPEDES has focused mainly on energy efficiency and combined heat and power projects [24].
Carbon brokers Ecosecurities and AgCert both have offices in Mexico City and tend to dominate the market for agro-industry and landfill gas capture projects [15]. Econergy International also has an office in Monterrey and has developed a small-scale energy efficiency project [25]. The World Bank helped develop a landfill project in Monterrey. Estudios y Técnicos Especializados en Ingeniera (ETEISA), a local company, has provided consulting services on landfill gas capture and is now beginning to be interested in developing these projects for CERs [20].
Renewable energy potential Mexico is replete with renewable energy resources with ~33,200MW of optimal wind resource in Oaxaca, as well as excellent wind in Baja California and the Yucatan Peninsula, and 3300MW of small hydro throughout the country [10]. Many parts of Mexico have been mapped and studied for wind potential. A detailed wind map of the state of Oaxaca was completed by the
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National Renewable Energy Laboratory (NREL) and shows average wind speeds to be in the excellent category of 7.5 to 8m/s. NREL also has a map for the northwestern border area that shows fair to good resources (6.4 to 7.5m/s) on the eastern coast of Baja California [26]. The average estimated solar radiation in the country is 5kWh/m2 per day. The biomass potential is predicted to be 1000MW from sugarcane residue and 150MW from municipal solid waste [27]. Altogether, the Regulatory Energy Commission in Mexico has given out permits for 1076MW of wind development in Oaxaca and Baja and 40MW of permits for biomass self-supply generation at paper and sugarmills, landfills, and farms that plan to use cow manure [28].
Unique experiences and situations A study that analysed Mexico’s potential to generate CERs based on its GDP shows that it is producing 5 million fewer CERs than expected while Brazil is producing over 6 million more than expected [29]. Mexico’s CDM potential emanates from its densely populated cities, especially the capital with an estimated 23–30 million inhabitants, and relatively advanced economy, which creates many opportunities for emission reductions across all sectors, from industrial gas efficiency to landfill gas capture and energy efficiency improvements [20]. And, as previously mentioned, Mexico’s plentiful natural resources make the country ideal for CDM development for renewable energy in particular. Despite the relatively large number of permits for renewable generation that have been distributed (as mentioned in the previous section), renewable energy developers face substantial hurdles that may prevent the abundant Mexican renewable resources from being harnessed for electrical generation. Renewable energy makes up half of the world’s portfolio of emission reduction projects, but in Mexico it makes up only 4.5 per cent of the registered and pipeline projects [30]. The underperformance of renewable energy in Mexico stems mainly from the CFE’s control of most of the country’s power generation and transmission. CFE not only has a culture that does not embrace new types of generation but also is thwarted by regulatory barriers. CFE cannot build renewable energy projects because the levelized or average cost of the energy over the lifetime of the plant of non-hydro renewable energy in the country is more expensive than conventional energy. CFE is bound by federal law to develop new capacity additions that will provide the cheapest electricity for citizens. Even with the regulations of 2001 to 2006 that provide some benefits to renewable energy, there are currently no regulatory mandates like domestic renewable energy targets or financial incentives like feed-in tariffs or production tax credits to make this type of generation competitive with fossil fuel-based generation. Also, in the planning process for new capacity additions, there is no incorporation of a future carbon tax or CDM revenues, which would make renewables more competitive with conventional energy [3]. Part of the Mexican government’s reasoning for not allowing the CER revenues to be incorporated into the least-cost planning process could be that
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these revenues are not guaranteed; they are susceptible to the risk that the project will not be registered and that there will be no value for CERs post2012. If a project that relies on CERs for economic viability is built, then it could in the future depend upon the Mexican government for this money if the CER revenue is not delivered. Also, the rigid structure of CFE currently has no way to deal with CER revenues. They, most likely, could not be brought into the CFE budget since the company’s profits are regulated and determined by a tariff calculation. Therefore, the money would probably go to the Mexican government. Consequently, CFE has no direct financial incentive to pursue CDM revenues [19]. If a project does not pass the financial analysis and get selected as the leastcost technology, then it is not published in the long-term planning process document called the Prospectiva del Sector Eléctrico that is presented before Congress and passed yearly. Capacity additions that are not in this document will not be considered for CFE development. However, if renewable energy is found to be the least-cost option and published in the long-term planning document, then this renewable energy would most likely not qualify for CDM revenues because it would fail both financial and regulatory additionality tests, which require that the project cause emission reductions beyond what would have occurred in a business-as-usual scenario [3]. Because of the least-cost planning process, there have been only two renewable energy projects owned by CFE that attempted to achieve CDM registration. The first of these projects, known as La Venta II, with a capacity of 83MW and located in the state of Oaxaca, is an anomaly in CFE’s portfolio. It is unclear how CFE was able to pass this project through the least-cost planning process since it was financed as a public works project and only received $3 million of upfront capital from the World Bank for the sale of the CERs that will be generated by the project [31]. Another CFE project that is hoping to earn CERs is a 100MW wind project in Oaxaca, known as La Venta III, which is being supported by the World Bank’s Global Environmental Fund output based grant for $25 million and a project reliability and technology research grant for $45 million. To avoid negating financial additionality for the CDM revenues, the World Bank claims that CERs or money given to the project by a newly established Mexican Green Fund will go back into the Green Fund instead of to the project owners. The large grant that this project is receiving may, however, make it impossible to show financial additionality and earn CERs [10]. CFE plans on developing La Venta IV, V, VI and VII with a total installed capacity of 405MW, but without the upfront capital provided by the World Bank that will later be paid back in part by the CERs generated by the project, these wind farms will not be financially competitive with other generation during the bidding process and will not be chosen for development. CFE is also planning on developing a 280MW thermal plant that will use 30MW of solar energy to supplement the project, with the help of a $50 million grant from the World Bank’s Global Environmental Fund [29].
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The lack of transparency in CFE’s accounting and planning process makes it hard to understand why La Venta II was able to succeed in passing the leastcost financial analysis and proving regulatory additionality by being listed in the planned capacity additions. La Venta III is obviously a special case and will be able to exist because of the World Bank’s production tax credit and research funds. However, the ability of La Venta III to earn CERs is highly doubtful because of this World Bank grant. The continued development of renewable energy through CFE will most likely be a slow process as it relies on grants or low-interest loans to successfully compete in the least-cost bid process and has the additional hurdle of demonstrating regulatory additionality. Because of these barriers for CDM participation from the state-run generation company, privately owned generation comprises the sector with the most potential for utilization of the CDM. The mere fact that private generation makes up only 17.73 per cent of the country’s portfolio limits the number of projects that can be developed [32]. And a multitude of barriers to renewable energy development in Mexico for IPPs have also caused this market to move slowly. For an IPP to begin generating electricity over 0.5MW in Mexico, the company must not only apply for a generation permit, but also obtain the more difficult land and/or water leases for the site of generation. Because there are few land deeds that show legal ownership of property, IPPs sometimes have to go through an arduous process of having the local inhabitants first apply for their land deed before the IPP can legally lease it. Some companies have had the experience of purchasing land from the legal owner and later finding that people are living illegally on the land but claim it as their own. Relocating these people has been problematic and time-consuming [18]. Siting a project that is near a surrounding community can also be a difficult process. COMEXHIDRO had to convince locals that the power plant they planned on building near farmers’ fields would not ‘electrify crops’ with its electricity and that the dam would not take any water away from the irrigation efforts. At the proposed Benito Juarez COMEXHIDRO site in Oaxaca, locals are barring the construction of the dam because they think preventing the project will provide them with the leveraging power to oust the current governor of Oaxaca [18]. Fuerza Eólica contracted a person to act as a community liaison in Baja California to handle the land leasing and community relations only to find that he was working for another company and started a land bidding war that raised the price of the land for wind project development. In general, project developers have found that locals, officials and even ornithologists, who study the impact wind turbines could have on birds and bats, often demand illegal payouts in order to allow the project to be completed [33]. The following stage in the process for the IPP to begin operations is for it to negotiate a price for transmission and firming capacity with CFE. The transmission charge is what CFE charges the IPP to use the excess capacity on the lines and the firming charge is the amount billed to provide backup energy for the investors in case what they use is more than the renewable generator
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produces over a monthly period. The tariffs charged by CFE constitute 15–30 per cent of the price per kWh that the customer eventually pays to the IPP [33 and 18]. For the area of Oaxaca where the current grid cannot support the large wind applications in the area, IPPs must pay a portion of the cost for CFE to create a new 230kV transmission line from Oaxaca to an area of interconnection [34]. The next stage of the process requires the IPP to complete a Power Purchase Agreement (PPA) under one of the five schemes provided by the 1992 Electric Energy Public Service Law (Ley de Servicio Público de Energía Eléctrica). Most renewable generators opt for the self-supply scheme, which entails an agreement between project investors and the IPP. Investors must purchase at least one share of the generating company and then sign a longterm PPA [34]. In most cases, the price offered by the IPP must be less than that which investors currently pay CFE to be competitive. However, to some project owners in energy-intensive sectors, a long-term, fixed electricity price is attractive as it acts as a hedge against upward fluctuations in hydrocarbon markets. Then the IPP is allowed to feed the amount of electricity into the grid that their customers use. If more energy is produced than the investors can use, then CFE buys the electricity from the IPP at 85 per cent of CFE’s avoided costs. If less electricity is produced than determined by the initial capacity calculation, then higher capacity charges can apply in the next contract between CFE and the IPP. An Environmental Impact Statement assessing the potential environmental ramifications of the project must be prepared, and usually costs several thousand dollars. Only after all of these hurdles have been overcome can the project begin to consider applying for CDM revenues and undergo the lengthy CDM process. Of the five available options given in the 1992 Electric Energy Public Service Law, IPPs are most interested in the self-supply scheme. This scheme can be the most lucrative since the average price of electricity in Mexico, for the industrial and commercial sectors that independent producers sell to is high at 13.04¢/kWh [35], and wind energy in a place like Oaxaca with a 50 per cent capacity factor [3] can be generated for 4–6¢/kWh [36]. However, all of these steps involved in the process cause delays that are too lengthy for most small, fledgling generation companies to endure. Therefore, in the state of Oaxaca, large companies dominate the landscape for project development and there are few small companies that have made movements to develop resources. Iberdrola was involved in the bidding process for constructing La Venta III for CFE’s operations, but their bid for generation at 4.6¢/kWh was rejected by CFE as being too high [37]. Deproe, partnered with Electricité de France, is pursuing a 67.5MW site. And Gamesa has a bid for a 200MW wind farm called Bii Nee Stipa that it will develop jointly with local Cableados Industriales [38]. Also, Eurus, a wind division of CEMEX Mexico, has a bid for a 250MW farm [39]. Econergy International is interested in developing a 20MW wind farm at a sustainable resort community in Baja [40]. A local firm called Guascor has shown interest in developing projects in Oaxaca, but the
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only small-sized company with a serious bid is Fuerza Eólica [41]. This Mexican company hopes to develop a 100MW self-supply wind project in Oaxaca, a 10MW self-supply wind project in Baja California for the state government and a 300MW export wind project in Baja California to serve California’s renewable energy demand. The company has invested 15 years in their development. If Fuerza Eólica did not have a manufacturing arm that makes Clipper turbines, it would not be able to finance its operations solely via its development arm because of the long, arduous process it has undergone to get projects initiated [33]. One other small Mexican IPP, COMEXHIDRO, has pioneered the way for small hydro development in the country. COMEXHIDRO has existed since 2003 and also encountered problems advancing projects. Their business model of retrofitting already existing irrigation dams for electrical production has cut project costs and some permit headaches [18]. Other than these two domestic firms, there is little activity in the field to develop new projects. The $7 billion of governmental subsidies that the state-run CFE and Companía Nacional de Fuerza y Luz receive every year also makes it hard for private companies to compete with electrical generation [34].
Summary Given Mexico’s GDP and potential for emission reduction projects, there is the possibility for substantial growth in the field of CDM projects. However, recent difficulties with Mexico’s methane capture projects and a lack of investment in transport and industrial efficiency projects do not portend a robust future in these sectors. Therefore, renewable energy is the most likely sector to take advantage of CDM revenues given demand growth in electricity and the significant obstacles to project development in other sectors. However, the state-run company that controls the bulk of the generation market, CFE, cannot invest in CDM renewable energy projects because of limitations on investment. Private companies face significant barriers because the Mexican market is still not completely privatized. The 1992 Electric Energy Public Service Power Law, promoting an open energy market, and the 2001 and 2006 regulation changes did not do enough to support the industry. Although the market was open, numerous barriers such as expensive transmission tariffs and size restraints prevented the private sector from competing with the CFE. Companies such as Fuerza Eólica and COMEXHIDRO struggled to obtain all of the necessary permits and concessions to begin operations since they were first-of-a-kind operations. However, their persistence has helped pave the way for development in the country. Also, the market could improve as significant 2007 laws favouring renewable energy become implemented. Time and market interest will show whether or not the renewable energy legislation is adequate to prompt development.
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Note 1 Much of the content in this chapter is revised from an article by the author entitled ‘Barriers to clean development mechanism renewable energy projects in Mexico’, published by the author in Elsevier’s Renewable Energy in July of 2008.
References 1 2 3 4 5 6 7 8 9 10 11 12 13
14 15 16
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18 19 20 21
Secretaría de Energía (SENER) ‘Generación bruta’, www.energia.gob.mx/webSener/portal/index.jsp?id=71, accessed 12 October 2007 Iberdrola (2007) La Ventosa Project Design Document, UNFCCC, 14 June Barnes de Castro, F. (2007) Interview with F. Barnes de Castro, Commissioner of Comision Regulatoria de Energía, 30 August Luz y Fuerza del Centro, ‘Capacidad’, www.lfc.gob.mx/capacidad.htm, accessed 20 October 2007 COMEXHIDRO (2007) Chilatán Project Design Document, UNFCCC, 29 May Secretario de Energía de México, ‘Sector nacional de energía: Generación bruta’, www.sener.gob.mx, accessed 3 October 2007 CO2 Global Solution (2006) Eurus Project Design Document, UNFCCC, 10 July Union Fenosa (2007) La Joya Hydro Project (Costa Rica) Project Design Document, UNFCCC, 9 March Secretaria de Energía de Mexico (1992) Ley del Servicio Público de Energía Eléctrica, in Articulo 3º, 23 December World Bank (2006) Project Information Document: Appraisal Stage for La Venta III, 26 April Comisión Regulatoria de Energía (2001) Resolución Num. RES/140/2001 Mexican Parliament (2006) Ley para el Aprovechamiento de las Fuentes Renovables de Energía, February Coviello, M. F. (2007) ‘Renewable energy sources in Latin America and the Caribbean: Two years after the Bonn Conference’, report for United Nations Economic Commission for Latin America and the Caribbean, April Point Carbon (2008) ‘World Bank loan to support Mexico’s domestic climate strategy’, Carbon Market News, 10 April Galvadón, H. (2007) Interview with H. Galvadón, Supervisor de Construcción for AgCert, 21 August, Veracruz, Mexico Landa Herrera, J. L. (2007) Interview with J. L. Lande Herrera, Director de Construcción, Medio Ambiente, y Mantenimiento of Granjas Carroll Mexico, 24 August, Perote, Mexico Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An assessment of DNAs in Latin America and the Caribbean’, report, 2 June, for Inter-American Development Bank, Washington, DC Mekler, J. (2007) Interview with J. Mekler, Project Developer for COMEXHIDRO, 15 August, Mexico City, Mexico Estrada, M. (2008) Interview with M. Estrada, CDM Consultant, 24 April Márquez, F. (2007) Interview with F. Márquez, Estudios y Técnicas Especializadas en Ingeniera, 29 August, Mexico City, Mexico SEMARNAT (n.d.) ‘Mecanismo para un Desarrollo Limpio’, www.semarnat.gob.mx/queessemarnat/politica_ambiental/cambioclimatico/Pages/ mdl.aspx, accessed 5 February 2008 and Cervantes, H. (2007) Interview with H. Cervantes, Designated National Authority of Mexico, 29 August, Mexico City, Mexico
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22 Comisión de Estudios del Sector Privado para el Desarrollo Sustentable (CESPEDES) (2006) ‘Se crea el fondo Mexicano de carbono’, Boletin CESPEDES, no 29, November 23 MacGregor, E. and Nienau, M. A. (2007) Interviews with E. MacGregor and M. A. Nienau, Administrators of Fondo Mexicano de Carbono for BANCOMEXT, 29 August, Mexico City, Mexico 24 Jiménez Ambriz, R. M. (2007) Interview with R. M. Jiménez Ambriz, Comisión de Estudios del Sector Privado para el Desarrollo Sustentable, 31 August, Mexico City, Mexico 25 UNFCCC (2005) Econergy Brazil, Monte Rosa Project Design Document 26 Flowers, L. et al (2000) ‘Renewables for sustainable village power’, paper presented at the American Wind Energy Association’s Windpower 2000 Conference, Palm Springs, California, 30 April–4 May 27 Quesada, J. R. E. (2004) ‘Perspectiva del mercado de la energía renovable en Mexico’, presented at Comisión para la Cooperacion Ambiental de America del Norte Reunion Trinacional hacia un Mercado de Energía Renovable en America del Norte, 27–28 October, Montreal, Canada, available at www.cec.org/files/ pdf/ECONOMY/Pres-Elvira-RenEnergyMeeting_es.pdf 28 World Bank Mexico (2006) Mexico: Hybrid Solar/Thermal Power Plant, Project Appraisal Document, 1 September 29 FEALAC (2006) ‘Analysis of the present situation and future prospects of the Clean Development Mechanism (CDM) in the FEALAC member countries’, Study for the Fourth Meeting of the Economic and Society Working Group of Forum for East Asia–Latin America Cooperation (FEALAC), Tokyo, 8 June 30 CDM Pipeline (2007) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 4 January 31 Cubillos, F. (2007) Correspondence with F. Cubillos, Senior Technical Specialist of the Carbon Finance Group, The World Bank, 21 November 32 Aracely Acosta, R. and Buendía, E. (2006) ‘Bidding on the largest wind project in Mexico’, Comisión Federal de Electricidad, 6 August, available at www.rrc.state.tx.us/commissioners/carrillo/mexico/2006/ FEDERAL_ELECTRICITY_COMMISS.pdf 33 Gottfried, P. (2007) Interview with P. Gottfried, Project Developer for Fuerza Eólica, 27 August, Mexico City, Mexico 34 UNFCCC (2007) COMEXHIDRO, Chilatán Project Design Document, 29 May 35 Secretaría de Energía (SENER) Mexico (2006) ‘Estadísticas de energía: Precios medios de energía eléctrica’, www.sener.gob.mx/web, accessed 3 October 2008 36 Komor, P. (2004) Renewable Energy Policy, iUniverse, Lincoln, NE. 37 Emerging Energy Research (2007) ‘CFE tender underlines Mexican wind hurdles’, Global Wind Energy Advisory: On Point Analysis, 28 November 38 UNFCCC (2005) Gamesa Energía, Bii Nee Stipa Project Design Document, 25 December 39 Dessommes, A. (2007) ‘Mexico: Cemex to build a 250MW generating plant’, newsbrief, US Commercial Service, April, available at www.buyusa.gov/mexico/en/oil_gas_electricity.html#_section24 40 Econergy (n.d.) ‘Projects in Development’, www.econergy.com/projects.php, accessed 5 January 2008 41 Gottfried, P. (2007) Interview with P. Gottfried, Project Developer for Fuerza Eólica, 27 August, Mexico City, Mexico
23 Nicaragua
Vital statistics Portfolio mix (by installed capacity): 64 per cent bunker oil; 14 per cent hydro; 12 per cent biomass from sugarcane; 9 per cent geothermal; 1 per cent diesel [1] Emission factor: 0.754 tonnes of CO2/MWh [2] Average price of electricity: residential 12.06¢/kWh; industrial 11.52¢/kWh [3] Privatized electricity market: partial Existence of spot market: yes Capacity payment: n/a Regulator: Instituto Nicaragüense de Energía (INE) Policy maker: Ministerio de Energía y Minas (MEM) Environmental permits: Ministerio del Ambiente y Recursos Naturales (MARENA) Rural electrification: MEM
Background and privatization The Nicaraguan Constitution establishes that the government must provide basic resources such as water and electricity to the people. In 1957, the Electric Industry Law established that the Instituto Nicaragüense de Energía (INE) would handle all electrical supply and policy related to the sector. In 1994, Executive Decree 46-94 separated INE’s generation from the country’s electrical sector policy making. Empresa Nicaragüense de Electricidad (ENEL) was created to handle generation. In 1998, Comisión Nacional de Energía (CNE) was established by Law 272 and charged with the task of creating energy policy while INE was transformed into the regulation body [4]. The stateowned Empresa Nicaragüense de Electricidad (ENEL) was also vertically and horizontally disintegrated by Law 272. In 2007, CNE’s responsibilities were taken over by the Ministry of Energy and Mines (MEM) and a strategy to reduce fraud and stolen electricity was developed [5].
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Privatization was an attempt to decrease the outages that had become frequent due to natural disaster and political instability in the 1980s and 1990s. ENEL’s contribution to supply dropped from 50 per cent in 2002 to 24 per cent in 2003. Law 272 is advantageous for generators in that it allows them to sell their electricity to distributors or large consumers, or directly into the national grid. While privatization has begun and private investment is entering the country, the restructuring of the sector and other difficulties have prevented the sector from achieving substantial increases in efficiency. ENEL is overstaffed by 40 per cent, and 50 per cent of the country is still without electricity [4]. The distribution losses were estimated in 2005 to be 28.8 per cent [3]. Outages were commonplace in the country every afternoon during peak demand because of capacity shortage, before 2006 when President Daniel Ortega took office and began to reform the sector [6 and 7].
Renewable energy laws Presidential Accord 279 of 2002 provided the policy that first established clear guidelines for run-of-river and wind projects and supported them with incentives. Law 467 supported hydro resources with income, construction and import tax exemptions for 15 years [5]. These laws helped build momentum for a comprehensive law that promoted renewable energy [8]. In April 2005, Nicaragua passed Law 532 as a reform to the 1998 Law 272 (Ley de la Reforma de la Ley de Industria Eléctrica). This law provided renewable generators with full exemption from income taxes for seven years. There was also a partial exemption from taxes on equipment and other project costs for seven years and exemption from import taxes for renewable generators. The tax exemptions will cut the first costs of renewable project implementation by an estimated 15–20 per cent [9]. Also, Law 272 established a maximum of 5.5–6.5¢/kWh for electricity from hydro installations and prevented Power Purchase Agreements (PPAs) from being signed for projects [10]. The limit on how much money generators can get for energy and their lack of ability to sign PPAs restrict opportunities for investment. In June 2008, Nicaragua passed a law that provides a stable 8.5¢/kWh payment for geothermal energy. Geothermal developers with projects under construction when this law was passed were pleased with the premium they will receive over hydro generators [11].
CDM portfolio Nicaragua hosts a few unusual projects that include one biomass project of sugarcane bagasse mixed with eucalyptus to generate electricity all year. The country hosts a geothermal project that includes the San Jacinto plant with 66MW. There is a beer maker that will generate electricity from the methane of
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Number of projects
2
1
0
Hydro
Wind
Geothermal
Landfill methane capture
Non-landfill methane capture
Biomass
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April
Figure 23.1 Projects registered or in validation in Nicaragua its wastewater and feed it into the grid. The large liquor company, Caña de Flor, is also looking to use CDM in a similar way. Mesoamerica Energy has identified additional sites in Nicaragua that are considered strong candidates for growing the park to over 60MW. Mesoamerica Energy has begun securing the relevant land for the new sites and has been measuring at the new site since mid-2006 [12]. There is also a planned 1MW wind application on an island called Ometepe in Lake Nicaragua that would serve a hotel and facility for tourists [13].
Special challenges and opportunities DNA office The country’s Designated National Authority (DNA) office is housed in the Office of Climate Change and Clean Development (Oficina de Cambio Climático y Desarrollo Limpio) within MARENA. It, like Honduras’ office, has experienced turnover that has prevented it from being as efficient as possible [14].
Other domestic institutional support Nicaragua has a few dispersed entities that could help promote CDM development. The Netherlands helped create a baseline study that calculated an average emission factor that small-scale project owners can use. An Accord of Energy Cooperation between Venezuela and Nicaragua exists and occasionally provides financial backing for energy projects. Also, the United Nations Development Programme (UNDP) and the Global Environment Facility completed a study to assess potential sources for carbon reductions and found that the forestry sector has the most potential [9].
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Carbon brokers No one carbon broker stands out as a frequently used entity in Nicaragua, but Ecosecurities was used as a carbon consultant for the San Jacinto geothermal project and could gain traction in the country as more projects are contemplated.
Renewable energy potential There are 30MW of installed biomass, including one unique eucalyptus cogeneration facility. Seventy megawatts more of biomass potential remain. Only 104MW of hydro energy are installed, but there are 1760MW of developable potential [15 and 16]. Approximately 18,000 solar home systems exist as a result of a World Bank rural electrification programme called PERZA (Programa de Electrificación Rural en Zonas Aisladas). The Inter-American Development Bank also sponsored a $700,000 programme of a partial grant and partial loan for solar homes in rural areas. Also, a few experimental hotel and hospital solar rooftop systems are in place. There are 923MW of geothermal potential and 77MW of geothermal installed. The country has no wind installations, but a few developers are interested in the Istmo de Rivas y Zona de Hato Grande where there are approximately 200MW of potential [5].
Unique experiences and situations Nicaragua hydro developers suffer from a price cap of 5.5–6.5¢/kWh for hydro energy payments. Also, the Ley de Industria Eléctrica of 2005 established that there can be no PPAs, which is a major barrier for renewable energy projects since they rely on these contracts for securing loans to cover the large initial project investment costs [17]. Another financial constraint in the country is the fact that it has reached its limit for debt from development banks. This situation occurs when development banks deem the country unfit to repay the loan in a reasonable amount of time due to existing debt and political and economic conditions. The inability of development banks to participate in loans then limits the type of financing that state entities in the country can access. While these state-run generators are usually not interested in CDM revenues, Nicaragua is a unique situation that breaks the mould. Mario Torres of state-run ENEL would utilize these funds from development banks if they were available. Even without this financing, he is spearheading a directive to earn Certified Emission Reductions (CERs) for four hydro projects. Torres is using his experience with CDM within the MARENA to run this effort [17]. Within the private sector, there is less interest in CDM. Of about 100 large companies in country, 20 per cent have the possibility of utilizing the CDM. Of those 20 per cent, only 10 per cent are interested in the CDM and 5 per cent are researching it. There has not been a critical mass of interested parties to make the Mechanism well known [13]. Getting financing in Nicaragua for feasibility studies is particularly difficult since the country has such a violent and politically unstable history [17].
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Nicaragua does not have the same social resistance to new hydro projects as is found elsewhere in the region, such as in Guatemala and Costa Rica. There have been no large dams that mar the industry’s reputation. This lack of large dam development results because a 650MW project called Hydro Copalar was considered but then dismissed when a study showed that it would displace too many people [18]. New CDM hydro projects would probably face more financial hurdles in securing a loan for the high capital costs of the project than from social resistance. Much of Nicaragua’s interest in CDM activities tends to be immature and behind that of other countries. The National Engineering University contains Grupo Fenix, which is dedicated to photovoltaics and solar cookers. However, the group works mainly on rural applications and has little information about the CDM. Without using the Programme of Activities methodology, the size of the group’s projects is too small to consider CDM. The National Engineering University also has a group (RUPAB) that is investigating biodiesel and methane digesters and has test facilities, but no projects are close to the industrial-scale size necessary for the CDM. The Union of Agricultural Producers of Nicaragua (UPANIC) is interested in methane capture, but has little information about it to provide to its members. The coffee giant Ramacafé is interested in capturing methane through the industrial processes, but the Alianza Energía y Ambiente and the Comisión Centroamericana de Ambiente y Desarrollo created a feasibility study that showed that the technology was expensive and not profitable [18].
Summary The Nicaraguan CDM market is relatively immature and lacks the requisite drivers such as strong legislation and a stable investment climate to make renewable energy an important part of country’s future. The notable exception to this situation is the well-developed and growing geothermal industry in the country. With regard to this technology, the country could become a leader in the region for others to follow. The country has tremendous wind potential compared to its neighbours in the region, but has not benefited from any development in this sector.
References 1 2 3
4
Dirección General de Electricidad (2005) ‘Generacion bruta por tipo de combustible (GWh)’, www.ine.gob.ni/PagElctric.html, accessed 10 March 2008 Ecosecurities (2005) San Jacinto Tizate Geothermal Project Design Document, UNFCCC, October World Bank (2005) Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/ Millán, J. (1999) ‘The power sector in: Nicaragua’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC
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Altomonte, H., Cuevas, F. and Coviello, M. (2004) ‘Fuentes renovables de energía en America Latina y el Caribe: Situacion y propuestas de politica’, commissioned by CEPAL and GTZ and prepared for the delegates of the Second World Renewable Energy Forum in Bonn, Germany, 29–31May 2004, 19 May, available at www.funtener.org/pdfs/Lcl2132e.pdf Renewable Energy and Energy Efficiency Partnership (n.d.) ‘LAC policy descriptions: Nicaragua’, Sustainable Energy Policy Initiative, available at www.oas.org/dsd/reeep/formularios/nicaragua_pb_reeep.doc Ley, D. (2007) Interview with D. Ley, United Nations Consultant for Economic Commission for Latin America and the Caribbean, 16 August, Mexico City, Mexico Comisión Nacional de Energía de Nicaragua (n.d.) ‘Energías renovables’, http://ine.gob.ni/DGE/mercado/CNE%20energias%20renovables.pdf, accessed 21 February 2008 Synergy de la Comunidad Europea (2005) ‘Metodologías para la implementación de los mecanismos flexibles de Kioto: Mecanismo de Desarrollo Limpio (MDL) – Guía Latinoamericana del MDL’, Guidebook, available at www.cordelim.net/extra/html/pdf/library/olade.pdf Asemblea Nacional de Nicaragua (2005) Ley Para la Promocion de Energía Eléctrica de Fuentes Renovables, Normas Jurídicas de Nicaragua, April 14 Marketwire (2008) ‘Polaris Geothermal Inc.: Nicaraguan Congress Approves Law’, newsbrief, 11 June Broide, A. (2007) Interview with A. Broide, Development Manager for Mesoamerica Energy, 26 September, San José, Costa Rica Barahona, C. (2007) Interview with C. Barahona, Representative of Centro de Producción Más Limpia de Nicaragua, 17 September, Managua, Nicaragua Madriz, M. (2007) Interview with M. Madriz, Designated National Authority Assistant in MARENA 19 September, Managua, Nicaragua Altomonte, H., Cuevas, F. and Coviello, M. (2004) ‘Fuentes renovables de energía en America Latina y el Caribe: Situacion y propuestas de politica’, report for CEPAL and GTZ, 19 May, available at www.cepal.org/publicaciones/ xml/9/14839/Lcl2132e.pdf Comision Nacional de Energia (2006) ‘Potencia de Energía Renovable en Nicaragua’, 7 September Torres, M. (2007) Interview with M. Torres, Project Planner for Empresa Nacional de Electricidad of Nicaragua, 19 September, Managua, Nicaragua Sthagtagen, M. (2007) Interview with M. Sthagtagen, Former DNA of Nicaragua, September 19, Managua, Nicaragua
24 Panama
Vital statistics Portfolio mix (by installed capacity): 50 per cent hydro; 49.5 per cent thermal; 0.4 per cent other renewables [1] Emission factor: 0.624 tonnes of CO2/MWh [2] Average price of electricity: residential 14.95¢/kWh; industrial 10.15¢/kWh [3] Privatized electricity market: yes Existence of spot market: yes Capacity payment: n/a Market manager: Centro Nacional de Despacho (CND) Regulator: Oficina de la Dirección de Electricidad de Autoridad Nacional de los Servicios Públicos (ASEP) Policy maker: Comisión de Política Energética (COPE) en Ministerio de Economía y Finanzas Environmental permits: Autoridad Nacional del Ambiente (ANAM) Rural electrification: Oficina de Electrificación Rural (OER) de COPE
Background and privatization Panama had a vertically integrated governmental monopoly on electricity until 1997 when Law 6 (Marco Regulatorio e Institucional del Servicio Público de Electricidad) privatized the sector. Prior to this law the Instituto de Recursos Hidraulicos y Electrificacion (IRHE) monopolized both generation and distribution. In 1998 IRHE sold over 50 per cent of its distribution and generation network to Spanish, US and Canadian investors such as Constellation, AES, Enron, HydroQuebec and Union Fenosa. The Panamanian government was then relieved of having to make expensive capacity additions [4]. Law 6 also established the COPE (Comisión de Política Enérgetica) to make laws related to energy and analyse them [5].
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The Panamanian Constitution establishes that public resources are the property of public domain and should be used for the well-being of citizens. To that end, the Autoridad Nacional del Ambiente (ANAM) sets tariffs for the use of natural resources. Law 44 (Ley del Ambiente) sets the rules for the utilization of hydro resources. Privatization occurred in two stages as the government tried to ease the country into this new regime. The first stage lasted from February 1997 to February 2002 and consisted of a Single Power Purchaser model whereby generators had to sell 100 per cent of their capacity to the Transmission Enterprise, a state-owned division of IRHE. This transmission company then resold the power to distribution companies without making a profit. A minimum of 85 per cent of electricity transactions had to flow through this process while the remaining 15 per cent consisted of large power purchases from end-users and distribution companies. Then after February 2002, the power sector began operating with a wholesale market. Now generators offer prices that are based on the market price instead of based on their cost of generation. In contracts between large consumers and generators, the Centro Nacional de Despacho tallies the accounts and has participants, who require more electricity than was provided by their Power Purchase Agreement (PPA), buy the needed generation based on wholesale prices [6]. Privatization has been a success story in Panama with distribution losses falling from close to 20 per cent during the state-run years to 10 per cent in 2005 [6 and 3]. However, foreign investment alone has not filled the gap of required capacity additions, and the government had to form a new state-run company called EGESA to provide some new generation. The lack of new capacity additions led to Law 45 of 2004 that provided additional incentives for small renewable energy projects. A study contracted by the World Bank and Inter-American Development Bank showed that it is cheaper to provide incentives for private sector involvement in new generation rather than to have the government provide these new additions [7]. Thermal generation, rather than renewable energy, has filled the bulk of new demand since the market was privatized. This generation was chosen because it is easier to get the required permits and stimulates less controversy over siting [8]. There is currently pressure to reduce tariffs, but subsidizing the industry would again lead to more losses in efficiency. Despite complaints about the high tariff prices at approximately 15¢/kWh, customers are sheltered from rate fluctuations, which are common in other Latin American countries, because of the country’s use of the US dollar.
Renewable energy laws Law 44 states that the government will prioritize clean electricity sources and that COPE and ANAM will assess the environmental damage of conventional sources. Also, Article 55 of Law 6 establishes that it is the obligation of the state to promote sources of energy that cause the least pollution by offering 5
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per cent more to renewable energy. This price preference can be established in the national wholesale market that Law 6 mandates. Other renewable energy incentives include the ability of renewable generators to create long-term PPAs of up to ten years and the allowance of a four-year grace period in these contracts [9]. A lack of sufficient renewable energy development under Law 6 led to Law 45 in 2004 which provided incentives that are specific to renewable energy [10]: 1 2 3
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5
For projects under 500kW that are not connected to grid, developers do not have to pay import taxes on equipment. For projects under 10MW, there are no transmission and distribution charges for projects. There is a 5 per cent reimbursement for projects that provide infrastructure that develops the country and a 25 per cent reimbursement of project costs based on the amount of CO2 emissions reduced because of the plant. This reimbursement is applicable to 100 per cent of the generator’s taxes on the project during the first ten years of operation. Renewable generators cannot receive both the 25 per cent reimbursement and CDM revenues [8]. Renewable energy generators can contract with any distributor regardless of where they are located, and sell to the spot market and the Central American market. For projects that are 10–20MW, the same benefits as above exist, except the producer does have to pay transmission and distribution charges for the MW above ten that they produce. The generator cannot directly contract with a distributor. The 25 per cent reimbursement for CO2 reductions is applied to 50 per cent of their annual tax, not 100 per cent. (This clause does not apply to wind development above 10MW, which gets transmission and distribution exempted for all sizes because of its low capacity factor.)
While Law 45 of 2005 has provided strong incentives for small renewable energy applications, access to transmission in remote areas that support this development can be problematic. As of October 2007, companies cannot earn both the local carbon credit and Clean Development Mechanism (CDM) revenues by law. Law 45 is in the process of being revised to possibly include the following provisions: 1 2 3
Companies would be able to receive both local and international carbon credit [8]. Renewable energy projects of all sizes would receive exemption from transmission and distribution charges [11]. Twenty to thirty per cent of CERs from projects would have to go towards sustainable development of the community [11 and 7].
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CDM portfolio 8
Number of projects
7 6 5 4 3 2 1 0
Hydro
Wind
Geothermal
Landfill methane capture
Non-landfill methane capture
Biomass
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April
Figure 24.1 Projects registered or in validation in Panama Hydro projects have dominated the Panamanian portfolio as they have for other Central American countries. Prospects for other development are discussed in the ‘Unique experiences and situations’ section.
Special challenges and opportunities DNA office The Designated National Authority (DNA) office is located within the Climate Change Group of the Autoridad Nacional del Ambiente (ANAM). This group is dedicated not only to CDM projects, but also to greenhouse gas inventory and mitigation. The office grew from two people to five in 2005 when the CDM became active. Its staff travel to international conferences and decide on the national approval of projects collectively [8]. The office’s website has an extensive list of interested project developers and map of project sites, but has little information on navigating the CDM project cycle.
Other domestic institutional support or barriers Other than the typical institutional support systems for Central America, the author found no additional support programmes.
Carbon brokers There is no one carbon broker that has dominated the country, and none has offices there. Econergy International was involved in writing a Project Design Document (PDD) for a hydro expansion project that was never registered. Most projects are undertaken by the project developer, which is Union Fenosa with the Spanish Climate Change Office for three of the five hydro projects in the country.
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Renewable energy potential In Panama, there are an estimated 2341MW of developable hydro and 702MW installed. The country has 400MW of wind potential and has several medium-sized sites of about 50MW in the process of being developed. There is one cogeneration unit with 10MW. Geothermal potential totals only 40MW, and none of it has been developed [9].
Unique experiences and situations There is some warranted concern on the part of project owners that hydro projects will no longer be able to prove their additionality. As of March 2008, there were 91 interested hydro developers listed on the Panamanian DNA webpage while wind attracted only 16, methane capture seven, energy efficiency four, forestry six and transport one. Of the five projects already registered, all are hydro-related. Panama’s grid, which is nearly 50 per cent hydro, shows that this technology is neither novel nor new in the country. However, hydro developers can prove additionality because there has been no new development in this sector since 1984 [12]. Other concerns of additionality arise due to the new proposed legislation supporting renewable energy. The current proposed changes to Law 45, which would allow carbon-free generation to qualify for both local and international carbon credits, may allow for such strong financial incentives that projects can no longer prove financial additionality. If changes to Law 45 are passed, questions of financial and regulatory additionality may be raised in earning double carbon credit for technologies. Panama has a variety of interesting proposals that would have little problem proving additionality due to a barriers analysis because of the novelty of the ideas. The Avian Producers Association is interested in using chicken excrement for electrical generation [8]. Within the movement to create energy or harvest methane from landfills, the most advanced proposal is by a company called Sicmar International, which hopes to use Startek Technologies plasma trash converter to create energy and obsidian that would be sold. This application would be the first commercial plant in the world. They have 20year contracts with three municipalities to receive their trash, have all of the requisite permits and the environmental impact statement completed, and hope to have three to four sites running in two years [13]. There is interest in creating biodiesel and bioethanol and harvesting methane from bananas. There is also a proposal to treat wastewater from boats that pass through the Panama Canal [14]. Other than hydro development and these unusual project proposals, there is movement in the wind sector. However, most of the best sites for development are on the tops of mountains that are isolated from transmission grids and on land owned by indigenous groups. Spanish Union Fenosa has a welldeveloped 40MW site called Hornitos, and locally owned Santa Fe Energy has a permit to develop an 81MW farm with another 81MW expansion [11]. To avoid any potential difficulty integrating this large wind project in with the
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surrounding community, Santa Fe plans on giving 30 per cent of CERs from this project to the community. Social resistance to hydro project development stems from the implementation of Rio Bayano, a 150MW project that was commissioned in 1976 and developed with the help of the World Bank. This project did not give much thought or extensive studies to how to relocate the people living in the flooded area and provide them with fair payment for land. This application and the other large dams in Central America that were developed in the 1970s and 1980s not only angered local communities, but also drew the attention of environmental groups around the world. It is because of these problems that a 20–30 per cent CER contribution to community development is being proposed [15]. Despite the initial problems with this project, a 50MW firm capacity addition to the project is being proposed by AES and carbon credits are being sought by Econergy International Corporation [12]. A limit on PPAs was set in 1997 at four years to provide a fluid marketplace that would provide the best possible price of electricity for the customer. Now the limit is set at ten years, which provides more certainty for developers but is still not ideal since it is shorter than the typical 20-year PPAs that are structured for many renewable energy projects in order for the project owner to get a loan [15]. Other barriers for developers arise from the governmental organization of the energy sector. Energy responsibilities are split between the environmental authority where the DNA is housed, ASEP, which stands alone and serves as the regulator and dispenses permits, COPE, which makes energy-related laws, and is in the Finance and Economy Ministry, and a Dirección Nacional de Hidrocarburos y Energía Alternativa that is located in a separate ministry (Ministerio de Comercio e Industria). During January 2006, these disparate groups began fighting over jurisdiction and responsibilities and the government created a Secretary of Energy to help coordinate interests. However, this secretarial position has less power than a ministerial position, and some involved parties are advocating the creation of a Ministry of Energy that would house related groups. Logistically, a separation of energy responsibilities leads to slow permit and decisions as many parties are involved, occasionally duplicating efforts [7].
Summary Panama’s need for capacity additions, strong renewable energy legislation and incentives, open marketplace, and relatively stable economy, because of use of the US dollar and revenues from Canal passages, make it an ideal place for CDM investment. However, the government’s dispersed energy-related sectors create complications for prospective investors. Social resistance to and difficulty proving additionality on hydro projects could limit the number of these projects that are successfully registered. Unique project types and a few wind applications are being pursued as alternatives to hydro.
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References 1
2 3
4
5 6
7 8
9
10 11 12 13 14 15
Synergy de la Comunidad Europea (2005) ‘Metodologías para la implementación de los mecanismos flexibles de Kioto: Mecanismo de Desarrollo Limpio (MDL) – Guía Latinoamericana del MDL’, Guidebook, available at www.cordelim.net/ extra/html/pdf/library/olade.pdf Ecosecurities (2006) Paso Ancho Hydroelectric Project Design Document, UNFCCC, 9 December World Bank (2005) Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/ Kelly, M. B. (n.d.) Panama: The Electric Power Sector: Opportunities and Challenges, Business Panama, the American Chamber of Commerce and Deal Inc, available at www.fenixpanama.com/panama-electric-power-sector.html Ley No 6, in 23,220, La Gaceta Oficial, Editor, 3 February, 1997, pp1–70 Millán, J. (1999) ‘The power sector in: Panama’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC Dias, F. (2007) Interview with F. Dias, Comision de Politica Energetica, Ministerio de Economia y Finanzas, 5 October, Panama City, Panama Cartin, Z. (2007) Interview with Z. Cartin, Member of the Designated National Authority team of Panama in Oficina del Cambio Climático de ANAM, 3 October, Panama City, Panama Altomonte, H., Cuevas, F. and Coviello, M. (2004) ‘Fuentes renovables de energía en America Latina y el Caribe: Situacion y propuestas de politica’, report for CEPAL and GTZ, 19 May, available at www.cepal.org/publicaciones/xml/9/ 14839/Lcl2132e.pdf Ministerio de Economia y Financas de Comision de Politica Energetica de Panama (2004) Legislative Assembly Law 45, 4 August Moreno, R. (2007) Interview with R. Moreno, President of Santa Fe Energy, 4 October, Panama City, Panama Econergy International Corporation (2004) Bayano Hydroelectric Expansion and Upgrade Project in Panama Project Design Document, UNFCCC, 20 January Shaw, D. (2007) Interview with D. Shaw, Vice President of Sicmar International Panama, 4 October, Panama City, Panama Reyes, E. (2005) ‘Panama: Ready for CDM /carbon market investments’, presentation at ETSAP Annex IX Technical Conference, 4–7 April, Taipei, Taiwan de Gracia, R. (2007) Interview with R. de Gracia, Asociacion de Servicios Publicos, 5 October, Panama City, Panama
25 Peru
Vital statistics Portfolio mix: 27 per cent thermal; 71 per cent hydro [1] Emission factor: 0.54 tonnes of CO2/MWh [2] Average price of electricity: 4.34¢/kWh residential; industrial N/A [3] Privatized electricity market: yes Existence of spot market: yes Capacity payment: yes, but exact amount not available [4] Market manager: Comité de Operación Económica del Sistema Interconectado Nacional (COES) Regulator: Organismo Supervisor de la Inversión de Energía (OSINERG) Policy maker: Ministerio de Energía y Minas (MEM) Environmental permits: Ministerio del Medio Ambiente Rural electrification: Dirección General de Electrificación Rural (DGER) in Minsterio de Energía y Minas
Background and privatization Peru has special challenges for renewable energy development because of simultaneous events that promoted natural gas development and hindered hydro development in the late 1990s. A huge drought during the 1998 El Niño caused massive disruptions in the electrical sector as the 19 per cent hydrobased system could not support the demand at the time [5]. This crisis happened on the heels of Shell’s discovering over 16 trillion cubic feet of natural gas in the Camisea region of Peru in the 1980s [6]. In order to promote more thermal generation to provide a backbone for the system to prevent Peru from being susceptible to droughts and promote more natural gas extraction, President Alberto Fujimori took radical steps to support the natural gas industry and discourage hydro development. In late 1998 and 1999, Peru passed two laws that modified various articles and definitions of the Law of Electric
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Concessions (26980 and 27239), which prevented new hydro development [7 and 8]. Fujimori then passed the Law of Promotion of Development of the Natural Gas Industry (27133), which promoted natural gas extraction in the Camisea gas fields by providing land concessions and fixed natural gas transport costs to ensure a 12 per cent annual profit for transmitters [9]. In 2000, the Peruvian government instated a contract that ensured that all gas from the Camisea fields would be paid for regardless of whether it is extracted under a ‘take-or-pay’ rule, and which included loan guarantees [2]. In 2001, another law allowed for exemption from the 18 per cent value-added tax for natural gas developers [6]. The anti-hydro laws remained in place until 2001 when the Law for the Promotion of Hydro Concessions (27435) was passed. Although hydro development was permitted after that date, investors were not eager to enter the market because the domestic natural gas was so cheap that hydro, with high initial capital costs, could not compete for generation. However, with on-site gas contracts set at a maximum $1/MMBTU (1 million British Thermal Units) for electrical use and state-controlled contracts for natural gas generation locked at $23.9/MWh for seven years in 2003 [2], it is still very difficult for hydro to compete as their costs average $1300/kW installed [10]. There is hope for renewables in Peru, though. The current president, Alan Garcia, is interested in promoting renewable energy again because the main gas pipeline from the Camisea fields is susceptible to guerilla attacks and other disruptions like earthquakes. Diversifying Peru’s energy resources also means that Peru could potentially sell the increasingly valuable natural gas to its neighbour, Chile, whose gas pipeline from Argentina was recently cut off after the Argentinean peso was devalued in 2002 [10]. The Peruvian electrical sector privatization occurred in 1992 and quickly led to lower marginal costs and electricity prices, improved reliability and service, and fewer black losses from stolen electricity [6]. After privatization, governmental intervention was still required to ensure that a certain amount of new development occurs by setting policies to promote sufficient generation. The large generation companies that were previously state-run were unbundled and made private. Edegel, Lima’s public utility, and Electroperu are the two largest examples of these previously state-run utilities [11]. By 2000, private companies handled 65 per cent of generation and 80 per cent of distribution, but much of this generation came from the large, previously governmentally owned companies. The privatization of the market, however, did not produce a flawless system. The restructuring was based on the Chilean model and set node prices that dictate the amount that generators earn when selling to distributors. These node prices are based on the average cost of generation and set for different points along the grid. During a drought in 2004, the spot market price rose from $20/MWh to $100/MWh. Generators were earning an average national node price of $25/MWh. They stopped selling to the distribution companies because they realized that there was more money to be made in the spot
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market. Therefore the state-run utility, Electroperú, had to supply these distribution companies during the shortage [12]. The pro-natural gas laws have prevented the free market from operating as intended and reduced the attractiveness of the market for private investment. As a result, the government or previously governmentally owned companies still own 44 per cent of the electrical generation [6 and 12].
Renewable energy laws In 2006, the Law for Assuring the Development of Efficient Electrical Generation (28832) called for an evaluation of the potential of hydro and other renewable resources [13].1 In March 2007, the Peruvian government encouraged developers to capture the estimated 57,000MW of untapped hydro energy by exempting this and other forms of renewable energy development from the 19 per cent value-added tax [14]. Within the existing Peruvian energy generation, combined heat and power plants currently receive priority dispatch on the system. This dispatch order favours sugarcane plants that burn the bagasse or unusable residue of the sugarcane husk for electrical power and heat to process the sugar [15]. Regulations governing the promotion of geothermal resources now exist and may help promote the approximately 300MW of geothermal potential that are suitable for development. These regulations stem from Law 26848 of 1977. This law finally passed in 1997, but regulations for its implementation were not put into place until July 2006 because of the country’s focus on hydro development in the 1990s and the exploitation of the Camisea natural gas fields in the early 2000s [16]. In May 2008, Peru passed a decree (1002) promoting renewable energy legislation that consists of wind, solar, tidal, geothermal, biomass and hydro under 20MW. The main provisions of this decree include the following: 1
2 3
4 5
The Ministry of Energy and Mines should set a goal for renewable energy penetration every five years with a minimum set at at least 5 per cent for the first five years. Renewable energy gets priority dispatch. The difference between renewable generation and competitive energy generation will be covered by a higher tariff price that will be set by OSINERG to compensate for the higher cost of renewable generation. Renewable energy will receive priority for connection in areas where transmission lines are heavily loaded. Funds will be dedicated to research and development of renewable energy. [17]
This new renewable energy law of May 2008 was accompanied by the creation of a Ministry of Environment, elevating environmental protection and management from its previous post in the Ministry of Environment, Housing and Territorial Development [18].
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CDM portfolio 16
Number of projects
14 12 10 8 6 4 2 0
Hydro
Wind
Geothermal
Landfill methane capture
Non-landfill methane capture
Biomass
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April
Figure 25.1 Projects registered or in validation in Peru Peru had two registered and validated projects in January 2008; by April 2008, its portfolio of projects in the process of validation had grown to 18 projects. Peru has followed the trend of the region in its development of hydro projects. There is interest, however, in future wind projects. There are four fledgling wind companies that are in the initial stages of acquiring land concessions for development. Five wind study concessions for projects of 80–300MW have been granted. Norwind, Eólica del Peru, Soleil SAC and Petromont are the main companies making moves to develop these wind resources, which are concentrated on the coast [19].
Special challenges and opportunities DNA office The Peruvian Designated National Authority (DNA) office is sited and studied by other countries as a model for development. It was divided into a promotion and regulatory arm, Fondo Nacional del Ambiente (FONAM) and Consejo Nacional del Ambiente (CONAM). FONAM has its roots in the government as its predecessor was created by Law 26793 in 1997 and is intended to increase public and private investment in sustainable industries. It morphed to support Clean Development Mechanism (CDM) projects in 2001 when a National Strategy Study between the World Bank and the Peruvian government recommended a promotion office for CDM projects. The FONAM office now helps projects through the complex CDM project cycle by offering free advice in the initial stages of the process such as the creation of a Project Idea Note (PIN). The office has other functions such as working as an intermediary between hydro and mining companies and the community where these projects are
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located. Representatives from the organization also work with local banks to explain Certified Emission Reductions (CERs) and their role in project finance. Virtually all CDM projects in the country have used FONAM’s services at some stage in project development. FONAM hopes to eventually develop Project Design Documents (PDDs) and earn a portion of projects’ CERs as payment for services. FONAM also authored a paper addressing renewable energy barriers and how to overcome them in Peru [20]. Currently the office’s operating budget is paid for by grants from organizations like the Risø National Laboratory of the Technical University of Denmark, but there were only enough funds during the autumn of 2007 to sustain the office’s operations for another six months [21]. FONAM’s director of the board also heads up the regulatory CDM office, CONAM. It also maintains private sector status by having its operating budget satisfied by grants, and operates efficiently, like a private company. Therefore, FONAM attracts project developers as it spans both worlds, providing regulatory guidance in a timely fashion consistent with the private sector [21]. While operating in both of these worlds is attractive to project developers, it creates a conflict of interest since the head of the board of both CONAM and FONAM is the same person. Since CONAM has the regulatory duty of approving projects by asserting that they achieve sustainable development or not, it is controversial that the head of its board would also be involved in an organization that promotes individual projects [21]. While FONAM has been able to achieve moderate success and provide a model for other Latin American countries, CONAM has experienced more problems. The people who work there change with each new administration. The lack of continuity in the office means that each person’s knowledge of projects and their history is weak. Also, Peru is unable to contribute effectively in international climate change conferences since each time there is a conference, a different person with little experience is sent. These individuals then have little negotiating power since they are new to the meeting. This revolving door of personnel is a reflection of the way people in Peru do not consider positions in government as a career, but instead as a short stint away from the private sector. There has also been a lack of employees within CONAM to carefully assess each project that applies and to keep up with the ever-changing CDM rules, in addition to the ongoing greenhouse gas inventories and adaptation to climate change projects [22 and 23].
Other domestic institutional support or barriers Beyond CONAM and FONAM, the Ministry of Energy and Mines has contracted studies to better understand how renewables can play a part in Peru’s future. The first of these studies was completed by a local NGO called the Centre for Conservation of Energy and the Environment (CENERGIA), who created a detailed diagnostic of the country’s current solar and wind development and made predictions for the future of these markets [24]. The second assessment, authored by Green Energy, considered the potential for all renew-
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ables in the country given the resources available [25]. UNEP and Risø created a report entitled ‘Institutional Strategy to Promote the Clean Development Mechanism in Peru’ through its Capacity Development for CDM [26]. Peru also supports renewable energy through a project hosted by the National Service for Industrial Work (SENATI) to improve local technicians’ ability to service renewable energy equipment. The Intermediate Technology Development Group (formerly Practical Action) is an international charity that has a long history of promoting renewable energy, especially micro hydro, in remote areas of Peru [27].
Carbon brokers Ahlcarbono has had the most success, with a total of 29 registered or validation-stage projects, 17 of which are in Peru. The founders had experience in the World Bank during the early stages of the CDM, and one of them, named Lazro Eguren, also worked in FONAM promoting projects for the country. This experience allowed Mr Eguren to get to know local project developers in the country. Ahlcarbono handles all types of projects and will tailor their work to meet the needs of the client [28]. Ecosecurities also has an office in Lima.
Renewable energy potential Peru has not been studied extensively for its solar potential, but some areas in the Andes average 6kWh/m2 per day. The National Meteorological and Hydrological Service (SENAMHI) estimates that 19GWh/year of wind energy are possible for Peru [29]. There are an estimated 1000MW of small hydro potential that have not yet been captured. More studies are needed to know the exact geothermal potential. Biomass residue has huge potential to satisfy the country’s needs as 21 per cent of the nation’s thermal and 81 per cent of its hydro generation could be replaced by using biomass residue [20]. Because of the lack of interest in renewables during the late 1990s under the Fujimori regime, Peru has no wind map of the country. The Ministry of Energy and Mines began negotiations with the National Renewable Energy Laboratory (NREL) of the US to create a wind map, but the standards for the project in terms of resolution and budget were set so low that NREL refused to do the project. Likewise, there are no geothermal projects in the country, and other than recent interest from Japanese banks to look at two sites on the border with Chile, there has been no exploratory testing for the feasibility of sites [19].
Unique experiences and situations Peru is well positioned to host new renewable generation projects because its economy has experienced a domestically unprecedented growth of about 6 per cent annually for the last seven consecutive years [30]. This economic growth translates into 5–6 per cent electrical growth annually, necessitating approximately 200MW of new firm capacity each year [10]. Also, ironically, the Fujimori laws of 1998 and 1999 that barred new hydro development did have
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the positive consequence of now creating an additionality argument for current hydro development that is seeking CDM revenues. Despite this recent economic upswing and argument for additionality, Peru is a risky marketplace for investment. Between 1985 and 1990, the currency was devalued by 40 per cent [31]. Then the economy recovered between 1990 and 1998 with 7 per cent growth each year, but the trend stopped in 1998 when there was an economic crisis because of financial upset in places such as Asia, Russia and Brazil, costly repercussions of that year’s El Niño, and the beginning of President Fujimori’s scandal charges [32]. Beyond these general investment risks, Peru’s history of wavering political support for renewables may make investors nervous that by the time they are ready to build a new project, there will no longer be the political will to undertake it. The Office of Energy Policy within the Ministry of Energy and Mines creates a long-term plan for the future each year. But, these plans are not binding and last only ten years, a time span that may be too short for investors who want secure energy prices for the life of the plant. Therefore, investors are concerned that the political will to support renewables may be fleeting and energy policy may reverse itself once again [20]. With regard to the social and environmental concerns about project development in Peru, there has been some local and governmental resistance for a variety of reasons, but the organized NGOs are too busy fighting the mining industries to also fight renewable energy development. Resistance at the state and local level has been focused on hydro projects. In Cañon Pato, Duke Energy’s 250MW hydro plant was installed before an Environmental Impact Statement (EIS) was required. The Ministry of Energy wants to use the reservoir as a tourist site and use an average of 2.6m3/s instead of 5.6m3/s. In order to have this request heeded, the Ministry of Energy is asking Duke to retroactively complete an EIS [10]. Locals at the small reservoir of Lago Cuné want to be able to graze cattle on lands above the reservoir and depend on a certain water level for their animals to use. It is essential that the community be in support of the project since, in Peru, 80 per cent of the community must be in agreement with the project in order for the developer to get the land permit [33].
Summary Peru is not in a situation of capacity shortage like some of its neighbours, but its strong economic growth for the past seven years hints that soon large additions will be needed. The renewable energy law of 2006 that exempts developers from the value-added tax may promote some interest in the renewables sector. If the proposed renewable energy law is passed, then significant interest in development may occur. However, the recent laws during the Fujimori regime that barred hydro development and supported natural gas extraction may make investors wary of this marketplace since there is the possibility that political whims could quickly change again.
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Note 1 Usually, Peruvian law refers to hydro resources in the title and later includes other renewables in the text. It is clear that hydro is the most common and widely accepted renewable technology in the country.
References 1
2 3 4
5
6 7 8
9 10
11
12
13 14
15 16
Ministerio de Energía y Minas de Peru (2006) ‘Produccion: Estadistica electrica 2005–2006, generacion y transmision’, www.minem.gob.pe/electricidad/ estad_inicio.asp, accessed 20 March 2008 Netherlands CDM Facility (2005) Netherlands CDM Facility, Poechos I Project Design Document, UNFCCC World Bank (2005) ‘Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005’, World Bank, Washington, DC Arango, S., Dyner, I. and Larsen, E. (2006) ‘Lessons from deregulation: Understanding electricity markets in South America’, Utilities Policy, vol 14, no 3, September, pp196–207 Joval, J. R. (n.d.) The Impact of the 1997–1998 El Niño on the Andean Community of Nations, United Nations International Strategy for Disaster Reduction, available at www.eird.org/eng/revista/No1_2001/pagina22.htm Center for Energy Economics (2006) ‘Gas and power in Peru’, case study, Bureau of Economic Geology, University of Texas at Austin, 27 March Ministerio de Energía y Minas (Direccion de Electricidad) (1999) Ley que Modifica Diversos Artículos de la Ley de Concesiones Eléctricas, 14 December Ministerio de Energía y Minas (Direccion de Electricidad) (1998), Ley que Modifica Diversos Artículos y Definición Anexa de la Ley de Concesiones Eléctricas, 24 September Ministerio de Energía y Minas (Direccion de Electricidad) (1999), Ley de Promoción del Desarrollo de la Industria del Gas Natural, 3 June Melindo, M., Armas, H. and Reyes, J. O. (2007) Interviews with M. Melindo, H. Armas and J. O. Reyes, Ministerio de Energía y Minas, Unidad de Electrificación, 6 November, Lima, Peru Center for Energy Economics (2006) ‘Results of electricity sector restructuring in Peru’, Bureau of Economic Geology, Jackson School of Geosciences, University of Texas at Austin, 27 March World Bank (2007) ‘Latin America and the Caribbean Region (LCR): Energy sector – retrospective review and challenges’, Energy Sector Management Assistance Programme report, 15 June Ministerio de Energía y Minas (Direccion de Electricidad) (2007) Ley para Asegurer el Desarrollo Eficiente de La Generación Eléctrica, November Ministerio de Energía y Minas (Direccion de Electricidad) (2007) Decreto Supremo: Aprueban Reglamento de la Ley que amplía los alcances del Régimen de Recuperación Anticipada del Impuesto General a las Ventas a las Empresas de Generación Hidroeléctrica, 29 March Ayon, H. (2007) Interview with H. Ayon, Gerente de Finanzas de Paramonga, 7 November, Lima, Peru Coviello, M. F. (2007) ‘Renewable energy sources in Latin America and the Caribbean: Two years after the Bonn Conference’, report for United Nations Economic Commission for Latin America and the Caribbean, April
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17 El Peruano (2008) Normas Legales: Decreto Legislativo (1002) de Promocion de la Inversion para la Generacion de Electricidad con el Uso de Energías Renovables, in 10219, 2 March 18 Congreso de la Republica (2008) Decreto Legislativo de Creacion de Organizacion y Funciones del Ministerio del Ambiente, Decreto Legislativo de Ley 29157, 13 May 19 Barco-Roda, J. (2007) Interview with J. Barco-Roda, NorWind Project Developer, 7 November, Lima, Peru 20 Fondo Nacional del Ambiente (2006) ‘Promoción de la participación pública y privada en proyectos de Energía Renovable y Fortalecimiento de la capacidad de FONAM’, report, 10 May 21 Garcia, D. (2007) Interview with D. Garcia, Fondo Nacional del Ambiente Energy and CDM Specialist, 5 November, Lima, Peru 22 Iturregui, P. (2007) Interview with P. Iturregui, Former CONAM Designated National Authority, 10 November, Lima, Peru 23 Gieseke, R. (2007) Interview with R. Gieseke, CONAM Designated National Authority Office, 6 November, Lima, Peru 24 Centro para Conservacion de Energía y Ambiente (2004) ‘Diagnostico de la situación actual del uso energía solar y eolica en Peru’, report for Ministerio de Energía y Minas 25 Reto, C. (2005) ‘Estudio para la promocion de la generacion electrica con fuentes de energia renovable’, report, Green Energy Consultoria y Servicios SRL 26 Cigaran, M. P. and Iturregui, P. (2004) ‘Institutional strategy to promote the Clean Development Mechanism in Peru’, report, UNEP/Risø Capacity Development for CDM, June 27 Coello, J. (2007) Interview with J. Coello, Intermediate Technology Development Group, 7 November, Lima, Peru 28 Eguren, L. (2008) Interview with L. Eguren, CDM Specialist for Ahlcarbono, 9 February, 29 Navarro, E. M. (2007) ‘Conferencia Introductoria: Potencial del viento y la aerogeneración en el Perú’, presentation at Congreso Sobre Biocombustibles Energias Renovables, 17 May, Lima, Peru 30 Kozak, R. (2007) ‘Peru works to emulate Chile with strong growth, less poverty’, Comtex News Network, 21 June 31 Rohter, L. (1987) ‘The slide steepens; Peru and Mexico try devaluation’, The New York Times, 20 December 32 Public Broadcasting Systems, ‘Peru: Commanding heights’, www.pbs.org/wgbh/commandingheights/lo/countries/pe/pe_economic.html, accessed 20 February 2008 33 Harmon, G. C. (2007) Interview with G. C. Harmon, Santa Rosa Project Developer, 7 November, Lima, Peru
26 Uruguay
Vital statistics Portfolio mix: 42 per cent hydro; 35 per cent imported; 14 per cent fuel oil; 8 per cent gas oil [1] Emission factor: predicted 0.2 tonnes of CO2/MWh [2] Average price of electricity: 11.7¢/kWh residential; 5.1¢/kWh industrial [3] Privatized electricity market: yes, but with almost no success Existence of spot market: yes, although currently dominated by UTE Capacity payment: yes, based on theoretical margin of reserve. While this payment exists legally, it is not currently being employed [4 and 5] Market manager: Administración del Mercado Eléctrico (ADME) Dispatch: Despacho Nacional de Cargas (DNCU) Policy maker: Dirección Nacional de Energía y Tecnología Nuclear Regulator: Unidad Reguladora del Servicio de Energía Eléctrica (UREE) and Unidad Reguladora de Servicios de Energía y Agua (URSEA) Environmental permits: Dirección Nacional de Medio Ambiente (DINAMA) of Ministerio de Vivienda, Ordenamiento Territorial, y Medio Ambiente
Background and privatization Uruguay has primarily been served by hydro electricity from large dams like Salto Grande, which is on the border of Argentina and Uruguay. Other than these hydro resources, it has few fossil fuel reserves, receives a large portion of its electricity from its neighbours, and has a history of negotiating power deals across borders. Power managers have found that Brazil and Uruguay have some complementary dry and wet seasons that allow power from an area with a dam that is receiving more rainfall to redirect that power to the area without water [2].
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It is this close cooperation between nations that prompted Uruguay to privatize the generation and distribution portions of its electrical sector with Decree 16,832 in 1997. The goal was to try to have a similar electrical structure to Argentina since the two countries were sharing the Salto Grande hydroelectric facility [6]. At the time of this decree, natural gas was cheap and importing generation was more economical than investing in new capacity. The privatization of the industry has not led to any new generation (except for a 1MW installation that runs on landfill gas). The reason for this failed attempt at privatization is partly due to the competition new generators face on the spot market. New generators would have to compete with existing state-run hydro plants, the capital costs of which are already paid off, and submit cost bids based on their marginal cost of generation, which is almost nothing. Also, generators may not have entered the market because, according to the country’s Designated National Authority (DNA), the rules for market entry were unclear [7].
Renewable energy laws UTE (Administración Nacional de Usinas y Transmisiones Eléctricas), the state generator, provides nearly all of the country’s generation but is now in a situation of a lack of generation capacity because of the natural gas supply shortage in Argentina.1 Because of this shortage and the current Minister of Energy’s interest in renewable energy, there was recently a request for 60MW of generation which must consist of 20MW of microhydro, 20MW of wind and 20MW of biomass in Decree 77 of 13 March 2006 [7]. UTE did not receive any microhydro bids, but filled the other two categories. There is speculation that no microhydro bids were offered because six months was not long enough for prospectors to get bids organized in this sector. Also, the country is very flat and has few hydro possibilities [6]. Bids in this elicitation were accepted on a least-cost generation basis, but renewable energy generators only had to compete among themselves, providing a more level playing field. The average amount that will be paid by UTE for energy as a result of this private bidding process is $80–90/MWh [6]. The contract term for the energy purchase is 20 years [8]. Under Article 3 of Decree 77, the price difference that UTE faces for this new, renewable generation will be covered by increased tariffs throughout the country for consumers. These renewable generators also receive the benefit that they are exempt from transmission tariffs. Locally produced technologies are favoured with a 10 per cent improved chance of winning the bid process [2]. In March 2008, another elicitation for biomass, small hydro and wind was sought by UTE for an additional 26.2MW of renewable energy. The elicitation provides preference for bids of up to 14MW of wind energy and 12.2MW of small hydro [9]. By 22 July 2008, UTE received responses from 15 companies for 150MW of generation from 6 biomass and 16 wind projects to fill this mandate [2]. The immediate future renewable energy legislation will most likely involve more elicitations for renewable energy capacity targets, while
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longer-term renewable energy goals will be a part of a more comprehensive plan for expansion [6]. UTE is considering confronting the capacity shortage by supporting more interconnection with Brazil in order to use complementary dry and wet seasons in the existing hydroelectric facilities [2].
CDM portfolio 2.5
Number of projects
2.0
1.5
1.0
0.5
0
Hydro
Wind
Geothermal
Landfill methane capture
Non-landfill methane capture
Biomass
Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April
Figure 26.1 Projects registered or in validation in Uruguay Uruguay’s sugarmill owners have become interested in using the bagasse they burn more efficiently since the price of electricity has increased in recent years as Argentina’s natural gas supply has become scarce. Although there is no movement in the wind sector yet, Gamesa of Spain is interested in developing a 10MW wind farm called Sierra de Caracoles. Spain is cancelling a portion of Uruguay’s debt in exchange for the first option to buy the Certified Emission Reductions (CERs) from this project. The country also hosts a landfill gas capture and electrical production (1MW) project that was funded by a Global Environmental Fund grant and is not eligible for Clean Development Mechanism (CDM) revenues. Although only three projects had been registered by January 2008, the DNA office counted three landfill gas, one biogas from wastewater, five bioenergy, five energy efficiency and two wind projects in its portfolio of developing projects [10].
Special challenges and opportunities DNA office Uruguay has good capacity building for CDM within its DNA office located in the Ministry of Housing, Territorial Regulation and Environment. This office partnered with the Swiss Federal Institute of Technology to create a tool to
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assess the sustainability of local CDM projects [11] and has provided materials such as videos, pamphlets and seminars for interested parties and investors. The DNA office also helped complete a comprehensive study of potential areas of CDM growth in Uruguay with projected baselines for each sector [12].
Other domestic institutional support or barriers A lack of initiative to support wind mapping has further prevented investors from entering this market. Currently the Global Environmental Fund and the National Energy Division are working on a wind mapping project, but it is not completed [6]. There is no other capacity development for renewables.
Carbon brokers MGM International and Ecoinvest both have large offices in Buenos Aires, Argentina, just two hours from Uruguay’s capital of Montevideo by boat. However, these carbon brokers have not broken into this market because of what they see as the major hurdle, UTE’s dominance in the electrical market [13].
Renewable energy potential Uruguay has few opportunities for renewable energy based on its resources. As previously mentioned, the country is flat with two sets of rolling mountain ranges of about 200 metres just inland of the coast. This flat topography means that a large area of land would have to be flooded to provide a significant amount of hydroelectricity. Daniel Tasende of UTE thinks that the next area of hydro development will be to convert irrigation dams for electrical production, as COMEXHIDRO of Mexico has begun to do [2]. There have been no publically available wind or solar studies. The country is not sited in an area of geothermal activity. Currently, biomass from wood, cane and rice provide the most robust renewable opportunities and constitute most of the development. The biggest potential area of growth is the sugarcane industry, which covers 3400 hectares and has an estimated harvest of 19,600 tonnes per year [14]. Producers are currently using the residue from this crop in inefficient boilers. As carbon prices increase and CDM revenues become better known in the country, these growers have begun to install more efficient equipment and sell excess energy to the grid as other countries in the region have done [7].
Unique experiences and situations UTE’s monopoly of the electrical sector is not a legal monopoly, but instead is a monopoly that can be interrupted by other generators. UTE managers contend that this monopoly is necessary for such a small country. Excess revenues go back to the state and help reduce taxes. And UTE’s control is limited by regulating organizations. This monopoly control can be seen as a detriment to CDM development since state-run generators are generally not interested in pursuing CDM revenues. However, UTE is moving away from state control,
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with five contracts with private generators signed in 2007, which may open up doors for new CDM development [2]. Despite the country’s relatively poor wind potential, there are some initiatives in wind development, but they have all run into difficulties. One of its small mountain ranges on the coast does provide a good wind resource that Gamesa of Spain began to take advantage of by planning a 50MW farm. Gamesa sold the wind data gathered at this site to a Brazilian company that is now developing the site for a 10MW farm and was hoping to produce electricity in 2008. Perhaps the site has experienced difficulties because its economic viability is questionable as it is 30km from the closest interconnection point with the electrical grid [15]. Typically, one kilometre of transmission per MW installed is the maximum distance a farm can be sited from a connection point [16]. Another wind developer, called Agroland, began producing electricity from its 0.45MW site in early 2007, but the quality of this energy was not good enough and contained harmonics, which are deviations from the ideal sinusoidal wave of the grid voltage, caused by fluctuations in the power supply due to the variable wind available [17]. These harmonics prevented this small site from being connected to the grid and selling to UTE until the third quarter of 2008 [2]. Infrastructure in Uruguay for wind development can also be a challenge and limitation. Nuevo Manantial, a 4MW wind project that in September 2008 was being expanded to 13MW, had to lease crane equipment from abroad for a month to assemble the farm since there were no domestically available cranes suitable for mounting the turbines on this mountain range. Both Nuevo Manatial and Agroland are in the process of seeking carbon credits through the CDM [2]. Other German wind prospectors have found a good site on the Uruguayan coast near the border with Brazil, but this site was near a low-voltage connection area and not suitable for transmitting energy efficiently. After the prospecting team ran into difficulty, UTE published all of the low and high voltage transmission lines on the Internet to avoid having this problem repeated [2]. UTE is also in the process of constructing a 10MW wind farm. For other, large-scale projects, UTE sees the Approved Consolidated Methodology (ACM) 0002 that is for large-scale grid-connected renewable energy as a major barrier to development of CDM projects. The default baseline calculation in this methodology counts the emission factor of the last 10 per cent of generation dispatched on the system for CER calculation. Since Uruguay, like Chile, values the water it holds in dams and only releases it to provide load-following during peak demand, UTE representatives of Uruguay argue that this methodology is not appropriate. The amount of water released will be the same with or without a CDM project, they argue. What will decrease as a result of the CDM project is the fossil fuel generation used as the baseload. Therefore, UTE wants to have the CER calculation based only on this displaced generation
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instead of the last 10 per cent dispatched, which is mostly hydro with no emission factor in Uruguay [2]. The second largest barrier for Uruguay to earn reductions is that imported energy is counted as zero with regard to its emission factor. Since 35 per cent of Uruguay’s energy is imported from Brazil and Argentina and 42 per cent of the remainder is hydro generation [1], UTE is predicting a national emission factor of just 0.2 tonnes of CO2/MWh for the country and not incorporating revenue from CERs into their economic analysis for future capacity additions [2]. Despite these many challenges to developing projects in Uruguay, there may be an opportunity for private developers since the price of electricity has risen in recent years as the Argentine natural gas supply has been cut. The average marginal cost in 2004 was 5.35¢/kWh and has surged to 20.9¢/kWh in 2006 [18]. Uruguay is experiencing social problems related to its Garabi hydroelectric dam on the Uruguay River. The power for this dam would be shared between Argentina, Uruguay and Brazil, but mainly utilized by Uruguay’s neighbours. Uruguayans are against the development because they have seen the poor performance of the enormous Salto Grande dam that is operating at less than a quarter of its rated capacity because of a drought. The detrimental effects these huge dams have on downstream flow concern Uruguayans [19].
Summary Uruguay has several major barriers to renewable energy CDM project development. The inability of the country to privatize its electrical sector because of the low generation prices competitors would have to face has prevented development. Also, the low capacity factor of the country is due to the large hydro portion of its electricity portfolio and limitations of ACM 0002. However, a recent supply shortage of natural gas from Argentina has prompted the government to make solicitations for 60MW and later 26.2MW of renewable energy that would compete only among renewable generators on the cost of generation. This movement has spurred some interest in the sector, but in order for this trend to continue, more permanent, long-term policies that promote renewables will need to be supported.
Note 1 The only energy applications that UTE does not own are Salto Grande hydro facility, which is operated by the Ministry of Foreign Affairs, and a 0.9MW landfill gas project that is owned by the Municipality of Maldonado [2].
References 1 2
Administracion Nacional de Usinas y Trasmisones Electricas (UTE) (2006) Cifras, Organizacion y Estudios Empresarioales Relaciones Publicas Tasende, D. (2007) Interview with D. Tasende, Director of Renewables, UTE, 27 November, Montevideo, Uruguay
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4 5 6 7
8
9
10 11
12
13 14 15
16 17 18
19
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World Bank (2005) Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/ Ariztía, R. and Watts, D. (2002) ‘The electricity crises of California, Brazil and Chile: Lessons to the Chilean market’, in Power Engineering (LESCOPE), pp7–12 Brandino, A. (2008) Interview with A. Brandino, Gerente de Despacho for Administración del Mercado Eléctrico, 11 February Larissa, D. (2007) Interview with D. Larissa, Dirección Nacional de Energía, 27 November, Montevideo, Uruguay Kasprzyk, M. (2007) Interview with M. Kasprzyk, Designated National Authority in the Ministerio de Vivienda, Ordenamiento, Territorial, y Medio Ambiente, Division de Cambio Climático, 27 November, Montevideo, Uruguay Coviello, M. F. (2007) ‘Renewable energy sources in Latin America and the Caribbean: Two years after the Bonn Conference’, report for United Nations Economic Commission for Latin America and the Caribbean, April Administración Nacional de Usinas y Trasmisiones Eléctricas (2008) Parte Uno: Pliego de Condiciones Particulares para Pliego de Condiciones y Especificaciones para la realización de CONTRATOS DE COMPRAVENTA DE ENERGIA ELÉCTRICA por parte de UTE a proveedores instalados en el territorio nacional que produzcan dicha energía utilizando como fuente primaria energía eólica, de biomasa, o de pequeñas centrales hidráulicas, in P37637, 6 March Ministerio de Vivienda Ordenamiento Territorial y Medio Ambiente (2007) Portafolio de Proyectos de MDL 2007, CD Rom from DNA office Heuberger, R., Sutter, C. and Santos, L. (2003) Host Country Approval for CDM Projects in Uruguay: Application of a Sustainability Assessment Tool, Swiss Federal Institute of Technology ETH, Institute of Environmental Physics, Energy & Climate, and Ministry of Housing, Territorial Regulation and Environment of Uruguay Unidad de Cambio Climático (2002) ‘Estudio de apoyo a la aplicación del Mecanismo para el Desarrollo Limpio del Protocolo de Kioto en Uruguay’, report for Ministerio de Vivienda, Ordenamiento Territorial y Medio Ambiente, May Camara, A. (2007) Interview with A. Camara, Ecoinvest Carbon Consultant, 22 November, Buenos Aires, Argentina Amy, L. (2007) Market Opportunities for Renewable Energy Equipment, US Commercial Service Gamesa (2007) Project Idea Note 10MW Wind Farm in Uruguay, accessed through Ministerio de Vivienda, Ordenamiento Territorial, y Medio Ambiente de Uruguay Garcia, A. (2007) Interview with A. Garcia, Project Developer for ABO Wind, 22 November, Buenos Aires, Argentina Integral Energy (2000) ‘Harmonic distortions in the electric supply system’, Power Quality Centre: Technical Note #3, March Administracion del Mercado Electrico (2004, 2006) Costo Marginal Horario Promedio Mensual - Año 2004 y 2006, available from www.adme.com.uy/ mmee/precios/2006/spotprom.htm Tierramerica (2008) ‘Uruguay: Hydro-electric dam criticized’, Daily Estimate, 25 March
27 Other Latin American Countries
There are a few Latin American countries that do not merit an entire countryspecific chapter. These countries have little to no Clean Development Mechanism (CDM) activity and/or renewable energy legislation. Therefore, they will be covered only briefly in this chapter. However, it is important for investors to know which countries fall into this category and be aware of major issues in the country that could be hindering CDM and renewable energy development.
Venezuela Venezuela signed the UNFCCC accord on 27 December 1994 [1] and ratified the Kyoto Protocol in 2004 [2], but has not yet set up a Designated National Authority (DNA) office because its president, Hugo Chavez, does not believe in the market-based Kyoto Protocol [3]. It has been proposed that the DNA be housed in the Ministry of Natural Resources and Environment [1]. Without the formation of this office, Venezuela cannot undertake any Clean Development Mechanism (CDM) projects since national approval cannot be given. However, Venezuela has taken steps to address global warming as its first greenhouse gas inventory was completed between 1994 and 1997. The results from this study showed that 77 per cent of the country’s emissions came from the electrical sector. These results are somewhat surprising since hydro electricity covers 70 per cent of the country’s electrical energy needs and point to the country’s overall low emissions [1]. This generation mix for electricity is even more surprising given the country’s wealth of natural gas and petroleum reserves. In 1999, the sector was privatized, but remained vertically integrated, meaning the same company owned generation, distribution and transmission [4]. In May 2008, the state still owned 89 per cent of generating facilities. The main private sector participant is the Electricidad de Caracas, which is majority-owned by American AES and owns most of the thermal generation. This largely state-owned system will be challenging for independent power producers (IPPs) to penetrate [5]. This could be a significant barrier for future CDM development.
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Three new thermal power plants are under construction in order to reduce the country’s dependence on hydro power [6]. Power prices remain reasonable with residential rates averaging 5.5¢/kWh in 2005, and the country is experiencing a modest electrical demand growth rate of 3.2 per cent per year [4].
Paraguay Paraguay has no registered CDM projects. However, it signed the UNFCCC accord in 1993 and ratified the Kyoto Protocol in 1999. It has signed memorandums of understanding with Austria, Japan and Spain for CDM activities and has completed greenhouse gas inventories in both 1990 and 1994 [1]. Paraguay is limited in its ability to participate in renewable energy CDM projects because it sources 99.9 per cent of its electrical generation from hydro plants [7]. Therefore, new renewable energy projects would yield very few Certified Emission Reductions (CERs) since there would be no emissions displaced. This large hydro portion provides relatively cheap electricity with a residential average of 5.7¢/kWh [8]. Another huge barrier for renewable energy CDM projects in Paraguay is the fact that is has a complete lack of private sector participation in generation [5]. State-run utilities in general are reluctant to become involved in CDM projects because of their institutional rigidities and the complications presented by regulatory and financial additionality requirements. Therefore, the only movement for CDM activities, in the form of Project Idea Notes (PINs), comes from a landfill gas capture project in Asunción and carbon sequestration in pastureland [1].
Caribbean countries Many of the countries in this chapter are countries that border the Caribbean Sea and merit their own introduction. They suffer from having electricity prices that are three to four times as expensive as US electricity rates because of the small sizes of the generation units, which cannot achieve economies of scale, and the lack of regional transmission, which means that high levels of backup spinning reserves which are usually sourced from expensive sources are required. Most utilities in the region permit non-utility generation, require utilities to purchase from IPPs, and mandate grid interconnection (with the exception of Granada for all of these categories). Some incorporate renewable energy into integrated resource planning. However, few of these islands have a high degree of private participation because the sizes of the systems are too small to support a competitive marketplace [5]. The Bahamas, Guyana and Suriname have grants for off-grid renewable energy projects. Of the countries discussed below, only Guyana supports carbon trading fiscally [9]. There are a few regional capacity building institutions that lend help to renewable energy developers. The task force on regional energy policy within
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the Caribbean Community Secretariat, which is comprised of Barbados, Trinidad and Tobago, Granada, Guyana, Jamaica, Suriname and Bahamas, is working on a collective purchase agreement of crude oil from Venezuela for these countries. It is also trying to build a pipeline that would allow natural gas from Trinidad and Tobago to be utilized throughout the region [9]. There is also a Geocaribe group that promotes the exploitation of geothermal resources in the area and a Caribbean Renewable Energy Development Programme (CREDP), which has set a goal of sourcing 5 per cent of electrical generation from renewable energy by the year 2015 [9].
Cuba There is one validated and registered CDM project in Cuba that involves a switch from an open cycle to a combined-cycle gas facility. There are also three landfill gas capture projects undergoing validation in the country. There is an opportunity for renewable energy CDM projects in the country since the country routinely experiences capacity shortages and suffers from blackouts. The government has attempted to remedy this problem by installing better transmission and distribution lines and synchronizing generating plants [10]. As tourism grows, the electrical demand should continue to provide opportunities for new market entrants. With regard to capacity development, a Cuban Society for the promotion of renewable energy sources (CUBASOLAR) exists, but the country’s 283 billion barrels of proven oil reserves may be a competitor to renewable energy [11].
Jamaica Jamaica has one wind farm CDM project, called Wington, which was developed by the Petroleum Corporation of Jamaica. This 20.7MW farm is an anomaly in a country that relies mainly on diesel and heavy fuel oil generation mixes. This wind farm received a subsidy from the Dutch Development and Environment Related Export Transactions Programme, which paid for 20 per cent of the total initial investment. The Dutch were involved in this transaction because the turbines were sourced from The Netherlands, and this subsidy was applied to this equipment [12]. Jamaica received funding from the Japanese government through the UNDP to set up its DNA office, which is now located in the Ministry of Lands and the Environment. The Ministry of Meteorological Services and the Scientific Research Council also have experience with the CDM through baseline studies and representing Jamaica at international conferences [13]. The electrical sector was restructured in 2000, and 80 per cent of the Jamaican Public Service Company, which previously had a monopoly, was purchased by Mirant. IPPs that enter the Jamaican grid would still compete in a semi-monopolistic market.
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Guyana In Guyana, there is one CDM project requesting registration, called the Skeldon Bagasse Cogeneration Plant. This project involves the burning of sugarcane residue to displace light fuel oil. The Community Development Carbon Fund and International Emissions Trading Association helped support this project by purchasing its CERs and negotiating the CDM project cycle [14]. The DNA office is located in the Hydrometeorological Service.
French Guiana, Barbados, Granada, Bahamas, St. Lucia, Trinidad and Tobago and Suriname The remaining countries in the Caribbean region have little to no CDM capacity development. There is a wind farm project that is being proposed by the state utility LUCELEC on St Lucia, and a Canadian firm conducted a feasibility study for a farm on the island [15]. In Trinidad and Tobago, the government owns transmission and distribution, but generation is privately owned. The DNA is located in the Ministry of Public Utilities and the Environment’s Environmental Management Authority. Within this sector, there is a CDM standing committee. This committee has only had to approve one methanol project. This project has not yet achieved UNFCCC registration [13]. Suriname has had UNEP/Risø support for technical assistance, but has no CDM activity and no DNA office listed on the UNFCCC website. French Guiana also is absent from this list of DNA offices. The Bahamas has a DNA office within the Ministry of Energy and Environment’s Environment, Science and Technology Commission, but thus far has no CDM activity [16].
References 1
2 3
4
5
6
Synergy de la Comunidad Europea (2005) ‘Metodologías para la implementación de los mecanismos flexibles de Kioto: Mecanismo de Desarrollo Limpio (MDL) – Guía Latinoamericana del MDL’, Guidebook, available at www.cordelim.net/ extra/html/pdf/library/olade.pdf Venpres (2004) ‘Venezuelan government will ratify the Kyoto Protocol’, newsbrief, 8 November, available at Venezuelanalysis.com Rangel, F. (2007) Misión de la República Bolivariana de Venezuela. Intervención del Delegado de la República Bolivariana de Venezuela ante la Segunda Comisión, Sr. Franklin Rangel, tema: ‘Desarrollo Sostenible’ en el marco del 62º período de sesiones de la Asamblea General, letter to Venezuelan government, 30 October, available from www.venezuelaonu.gob.ve/detalle_publicacion.php?id=513. Perez, M. A. A. and Sanchez, J. J. R. (2004) ‘The electric business in Venezuela: Restructuring and investment opportunities’, presentation at World Energy Congress, 5–9 September, Sydney, Australia World Bank (2007) ‘Latin America and the Caribbean Region (LCR): Energy sector – retrospective review and challenges’, Energy Sector Management Assistance Programme report, 15 June International Energy Regulation Network (2006) ‘Country Fact Sheets: South America: Venezuela’, www.iern.net/country_factsheets/market-venezuela.htm, accessed 20 March 2008
OTHER LATIN AMERICAN COUNTRIES
7
8
9
10 11 12 13
14 15
16
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International Atomic Energy Agency: Data Centre Statistics (2005) ‘Energy and Environment Data Reference Bank (EEDRB): Republic of Paraguay’, www.iaea.org/inisnkm/nkm/aws/eedrb/data/PY.html, accessed 26 March 2008 World Bank (2005) Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/ Clarke, R. (2006) ‘Alternative sources of energy and effective implementation policy’, presentation at Caribbean Connect: A High Level Symposium on the CARICOM Single Market and Economy, 28–30 June, Barbados Granma International (2007) ‘Electricity production in Cuba exceeds maximum demand’, newsbrief, 4 October, Havana, Cuba Jaffe, A. M. and Soligo, R. (2001) ‘The potential for the U.S. energy sector in Cuba’, report for Cuba Policy Foundation, December Ecosecurities (2006) Wington Wind Farm Project Design Document, UNFCCC, 6 January Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An assessment of DNAs in Latin America and the Caribbean’, report, 2 June, for Inter-American Development Bank, Washington, DC UNFCCC (2007) International Bank for Reconstruction and Development, Guyana Skeldon Bagasse Cogeneration Project Design Document, 7 November Chaderton, T. (2003) ‘LUCELEC explains its renewable energy efforts’, press release, 27 February, Caribbean Electric Utility Service Corporation, available at www.lucelec.com/news/news_february24_2003.htm UNFCCC (2008) ‘Designated National Authorities (DNA)’, http://cdm.unfccc.int/DNA/index.html, accessed 30 March 2008
28 Regional Trends
Each brief country description was meant to give the reader an indication of the specific challenges and opportunities available for renewable energy Clean Development Mechanism (CDM) development in each country. Many of the challenges that countries face are isolated circumstances, but some can be generalized to the region. Latin American regional trends in privatization and renewable energy policy can help illuminate the larger picture of the history and prospects for renewable energy CDM development.
Regional trends The phenomenon of privatization has impacted all Latin American countries to varying degrees. In general, this trend has brought about more efficient electrical sectors that can provide their customers with lower prices, fewer outages and fewer losses due to stolen energy and inefficient transmission and distribution. Chile cut its distribution losses in half as a result of privatization. Electrical coverage has also grown during this period to serve more of each country’s population. However, privatization has not led to improvements everywhere [1 and 2]. See Table 28.1 for the distribution losses before and after privatization for select countries. Just because a country privatized its market aggressively does not mean that privatization took hold. Ecuador adopted a wholesale market, but because of an economic crisis and distribution losses and subsidized tariffs that prevent distribution companies from paying independent power producers (IPPs) in a Table 28.1 Non-technical electrical losses before and after privatization Year privatized El Salvador Guatemala Nicaragua Panama
1998 1998 2000 1998
Pre-privatization 11.3% 13.5% 30.1% 17.88%
Post-privatization 9.3% 15.5% 28.78% 10.42%
Source: World Bank (2005) Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/
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timely fashion, it has not led to a competitive sector [3]. But, in general, most countries that opened the market have experienced the entry of new participants [4]. Also, companies such as AES Gener and Enersis that once operated only domestically have begun to expand their markets abroad and partner with foreign companies [1]. Restructuring the market has complicated the electrical sector of each country in various ways. Several new entities that regulate, oversee, set policies, address rural electrification and plan for the future had to be formed in each country. Also, each emerging new electrical market had to organize itself based on a pre-existing model or a hybrid of existing models. These markets range from least-cost bid to price cap and energy payment markets. Countries undergoing restructuring also had to decide how to manage existing state-run companies. Costa Rica, Mexico, Honduras and Uruguay allowed these companies to continue operating and are allowing new entrants to fulfil a portion of the country’s new capacity needs. Other countries, such as Chile, Ecuador, Argentina and Peru, required state-run entities to separate into smaller, privately owned and run companies. In general, those countries that have more open markets with less state-run generation have the potential for more CDM projects. See Table 28.2 for the diversity of privatization schemes in select Latin American countries. Table 28.2 Privatization schemes in select countries Country
Privatization scheme
Argentina Brazil Chile Costa Rica
Price-based energy auctiona Distributors’ aggregate generation neededb Cost-based energy auctionc 30% IPP penetrationd; IPPs must be renewable generators with 35% Costa Rican ownershipe Limited PPAs with large consumers; ENEE offers fixed price unless generation solicitedf IPPs enter market under self-supply scheme or get paid 85% of CFE’s avoided costsg Two-phased energy transition with single purchaser model before wholesale marketh
Honduras Mexico Panama
Sources: a Arango, S., Dyner, I. and Larsen, E. (2006) ‘Lessons from deregulation: Understanding electricity markets in South America’, Utilities Policy, vol 14, no 3, September, pp196–207 b Organisation for Economic Co-operation and Development (2005) ‘Regulation of the Electricity Sector’, OECD Economic Survey of Brazil 2005, OECD, Paris c Millán, J. (1999) ‘The electrical sector in: Chile’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC d Villa, G. (2007) Interview with G. Villa, Director of Energy within Ministerio de Ambiente y Energía, Costa Rica, 27 September, San Jose, Costa Rica e Broide, A. (2007) Interview with A. Broide, Development Manager for Mesoamerica Energy, 26 September, San José, Costa Rica f Salgado, G. (2007) Interview with G. Salgado, CDM Consultant, former Designated National Authority of Honduras, 11 September, Tegucigalpa, Honduras g Secretaria de Energía de Mexico (1992) Ley del Servicio Público de Energía Eléctrica, in Articulo 3º, 23 December h Millán, J. (1999) ‘The power sector in: Panama’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC
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Table 28.3 Summary of renewable energy legislation Country
Legislation
Argentina
Production tax credit of 1.5 peso ¢/kWh for wind, hydro under 30MW, biomass and geothermal, and 0.9 peso ¢/kWh for solar; 15-year exemption from income taxesa None Standards for PV installationsb; several rural energy programmesc,d Phase I: 1422MW wind, 1191MW small hydro and 685MW biomass from bagasse (sugarcane residue) by 2008 with a 60% local component requirement Phase II: 10% of overall generation by 2022; 90% local component requirement suggestede Short Law I: Guaranteed grid access and reduced transmission rates for projects under 20%f; Short Law II: 5% of country’s generation for residential customers by 2010g; Short Law III: 10% of residential, industrial and commercial customers’ energy sourced from renewable sources by 2024h No income or value-added tax on importations for the first ten years of operation; other taxes on salaries, research equipment and machinery exempted for ‘first-ofa-kind’ projectsi,j; 35% income tax waiver for projects that give 50% of CERs to community developmentk Former feed-in tariff for small renewable energyc; ICE will only buy renewable generation from IPPs; IPPs must have a 35% Costa Rican ownership structure; IPPs can make up only 30% of market; IPPs must sign contract with ICE for generation price, and relinquish plant operations to ICE after 18 years of operation in a Build, Operate and Transfer agreementl,m,n Renewable energy fund from 5% of hydrocarbon saleso; subsidized financing during ten years for a part of the capital required for installations not exceeding 50MW; 100% exemption from import tariffs on the equipment and tools needed for renewable energy generation; ten-year exemption from income tax on revenues obtained in generation of renewable energy; tax incentive for selfproductionp; dispatch priorityq Feed-in tariff for hydro under 10MW and wind, solar, geothermal and biomass under 15MW; applies until 2% penetration of renewables in gridr; renewables get guaranteed dispatch and exoneration from import and income taxess No taxes on renewable energy projects below 10MW for ten years; projects of 10–20MW are exempt from taxes for five years; projects do not have to pay taxes on CER revenues from projectst; projects under 5MW have streamlined permitsu; fund for renewable energy and soft loans being consideredv No import tax for equipment, no income tax for first ten years; retailers are obligated to buy electricity from private generatorsm; distributors have to buy generation for projects under 5MWw For applications below 50MW, no import tax for equipment and no income tax for first ten years; state distribution company (ENEE) has to buy electricity from generators; ENEE pays its short-term marginal avoided cost + 10% for generation; transmission tariff set at $0.01/kWh; systems under 3MW do not need a generation licence; generators can sell directly into the Central American grid or to large consumers; permits may take a maximum of two months to processx Renewable energy can be ‘banked’ and counted towards fulfilling the goal of satisfying customer’s demand for the monthy; accelerated depreciation for renewable investorsz; lower transmission tariffs for renewables based on capacity factoraa; new proposed LAFRE law would allow first dispatch and a green fund to support renewables, accelerated depreciation on profits, and lower transmission capacity charges based on the average capacity of the renewable sourcebb No import tax for equipment, no income tax for first seven yearscc; a maximum of 5.5–6.5¢/kWh paid for hydro generationdd
Belize Bolivia Brazil
Chile
Colombia
Costa Rica
Dominican Republic
Ecuador
El Salvador
Guatemala
Honduras
Mexico
Nicaragua
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Table 28.3 continued Country
Legislation
Panama
Projects under 500kW do not pay equipment taxes; projects under 10MW do not pay transmission and distribution charges; up to 5% of project costs can be reimbursed if the project contributes to national infrastructure development and up to 25% can be reimbursed based on the carbon reductions the project represents; projects greater than 10MW can only obtain half of the carbon reduction potential; currently projects cannot receive both CERs and reimbursement for project costs based on carbon reductionee Renewable energy exempt from value-added taxff; combined heat and power systems get priority dispatchgg; geothermal resources promotedgg; recent Decree 1002 of May 2008 provides 5% renewable mandate, priority dispatch and transmission for renewables, funding for renewables research and special tariff-setting to reflect the higher cost of renewableshh. Elicitation for 20MW of wind, 20MW of small hydro and 20MW of biomass, and 2008 bid for 26.2MW; least-cost bid process only among renewable generatorsii,jj
Peru
Uruguay
Note: Abbreviations: CER (Certified Emission Reduction), ENEE (Empresa Nacional de Energía Electrica), ICE (Instituto Costarricense de Electricidad), IPP (independent power producer), LAFRE (Ley para el Aprovechamiento de Fuentes Renovables de Energía) Sources: a El Senado y Cámara de Diputados de la Nación Argentina (1998) Régimen Nacional de Energía Eólica y Solar: Ley 25,019, 7 December, Boletín Oficial b Programa Electricidad de Ministerio de Hidrocarburos y Energía (2008) ‘Normativa’, April, www.hidrocarburos.gov.bo/07_NORMATIVA/normativa.php, accessed 10 March 2008 c ESMAP (2007) ‘Latin America and the Caribbean Region (LCR): Energy sector – retrospective review and challenges’, 15 June, Energy Sector Management Assistance Programme, World Bank, Washington, DC d Programa Electricidad de Ministerio de Hidrocarburos y Energía (2008) ‘Electricidad para vivir con dignidad’, April, www.hidrocarburos.gov.bo/07_PLAN/plan.php, accessed 10 March 2008 e do Valle, C. (n.d.) ‘Renewable Energy Policy: Brazil’, presentation at Centro Clima: Centre for Integrated Studies on Climate Change and the Environment, available through Renewable Energy Policy Network for the 21st Century at www.ren21.net/pdf/WorkShop_Presentations/do-Valle_Renewable%20Energy% 20Policy%5B1%5D.ppt f Ministerio de Economía Fomento y Reconstrucción (2004) Ley Corto I: Regla Sistemas de Transporte de Energía Eléctrica, Establece un Nuevo Regimen de Tarifas para Sistemas Eléctricos Medianos, y Introduce Adecuaciones que Indica a la Ley General de Servicios Eléctricos, 13 March, Diario Oficial de la Republica de Chile g Ministerio de Economía Fomento y Reconstrucción (2005) Ley Corto II: Modifica el Marco Regulatorio del Sector Eléctrico, 19 May h Ministerio de Economía Fomento y Reconstrucción de Chile (2008) Ley Nº 20.257, Comisión Nacional de Energía de Chile, 1 April, Diario Oficial de la Republica de Chile i Unidad de Planeación Minerio Energética (2003) Decreto No 3683, 19 December j Cardonas, A. (2007) Interview with A. Cardonas, Administrator Ministerio de Energía y Minas, 10 October, Bogota, Colombia k Ministerio del Interior y Justicia (2003) Decreto 2755, 30 September, Diario Oficial 45,326 l Millán, J. (1999) ‘The power sector in: Costa Rica’, Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC m CEPAL and GTZ (2004) ‘Fuentes renovables de energía en America Latina y el Caribe: Situacion y propuestas de politica’, 19 May n Broide, A. (2007) Interview with A. Broide, Development Manager for Mesoamerica Energy, 26 September, San José, Costa Rica o Congreso Nacional de La República Dominicana (2000) Ley de Hidrocarburos 112-00 p Congreso Nacional de La República Dominicana (2007) Ley No 5707 sobre Incentivo al Desarrollo de Fuentes Renovables de Energía y de sus Regímenes Especiales, May q Congreso Nacional de La República Dominicana (2001) Ley General de Electricidad Ley No 125-01 r Neira, D., Van Den Berg, B. and De la Torre, F. (2006) ‘El Mecanismo de Desarrollo Limpio en Ecuador: Un diagnostico rapido de los retos y oportunidades en el Mercado de Carbono’, report for Banco Interamericano de Desarrollo and Ministerio del Ambiente and Corporación Interamericana de Inversiones
REGIONAL TRENDS
s t
u
v
w x y z aa bb cc
dd ee ff
gg hh ii
jj
307
Registro Oficial Ecuador (2005) Ley de Beneficios Tributarios para Nuevas Inversiones Productivas, Generacion de Empleo, y Prestacion de Servicios, 18 November Altomonte, H., Cuevas, F. and Coviello, M. (2004) ‘Fuentes renovables de energía en America Latina y el Caribe: Situacion y propuestas de politica’, commissioned by CEPAL and GTZ and prepared for the delegates of the Second World Renewable Energy Forum in Bonn, Germany, 29–31 May, 19 May, available at http://www.funtener.org/pdfs/Lcl2132e.pdf Sanchez, I. A. (2006) ‘Estudio sobre la aplicación del mecanismo para un desarrollo limpio en El Salvador’, report for Ministerio de Medio Ambiente y Recursos Naturales, La Cooperación Internacional de Japón and Universidad Centroamericana, June Red de Oficinas Económicas y Comerciales de España en el Exterior (2007) ‘El Salvador aprueba una Ley con incentivos para inversiones en Energía Renovable’, notice in La Prensa Gráfica, 10 November, available at www.oficinascomerciales.es/icex/cda/controller/pageOfecomes/0,5310,5280449_5282927_5284940_403018 4_SV,00.html Ruiz, O. (2007) Interview with O. Ruiz, Head of the Centre of Information and Promotion of Renewable Energy, Ministerio de Energía y Minas, 7 September, Guatemala City, Guatemala Comision Nacional de Energía (2007) Decreto 70-2007, in La Gaceta: Diario Oficial de La Republica de Honduras, 2 October, Tegucigalpa, Honduras Barnes de Castro, F. (2007) Interview with F. Barnes de Castro, Commissioner of Comision Regulatoria de Energía, 30 August World Bank (2006) Project Information Document: Appraisal Stage for La Venta III, 26 April Comisión Regulatoria de Energía (2001) Resolución Num. RES/140/2001 Mexican Parliament (2006) Ley para el Aprovechamiento de las Fuentes Renovables de Energía, February Synergy de la Comunidad Europea (2005) ‘Metodologías para la implementación de los mecanismos flexibles de Kioto: Mecanismo de Desarrollo Limpio (MDL) – Guía Latinoamericana del MDL’, Guidebook, available at www.cordelim.net/extra/html/pdf/library/olade.pdf Asemblea Nacional de Nicaragua (2005) Ley Para la Promocion de Energía Eléctrica de Fuentes Renovables, Normas Jurídicas de Nicaragua, 14 April Ministerio de Economia y Financas de Comision de Politica Energetica de Panama (2004) Legislative Assembly Law 45, 4 August Ministerio de Energía y Minas (Direccion de Electricidad) (2007) Decreto Supremo: Aprueban Reglamento de la Ley que amplía los alcances del Régimen de Recuperación Anticipada del Impuesto General a las Ventas a las Empresas de Generación Hidroeléctrica, 29 March Ayon, H. (2007) Interview with H. Ayon, Gerente de Finanzas de Paramonga, 7 November, Lima, Peru El Peruano (2008) Normas Legales: Decreto Legislativo (1002) de Promocion de la Inversion para la Generacion de Electricidad con el Uso de Energías Renovables, in 10219, 2 March Kasprzyk, M. (2007) Interview with M. Kasprzyk, Designated National Authority in the Ministerio de Vivienda, Ordenamiento, Territorial, y Medio Ambiente, Division de Cambio Climático, 27 November, Montevideo, Uruguay Administración Nacional de Usinas y Trasmisiones Eléctricas (2008) Parte Uno: Pliego de Condiciones Particulares para Pliego de Condiciones y Especificaciones para la realización de CONTRATOS DE COMPRAVENTA DE ENERGIA ELÉCTRICA por parte de UTE a proveedores instalados en el territorio nacional que produzcan dicha energía utilizando como fuente primaria energía eólica, de biomasa, o de pequeñas centrales hidráulicas, in P37637, 6 March
These changes in the electrical sectors of each country have succeeded in creating an environment that allows for more efficiency and better service, but have left many countries with a shortage in capacity. The organization of the market and laws that provide incentives for new capacity additions through production tax credits, feed-in tariffs, tax exemptions and renewable energy mandates are all meant to stimulate the market without causing too drastic a rate impact. However, the setting of these policies and incentives is not an exact science and involves a bit of trial and error. Also, external events like the collapse of both Ecuador’s and Argentina’s economies in 1998 and 2002 can lead to a lack of capacity additions even if the policies and incentives are appropriately set. Often these newly privatized countries are not able to attract investment because the current price of electricity, which is usually based on
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hydro resources that operate very cheaply, is low. New generators must compete against these low-cost resources with their new generation. Other countries, like Nicaragua, have had fewer new market entrants than the system needs because of the country’s political and economic risks [5]. This situation has left most countries in Central America, as well as Ecuador, Uruguay, Chile and Argentina, facing an energy crisis and importing energy and fossil fuels to satisfy the current demand. The capital costs for building new hydro applications are too high for private investors to take on as state-run companies did prior to restructuring. This predicament has led to a lack of capacity additions, blackouts and power shortages throughout the region that are reminiscent of the 1990s when the state-run utility could not provide adequate supply [1]. In order to reduce these supply shortages, the government has begun contracting emergency generation from fossil fuelburning sources. This trend is especially pronounced in Central America where many sites of ‘rented’ generation are springing up. These sites typically burn bunker fuel oil #6, which is highly polluting and expensive. The government is entering into Power Purchase Agreements (PPAs) with these entities for high rates of 23–30¢/kWh. The government contracts these generators because they can provide generation that is quickly installed, and they do not have to enter into long-term agreements with the generators since the facility components like the gas or diesel turbine can be easily moved to another location [6]. Hydro and other types of renewable generators do not receive this type of preferential treatment. They are discouraged by these PPAs as they are still forced to compete with the existing low-cost hydro generation on the grid in energy auctions. In most cases, non-hydro or biomass renewable energy like wind must compete against fossil fuel generation that earns capacity as well as generation payments [7]. Private generators have also been discouraged from building new hydro facilities in some countries because of droughts that have plagued areas of South America. Colombia, Peru and Chile have experienced severe El Niño and La Niña-related droughts since the late 1990s that caused outages [8, 9 and 10]. El Niño and La Niña Southern Oscillation impacts the surface temperatures of the Pacific Ocean and brings either dry or wet condition and has had dramatic impacts on the hydroelectric industries of Colombia, Ecuador and Chile. Since hydro resources make up 50 per cent or more of each of these country’s electrical grids, precipitation changes can cause energy shortages [11]. Some countries like Peru even implemented legislation to discourage hydro development in order to diversify the country’s generation sources, reduce these outages and support the natural gas industry. From 1998 to 2000, President Fujimori of Peru banned all new hydro development and put in place strong incentives for natural gas plants [12, 13, 14, 15 and 16]. Recent high fossil fuel prices at $119 per barrel of crude oil (as of 30 April 2008), however, have made this type of new fossil fuel-based generation undesirable in most countries [17]. Chile, which is currently facing a natural gas supply shortage from Argentina, has had electricity prices jump from $40/MWh
REGIONAL TRENDS
309
in April 2004 to $250/MWh in April 2008 as the country has had to convert most of its natural gas facilities to accept petroleum-based products [18]. As climate change has the potential to cause more unpredictable weather patterns, worse drought conditions and higher rates of evaporation from reservoirs, and fossil fuel prices continue to rise, countries will most likely look to increase interconnectivity in order to take advantage of the complementary nature of hydro resources located in different regions in order to prevent capacity shortages [1]. Already, Central America is boosting its existing line connection by double its current capacity, and there are plans to connect this grid with Mexico and Colombia [19]. Ecuador is increasing its interconnection capacity with Colombia [20], and Uruguay is doing the same with Brazil [21]. These countries have also begun to consider renewable energy policies to promote generation with more stable fuel costs.
Renewable energy legislation In response to these high fossil fuel prices, most Latin American countries have begun to promote renewable energy with incentives and mandates. This energy, which usually has fixed fuel costs for biomass and no fuel costs for hydro, wind and other types of generation, is now desirable. To avoid the problems with drought, countries such as Chile and Brazil are only allowing hydro below 20MW (in Chile) and 30MW (in Brazil) to qualify for the renewable energy incentives and mandates [22 and 23]. By having smaller hydro applications, the effects of drought could be minimized as installations would be more dispersed. Like privatization, each country has taken its own path towards promoting renewables. These various schemes reflect the diversity in each country’s philosophies and investment climate. A summary of these renewable energy policies is provided in Table 28.3 above. Some common policies used widely throughout the region of Latin America are to exempt renewable generators from paying income taxes for a set number of years (usually five to ten) of project operation and from paying import taxes. Also, mandates and financial incentives for generation have been incorporated into most countries’ legislation in a variety of ways. The three main policies used to promote renewable energy penetration in Latin American markets are described and discussed below [24].
Pros and cons of renewable energy legislation Renewable energy mandate Renewable energy mandates oblige generators or distributors to source a certain percentage of their generation from renewable sources. Binding mandates outline target years for compliance; entities that do not comply by that year face non-compliance fees that can serve to create a premium for renewable energy. If the mandate authors have a goal of promoting a certain type of technology, they can create a set-aside for specified technologies. These
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set-asides require that a percentage of the overall renewable energy requirement be sourced from a given technology [25]. Currently, 25 US states and Chile have voluntary or binding target percentages of renewables that electrical generators must fulfil [26]. Renewable energy mandates can also be expressed in terms of MW capacity additions. Uruguay, Brazil and the US state of Texas have adopted this approach to supporting renewable energy. This technique successfully ensures that a set amount of installations will be implemented, but fail to take into account electrical growth rates. If the electrical growth rate is high, then a set MW requirement could become insignificant. Renewable energy mandates are more economically efficient than some of the alternatives to promoting renewable energy as they allow market pressures to lower the cost of generation. Like a competitive market, generators in a market with a renewable energy mandate compete against each other to provide the least-cost energy and engage in PPAs. This situation differs from the feed-in tariff described below, which provides generators with a fixed price for either their generation or capacity and does not encourage innovation to reduce generation costs. Despite these advantages to the mandate, there are also negative aspects to mandates if they are not structured well. A mandate without set asides, which necessitate that a portion of generation be sourced from a particular technology, does not help promote a diversity of technology types. Also, some administrative costs for monitoring and verification are imposed as regulated entities must be checked for compliance [25]. Production tax credit A production tax credit (PTC) is an alternative or supplemental instrument to renewable energy mandates that can be a useful way to help renewables compete with other types of generation technologies by providing the difference in generation costs. However, if not properly designed, PTCs can also be a detriment to an industry. A PTC is a per kWh premium payment from the federal government to generators. This payment is in addition to an energy payment and often varies based on the type of generation. In the US, the PTC for wind generation set at 1.9¢/kWh in 2008 has not been consistently supported by the federal government and has therefore expired and been renewed several times. The result of this inconsistent support is a periodic boom and bust in the wind industry [27]. If a developer begins the process of measuring wind speeds on a site, buying or renting the land, getting the requisite permits and sourcing the wind turbines, but does not begin generation on the site before the PTC has expired, then he is not eligible for this economic incentive. The time required to procure permits and turbines (especially during this global turbine shortage period) is so uncertain that often wind and other renewable developers cannot rely on the PTC. In the Latin American region, only Argentina has adopted a PTC.
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Feed-in tariff Feed-in laws are yet another policy tool to promote renewable energy. These laws require distributors to buy renewable energy at a fixed rate per kWh that is higher than the average wholesale market price and usually close to the retail price of electricity and the cost of generation. If the authors of the feed-in law hope to promote a particular type of technology, then feed-in laws are structured to pay different rates for different types of renewables [25]. The main benefit of feed-in laws is that they provide assurance to banks that generation will earn a given price and allow developers to more easily access loans. Critics of feed-in tariffs say they are not an economically efficient way to promote renewables. Giving generators a guaranteed set price for electricity provides little incentive for innovation that would reduce generation costs. In a regulatory system with feed-in tariffs, generators are not competing against each other in an energy auction [25]. Another critique of feed-in tariffs is that phasing them out as renewable technologies become more cost-competitive can be problematic as generators rely on the preferred tariff for their existence and financial viability. The tariffs are generally active until the lifetime of the plants built under the tariff structure expires. Germany, Denmark and the US, with its Public Utilities Regulatory Policies Act (PURPA), have implemented feed-in tariffs [25]. Ecuador and Costa Rica have adopted traditional feed-in tariffs while Peru recently pledged to cover the difference between the cost of conventional and renewable generation in a derivation of a feed-in tariff [28]. Comparison There is no clear preferred renewable energy policy since some policies are more appropriate for a given political environment than others. Chile has been able to utilize a mandate because it has a stable economic climate and is ripe for foreign investors that will compete in a least-cost bid process with other renewable generators. Therefore, it is likely that the mandate, with penalties for non-compliance, will be filled by competitive bids from renewable generators. Using a direct subsidy in Chile could have been more costly for consumers, who ultimately usually bear the additional costs or savings for renewable energy since there is no competition for generation. Implementing a mandate in a politically and economically unstable country like Nicaragua, on the other hand, may prove to be a failure. New generators in Nicaragua may be hesitant to enter the marketplace until the final moment before non-compliance fees are charged in a mandate. Noncompliance fees in a politically unstable country may have to be set higher than in a politically and economically stable country since investors will want to have a higher rate of return given the risky environments. Also, there will probably be less competition for new generation, and the few renewable generators that enter the market may be able to collude on prices, and charge a premium for the energy that is close to the non-compliance fee, since there is little competition. In this example, using a mandate rather than a direct
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incentive could lead to a lag in developer interest and may fail to create a competitive marketplace where generators could pass on a minimal cost for renewable generation to customers. Ecuador may have recognized this phenomenon when it chose to implement a feed-in tariff to promote renewables. While perhaps not the most elegant and efficient policy instrument, the feed-in tariff is probably appropriate for this country given its economic crisis of 1998 and rapid succession of presidential changes since 1995 [3]. The feed-in tariff provides a guaranteed profit for generators that bolsters project finances and makes it easier to obtain a loan from banks. However, using a fixed feed-in tariff or PTC also has its dangers and does not automatically stimulate development in a given sector. Countries with an unstable currency are at risk of having the PTC and feed-in tariff being meaningless if they are fixed in federal legislation that cannot be easily adjusted to reflect devaluation. This situation occurred in Argentina in 2002 when the Argentine peso was devalued by 30 per cent to the US dollar. The PTC was reset years later in 2006 to 1.5 peso ¢/kWh for wind, hydro under 30MW, biomass and geothermal, and 0.9 peso ¢/kWh for solar [29]. But the PTC now fails to provide complete investor confidence as it could again become meaningless if the currency is devalued. Therefore, the best policy choice for each country is case- and site-specific. The country’s current electrical sector structure, portfolio mix and investment climate should be considered when making this decision.
Country-specific challenges Beyond the privatization scheme selected and the renewable energy legislation, the obstacles to Clean Development Mechanism (CDM) development in each country are varied. In some cases they depend on the political and economic history of a country, and in other instances they are contingent on renewable resource availability and the past history of implementation, especially with hydroelectric projects. The amount of support for renewable energy through NGOs, national laboratories, regional organizations, development banks, foreign governments and other entities can be wide-ranging, based on relationships and existing organizational infrastructure. The Designated National Authority ( DNA) office can have a huge bearing on the success of CDM projects as it can be a partner or barrier to development. The role and participation of the DNA office in each country is summarized below in Table 28.4.
Summary The lack of capacity additions due to the restructuring trial-and-error process, vulnerability of nations to foreign fossil fuel resources, and El Niño/La Niñaprovoked droughts have provided an opportunity for renewable energy and small-scale hydro. In response to these situations, most Latin American
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Table 28.4 The role and participation of DNA offices in Latin American countries Office location Role Argentina
Separate office formed for promotion that will take 1% of CERs from projects it helps; sustainable development criterion considers additionality of projectsa Belize None Bolivia Privately run office that will support itself through CER taxes of 15–35%; highly developed websiteb Brazil Regulatory function emphasized, but some capacity building done through seminars and CDM guide; project documents must be completed in Portuguese for national approvalc Chile Poorly developed office that does not communicate well with project developers and has little information on webpaged Colombia Project must pass three committees which sometimes leads to delays; staff have temporary posts which leads to turnover and inconsistencye Costa Rica Staff were involved early in the climate change negotiations process but did not succeed in helping to formulate CDM procedures that would benefit the country and are therefore discouragedf Dominican Rep. Created relationships with CER-buying partners early in processg Ecuador Regulatory and promotion offices separated; promotion office is very developed; projects visited individually with money from CER taxes of between 3 and 5%h El Salvador Takes on strong promotion rolei Guatemala Long history with CDM office which was established in 1996j Honduras Potential division of CDM office by sector; staff upheaval with administration changesk Mexico Staff of only two people limits office’s ability to promote and educate about projectsl Nicaragua Staff upheaval with administration changesm Panama Young staff with high turnovern Peru Promotion and regulatory offices separated; promotion office is functional and helpful; regulatory office has turnover with administration changes and is charged with more than it can handle given its limited staffo Uruguay Well-developed office with information for developersp Sources: a b c
Galbusera, S. (2007) Interview with S. Galbusera, Fondo Argentino de Carbono, 20 November, Buenos Aires, Argentina Trujillo, R. (2008) Interview with R. Trujillo, Designated National Authority of Bolivia, 16 April Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An assessment of DNAs in Latin America and the Caribbean’, report for Inter-American Development Bank, Washington, DC, 2 June d CONAMA (n.d.) Cambio Climático, www.conama.cl/especiales/1305/propertyvalue-14612.html, accessed February 2008 e Bettelli, P., Garcia, A. and Graviator, S. (2007) Interviews with P. Bettelli, A. Garcia and S. Graviator, Designated National Authority in the Unidad de Cambio Climatico de Ministerio del Medio Ambiente, Vivienda, y Desarrollo Territorial, 12 October f Manzo, P. (2007) Interview with P. Manzo, Director General de Instituto Meteorológico Nacional (Costa Rica’s Designated National Authority), 27 September, San José, Costa Rica g Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An assessment of DNAs in Latin America and the Caribbean’, report for Inter-American Development Bank, Washington, DC, 2 June h Cornejo, J. (2007) Interview with J. Cornejo, Designated National Authority of Ecuador in the Unidad del Cambio Climático de la Comisión Nacional del Medio Ambiente, 25 October, Quito, Ecuador i Sanchez, I. A. (2006) ‘Estudio sobre la aplicación del mecanismo para un desarrollo limpio en El Salvador’, report for Ministerio de Medio Ambiente y Recursos Naturales, La Cooperación Internacional de Japón and Universidad Centroamericana, June j Castañeda, R. (2007) Interview with R. Castañeda, Designated National Authority of Guatemala, Ministerio del Medio Ambiente y Recursos Naturales, 3 September, Guatemala City, Guatemala k Salgado, G. (2007) Interview with G. Salgado, CDM Consultant, former Designated National Authority of Honduras, 11 September, Tegucigalpa, Honduras l Cervantes, H. (2007) Interview with H. Cervantes, Designated National Authority of Mexico, 29 August, Mexico City, Mexico m Madriz, M. (2007) Interview with M. Madriz, Designated National Authority Assistant in MARENA, 19 September, Managua, Nicaragua n Cartin, Z. (2007) Interview with Z. Cartin, Member of the Designated National Authority team of Panama in Oficina del Cambio Climático de ANAM, 3 October, Panama City, Panama o Garcia, D. (2007) Interview with D. Garcia, Fondo Nacional del Ambiente Energy and CDM Specialist, 5 November, Lima, Peru p Heuberger, R., Sutter, C. and Santos, L. (2003) Host Country Approval for CDM Projects in Uruguay: Application of a Sustainability Assessment Tool, Swiss Federal Institute of Technology ETH, Institute of Environmental Physics, Energy & Climate, and Ministry of Housing, Territorial Regulation and Environment of Uruguay, August
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countries have recently created renewable energy incentives and are in the process of revising these policies to make them more supportive. These renewable energy policies have associated advantages and disadvantages and should be implemented in a site-specific manner. Other country-specific challenges and opportunities, including the country’s DNA office, have played a role in shaping the Latin American CDM development.
References 1
2
3
4
5
6
7
8 9
10
11 12 13
14 15 16
Rudnick, H. and Zolezzi, J. (2001) ‘Electric sector deregulation and restructuring in Latin America: Lessons to be learnt and possible ways forward’, IEE Proceedings: Generation, Transmission, and Distribution, vol 148, no 2, March World Bank (2005) Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/ The Heritage Foundation and The Wall Street Journal (2008) ‘Index of Economic Freedom’, www.heritage.org/index/country.cfm?id=Ecuador, accessed 14 April 2008 World Bank (2007) ‘Latin America and the Caribbean Region (LCR): Energy sector – retrospective review and challenges’, Energy Sector Management Assistance Programme report, 15 June Renewable Energy and Energy Efficiency Partnership (n.d.) LAC Policy Descriptions: Nicaragua, Sustainable Energy Policy Initiative, available at www.oas.org/dsd/reeep/formularios/nicaragua_pb_reeep.doc Salgado, G. (2007) Interview with G. Salgado, CDM Consultant, former Designated National Authority of Honduras, 11 September, Tegucigalpa, Honduras Cardona, E. Z. (2007) Interview with E. Z. Cardona, Gerente General de Colegio de Ingenieros Mecánicos Electricistas y Químicas (former director of AHPPER), 10 September, Tegucigalpa, Honduras Pombo, C. (2001) ‘Regulatory reform in Colombia’s electric utilities’, The Quarterly Review of Economics and Finance, vol 41, no 5, pp683–711 Joval, J. R. (n.d.) The Impact of the 1997–1998 El Niño on the Andean Community of Nations, United Nations International Strategy for Disaster Reduction, available at www.eird.org/eng/revista/No1_2001/pagina22.htm Arango, S., Dyner, I. and Larsen, E. (2006) ‘Lessons from deregulation: Understanding electricity markets in South America’, Utilities Policy, vol 14, no 3, September, pp196–207 Garcia, D. (2007) Interview with D. Garcia, Fondo Nacional del Ambiente Energy and CDM Specialist, 5 November, Lima, Peru Ministerio de Energía y Minas (Dirección de Electricidad) (1999) Ley que Modifica Diversos Artículos de la Ley de Concesiones Eléctricas, 14 December Ministerio de Energía y Minas (Dirección de Electricidad) (1998) Ley que Modifica Diversos Artículos y Definición Anexa de la Ley de Concesiones Eléctricas, 24 September Ministerio de Energía y Minas (Dirección de Electricidad) (1999) Ley de Promoción del Desarrollo de la Industria del Gas Natural, 3 June Netherlands CDM Facility (2005) Poechos I Project Design Document, UNFCCC Center for Energy Economics (2006) ‘Gas and power in Peru’, case study, Bureau of Economic Geology, University of Texas at Austin, 27 March
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17 Energy Information Administration (2008) ‘This week in petroleum’, newsbrief, 30 April 18 Frias, C. A. (2007) Interview with C. A. Frias, Especialista Area Ingeniería para Colbún, 18 November, Santiago, Chile 19 Gomez, T., Enamorado, J. C. and Vela, A. (1994) ‘Feasibility studies of a power interconnection system for Central American countries: SIEPAC Project’, Power Engineering Review, vol 14, no 6, June, pp11–13 20 Castillo, D. (2007) Interview with D. Castillo, President of ERD Consultants, 1 November, Guayaquil, Ecuador 21 Tasende, D. (2007) Interview with D. Tasende, Director of Renewables, UTE 27 November, Montevideo, Uruguay 22 Ministerio de Economía Fomento y Reconstrucción (2004) Ley Corto I: Regla Sistemas de Transporte de Energía Eléctrica, Establece un Nuevo Regimen de Tarifas para Sistemas Eléctricos Medianos, y Introduce Adecuaciones que Indica a la Ley General de Servicios Eléctricos, Diario Oficial de la Republica de Chile, 13 March 23 do Valle, C. (n.d.) ‘Renewable Energy Policy: Brazil’, presentation at Centro Clima: Centre for Integrated Studies on Climate Change and the Environment, available through Renewable Energy Policy Network for the 21st Century at www.ren21.net/pdf/WorkShop_Presentations/do-Valle_Renewable%20Energy% 20Policy%5B1%5D.ppt 24 Lokey, E. (in press) ‘Renewable energy legislation in Latin America to ease dependency on fossil fuels’, in Energy Policy: Economic Effects, Security Aspects and Environmental Issues, in N. Jacobs (ed), Nova Publishers, Hauppauge, NY 25 Komor, P. (2004) Renewable Energy Policy, Diebold Institute for Public Policy, New York 26 Bird, L., Dagher, L. and Swezey, B. (2007) ‘Green power marketing in the United States: A status report’, 10th Edition, NREL/TP-670-42502, December, National Renewable Energy Laboratory, Golden, CO 27 US Energy Information Administration (2005) ‘Production tax credit for renewable electricity generation’, Issues in Focus report, available at www.eia.doe.gov/oiaf/aeo/otheranalysis/aeo_2005analysispapers/prcreg.html 28 El Peruano (2008) Normas Legales: Decreto Legislativo (1002) de Promocion de la Inversion para la Generacion de Electricidad con el Uso de Energías Renovables, in 10219, 2 March 29 El Senado y Cámara de Diputados de la Nación Argentina (2000) Régimen de Fomento Nacional para el Uso de Fuentes Renovables de Energía Destinada a la Producción de Energía Eléctrica: Ley 26,190, in Boletín Oficial, 5 July
Section 4 Future Development
29 Stimulating Investment and Overcoming CDM Barriers
This chapter presents potential solutions to the CDM barriers identified. These solutions are organized by those who should implement them and then further subdivided into the category of barrier addressed.
Project developers/investors Technical Many of the technical and social solutions to Clean Development Mechanism (CDM) project implementation have been recognized by groups like Sandia National Laboratories and NGOs like Practical Action that have been implementing renewable energy projects for years. With regard to technical barriers, some common-sense solutions that project developers could implement include the following: (1) classes to build a group of local technology experts to support projects on an ongoing basis and providing printed booklets of maintenance with pictures and words; (2) the creation of a system for ordering parts through the phone/Internet or making communities aware of how and where to buy replacement parts for remote projects; (3) the inclusion of a stockpile of replacement small parts in the budget of the project for remote projects; and (4) the creation of strict quality control during construction. In order to ensure that these general good-practice technical solutions are heeded, the technical trouble-shooting procedures and policies listed in the previous paragraph could be listed in the Project Design Document (PDD) as a requisite part of the monitoring plan. Designated National Authority (DNA) offices could offer these technical solutions to developers. Since it is in the project owner’s best interest to ensure the successful operation of the project and production of Certified Emission Reductions (CERs), project developers may welcome these recommendations.
Social Just as project developers could follow technical project implementation guidelines that large organizations such as Sandia National Laboratories and other
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NGOs follow, they also could follow the procedures for incorporating the project in the community that have proven successful. Sandia has records of how well each project was incorporated into each community and the subsequent success or failure of the project. Perhaps by reviewing these documents prior to implementing the project, developers could anticipate problems and take steps to avoid them.
Financial In order to avoid the pitfalls described in Chapter 4, ‘Financial Barriers’, project developers and investors could control CDM risks by utilizing Swiss Re, RNK Capital LLC or other insurance products to ensure CERs are from renewable energy projects and decrease investors’ concerns about their financial viability [1].
Host country governments / DNA offices Social Host country governments could provide incentives for projects developed by local municipalities that are owned by communities and allow project profits to be shared by all community members. To decrease conflicts that occur with foreign project developers, host country governments could require foreign developers to give a portion of project profits to the community for specific development goals like school- or bridge-building, as Panama proposes [2]. Alternatively, the host country government could require that the local community be a part owner of projects in exchange for the land and water permit. Host countries could follow Panama’s and Colombia’s leads in offering an income tax deduction on the project if a percentage of the CERs are reinvested in community development [3]. As in Costa Rica, host countries could require developers to comply with the International Standards Organization’s 14000 standards for environmental responsibility [4]. The problem of stolen electricity, which poses a risk to project developers’ ability to profit from the projects they implement, must be addressed at the national level, as Colombia and Peru have shown by creating incentives to make a culture of paying for electricity bills. Host countries and domestic energy companies must install better metering devices and system surveillance to ensure that lines are not split and electricity stolen. Another systemic social problem that host countries could help remedy would be the issue of how to settle disputes over land and water deeds for areas with renewable energy resources. Illegal land tenants that refuse to abandon the land have caused headaches for developers. Each country could help solve these problems by clarifying its domestic water permits and creating a policy for how renewable energy developers should handle the eviction and relocation of residents who do not own the land.
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Financial Since some project owners still have difficulty utilizing the future value of CERs to boost their project’s pro forma and gain a loan, having the DNA office explain the benefit and value of CERs to local banks, as FONAM of Peru has done, could help educate local lenders about the value of carbon credits [5]. This type of education could also help state-run utilities to better utilize the CDM as it could help regulators incorporate prospective CDM revenues in the least-cost planning process. Host country governments could help renewable energy projects overcome general financial hurdles by benefiting from financing for feasibility studies as CORFO of Chile has done [6]. The high cost of these feasibility studies prevents projects from being developed since there is no guarantee that this initial money invested will be recovered if the project isn’t implemented. Host country’s DNA offices could structure incentives that provide momentum for projects from the same developer or Designated Operational Entity (DOE). Perhaps these projects would be exempt from or pay a lower rate on the aforementioned tax. In this way, project developers would have more of an incentive to embark upon the lengthy and complicated CDM process. Host countries could provide an environment that is favourable to CDM development by reducing barriers to renewable energy interconnection with the national grid such as excessive paperwork. Creating uniform interconnection rules for CDM projects in order to entice foreign developers who are discouraged by country-specific regulation would also help reduce these barriers. The host country could require power to charge uniform transmission and distribution rates to avoid overcharging potential renewable generators. The host countries could also improve renewable energy economics without providing a direct subsidy by eliminating the import tax on energy system components and annual income tax on renewable energy generation [7]. In countries with a primarily state-run electrical sector, potential CDM revenues could be required for consideration in future least-cost planning processes to ensure that state utilities could still take a part in CDM projects. If the CDM revenues were not earned and customers suffered from higher rates due to a more expensive renewable energy generation having been implemented instead of the least-cost generation, then a portion of the proceeds from a tax that the DNA office implements on projects registered in the country could help pay this cost difference. Many countries in the region are not achieving their CDM potential because they have short-term visions for their energy sector. The long-term energy policy plans of host countries could incorporate CDM goals and specific incentives to achieve these goals. Also, the CDM office should be one that is permanent and continues despite frequent administration changes that clear out the staff of governmental offices. Doing so would allow DNAs to have long-term relationships with project developers, who sometimes work through many administrations to develop a project. It also would allow for a
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body of knowledge and experiences about the CDM to accumulate and become useful to developers.
Informational The amount of information about the CDM that is distributed is largely controlled by the host country’s DNA office. DNA offices could be required to take a small percentage of CERs revenues and allocate this taxed amount to the advertising of CDM opportunities. Or, this CER tax could go into a fund that provides economic incentives for local advertising and/or engineering firms that market the CDM opportunities. DNA offices could also use this tax to supply each country with clear CDM registration guides in each country’s official language. These guides could be distributed to the DNA office, DOEs and local engineers and be updated annually to reflect changes in CDM Executive Board decisions [8]. These revenues could also be used to sponsor CDM workshops in developing countries for local engineering firms, municipalities and local financing institutions [8], create webpages with useful CDM information for project developers, and offer free legal assistance to project owners involved in Emission Reduction Purchase Agreement (ERPA) negotiations. Using some of the revenues to help project developers in the initial stages of the CDM process, as Peru, Ecuador and Argentina have done with their CDM promotion, offices would help clarify some of the initial confusion over the CDM. DNAs could also be required to keep a database of domestic CDM projects for project developers and carbon financers to reference when establishing additionality, which often requires that the project be a first-of-its-kind type [9]. If DNA offices also tracked and disseminated information about CER prices, then project developers could be better informed to make decisions about forward selling their CERs or holding them for sale at a future date. Since the revenues from CER sales would be skewed to favour those countries with more CDM potential, perhaps host countries and NGOs could pressure capacity building organizations like UNEP/Risø to provide equitable support in the form of national strategy studies and barrier analyses to all countries, regardless of their CDM potential.
Small scale The host country could require generators to buy electricity from systems under 15MW at a fixed price that is on average higher than the spot price, offer tax breaks for utilities that buy renewable energy from generators under 15MW, require DNAs to keep an updated list of regional emission factors from electrical generation to ease the baseline calculation for small-scale CDM developers, and offer a financial bonus for each small CDM project that staterun utilities have connected with their systems [9].
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UNFCCC Social Basic guidelines to successfully incorporate a project into a community’s social structure could avoid delays and system sabotage. The United Nations Framework Convention on Climate Change (UNFCCC) CDM Executive Board could help ease social tensions by creating basic guidelines for project incorporation into society and conducting socialization sessions. The UNFCCC could ensure that these guidelines are followed by having the verifying DOE review the steps the developer took to incorporate the project in the community and make an assessment of how well a system works within the existing community structure.
Technical To avoid the problem that has occurred with agro-industry methane capture projects in Mexico, a better definition of what qualifies as a ‘proven technology’ should be applied. Currently, only those technologies that are deemed ‘proven’ by the UNFCCC may be eligible for the CDM; however, the UNFCCC’s guidance of what qualifies as ‘proven’ consists of only one terse sentence that reads: ‘The Board agreed to indicate to the project participants that project activities under the CDM shall make use of technologies which are proven under field conditions and show general acceptance of the technology’ [10]. This definition provides project developers with little assistance since it uses the word it is trying to define in the guidance statement. Since agro-industry methane capture is a fairly new technology, that is still being refined for various altitudes and weather conditions and not widely dispersed in developed countries, perhaps this technology should not qualify as ‘proven’.
Financial To reduce project failure risk and lack of CDM value after the Kyoto Protocol ends in 2012, there is a need for the private sector to create an insurance product for CERs generated in future years. Also, private sector pressure on the Annex I countries to come to an agreement on the post-2012 rules at the 2009 Copenhagen Conference of the Parties could help provide the requisite certainty that CERs will have a value in the future [7]. The UNFCCC could help stimulate development by setting targets and incentives for DNAs and DOEs to be involved in a certain number of CDM projects per year. The money for these incentives could be taken from the funds collected from UNFCCC CDM project registration. These incentives could be set in a way that ensures that the projects passed are of a high quality and additional. Also, these incentives could be structured to account for a country’s natural differences in CDM potential. The UNFCCC could also prompt project development by lowering transaction costs by allowing monitoring and verification to be done in random years instead of every year [11].
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UNFCCC procedural and methodological Several changes to the way in which methodologies are created and used could avoid some of the CDM renewable energy barriers. The changes made to methodologies at random times make it difficult for a project developer to trust that it makes financial sense to engage in a CDM project since the alterations to methodologies often drastically change project finances. Perhaps these changes could be made less frequently or only be permitted once every two years so that they would at least be predictable and allow project developers to better plan their projects. The way in which the current UNFCCC rules allow for selection of a build and operating margin ratio and baseline calculation allows carbon brokers to manipulate the UNFCCC system, claiming perhaps more emission reductions than are really created. The choice of these factors should either be eliminated or strictly overseen. When proposing a new methodology, developers in Chile who worked on the Chacabuquito Hydroelectric Project had the experience of their methodology being approved but changed slightly to yield fewer reductions than they predicted [12]. The UNFCCC should perhaps just reject or accept proposed methodologies exactly as they have been written to avoid this problem. Some countries with clean energy portfolios like Costa Rica’s have felt left out of the CDM since they have the potential for few reductions. The UNFCCC could base emission reduction calculations on the emission intensity of the fuels for electrical generation listed in the short- and long-term national energy plans. While these plans are not perfect and do not always portend the precise future additions that are built, the plans may help provide a more accurate picture of what the CDM project would be displacing in the future. Using these plans of estimated capacity additions would provide more of an incentive for countries with clean fuels in their historical growth but current and future reliance on fossil fuels to utilize the CDM to promote renewable energy additions that would not have otherwise occurred. However, safeguards would have to be put in place to ensure that the expansion plans remained as accurate as possible and plan authors did not falsely predict more fossil fuel expansion just to be able to capture more CERs. The UNFCCC must also decide how to handle imported energy in a way that recognizes that imported fuels do have some carbon content. Perhaps imported energy could utilize the country of origin’s average emission factor for purposes of creating the national and regional grid emission factors of the country using the energy. Then, the country exporting the energy could annually tally the amount of energy exported and deduct the associated emissions from its national and regional grid totals for purposes of an accurate calculation of its own grid emission factors. The new Programme of Activities (PoA) methodology has been underutilized, perhaps because of concerns over the ability of projects to demonstrate additionality if they fulfil national and private sector initiatives. Therefore, clear rules on how PoA projects can demonstrate additionality must
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be formulated. And incentives for DOEs to be involved in PoA projects must be created since DOEs must assume liability for PoA CERs issued in error. Another major barrier due to UNFCCC regulations is the additionality requirement. There is a need to create clear regulatory and financial additionality guidelines that do not create a perverse incentive for countries not to implement greenhouse gas-mitigating activities. One way to achieve this goal would be to create a ‘positive list’ of pre-approved offset categories, as is used in the Regional Greenhouse Gas Initiative in the US [13]. For example, one type of project that is considered acceptable according to the positive list approach in the Regional Greenhouse Gas Initiative is Landfills, which are not subject to New Source Performance Standards therefore are not required by law to install methane capture systems. Other solutions to the additionality conundrum have been proposed. Some CDM experts think that there should be a tax on each CER generated from large projects or for projects that are not in line with the host country’s determination of sustainable development [14]. The tax could possibly go towards development and operations of the country’s DNA office or advertising of CDM opportunities and/or community development. Or the UNFCCC could issue a different number of CERs for different gases/fuels [15]. This suggestion would eliminate the allocation of CERs on a CO2-equivalence basis and instead allocate reductions based on priorities set by the UNFCCC for sustainable development. The exclusion of industrial gases like HFC-23 or the reduction of their significance in terms of emission reduction generation would allow renewable energy projects to compete better in the CDM market. The additionality criterion could be different for countries in distinct stages of development. The requirements could be more stringent for projects in more developed countries and less stringent in less developed countries. Countries could be labelled and categorized in three groups, each of which has different requirements, in order to promote more equitable project distribution in areas like sub-Saharan Africa which have the the most poorly developed countries and have received the least CDM development [16]. Alternatively, a sliding scale of additionality that would provide fewer CDM revenues for projects with less additionality could be utilized [17]. Finally, there is a dire need for the UNFCCC to create and adhere to concrete sustainability goals [18]. Creating a definitive ‘sustainability’ definition would guide the rule-making and decisions that the UNFCCC makes as well as give all host countries guidance on which projects to allow. The creation of this definition could have the effect of eliminating industrial gas projects to put renewable energy on a more level playing field.
Small scale The UNFCCC could take several actions such as changing the small-scale project size definition to overcome the barriers to small-scale project development [19]. Some CDM experts have recommended increasing the size of small-scale projects by factor of five to make them more economical [11],
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defining ‘small’ by type of technology and application [19] and using a sliding scale of ‘small’ with different levels and degrees of methodological complexity. The UNFCCC could also let small-scale projects be exempt from the leakage requirement, which obliges the person creating the PDD to consider emissions created outside of the project boundaries, known as leakage [20]. The UNFCCC could provide exemption of small-scale projects from having to pay the climate change adaptation levy tax of 2 per cent that applies to all CERs generated [20]. To reduce transaction costs, small-scale projects could be exempt from having to redo the PDD after each crediting period [20]. The UNFCCC could stimulate project type diversity by imposing changes to methodologies. More relaxed methodologies for distinct project types, especially solar and wind, might instigate more development in these sectors. The UNFCCC could create more simplified bundling rules for solar, wind and biomass projects under one PDD since doing so now constitutes as much work as doing separate PDDs for all of these projects. Allowing projects like wind and solar generation that have low capacity factors of below 50 per cent to qualify as small scale even if their capacity rating were closer to 30–50MW, rather than the current small-scale definition of 15MW, would be more appropriate for these technologies. Making this adjustment would put small-scale wind and solar projects on a level playing field with small-scale biomass and hydro projects that have capacity factors closer to 85 per cent. For off-grid projects that have baseline emission calculations that are difficult to predict, because they depend on a combination of firewood, kerosene, car battery and diesel generation use, an average emissions factor that each technology replaces could be used. For example, solar home systems usually replace fuel wood or kerosene with an emission factor of 0.233 tonnes of CO2 for the amount of energy a 50W panel can provide per year [21]. Also, for these systems, a future predicted emissions factor could be used as a baseline instead of historical emissions because diesel generator sets, car batteries or the grid will soon serve many rural communities that currently use biomass or kerosene for energy needs [22].
Conclusion The solutions proposed in this chapter are by no means comprehensive, but instead meant to serve as a starting place. Many of the solutions proposed would require large, systemic changes in host country governments in order to remedy the problem. Others could be dealt with by simple modification of the UNFCCC rules or host country DNA office policies. As experience with the CDM grows and project developers / carbon brokers advocate these changes from the UNFCCC and DNA offices, there is hope that these solutions could be implemented.
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References 1
2 3 4
5 6 7 8
9
10 11 12 13 14 15
16
17
18 19
RNK Capital and Swiss Re (2006) ‘RNK Capital and Swiss Re structure first insurance product for CDM carbon credit transactions: Insurance instrument mitigates Kyoto-related transaction risk for global carbon credit trading’, press release, 13 June Días, F. (2007) Interview with F. Días, Comisión de Política Energética, Ministerio de Economía y Finanzas, 5 October, Panama City, Panama Fernandez, O. (2007) Interview with O. Fernandez, Departamento de Generación de Empresas Públicas de Medellín, 18 October, Medellín, Colombia Alvarado, M. (2007) Interview with M. Alvarado, President of Asociación Costarricense de Productores de Energía (ACOPE), 25 September, San José, Costa Rica Garcia, D. (2007) Interview with D. Garcia, FONAM Energy and CDM Specialist, 5 November, Lima, Peru Garcia, J. (2007) Interview with J. Garcia, Chilean Economic Development Agency (CORFO) Renewables Coordinator, 16 November, Santiago, Chile Dankers, A. (2001) Presentation at ‘Small is feasible: Designing small-scale CDM projects’, side-event at UNFCCC COP-7, 6 November, Marrakesh, Morocco Michaelowa, A. (2005) ‘Creating the foundations for host country participation in the CDM: Experiences and challenges in CDM capacity building’, in F. Yamin (ed) Climate Change and Carbon Markets: A Handbook of Emissions Reductions Mechanisms, Earthscan Publications, Sterling, VA, pp305–320 Michaelowa, A. (2005) ‘Determination of baselines and additionality for the CDM: A crucial element of credibility of the climate regime’, in F. Yamin (ed) Climate Change and Carbon Markets: A Handbook of Emissions Reductions Mechanisms, Earthscan Publications, Sterling, VA, pp289–304 CDM Executive Board (2006) ‘Guidance on proven technologies’, para 71, Report of the Twenty-Fifth Meeting of the Executive Board, 28 July Grütter, J. (2001) Presentation at ‘Small is feasible: Designing small-scale CDM projects’, side-event at UNFCCC COP-7, 6 November, Marrakesh, Morocco Synex: Ingenieros Consultores (2006) ‘Determination of the operating margin when a CDM project displaces a reservoir hydro power plant’, report, 25 July Regional Greenhouse Gas Initiative Model Rule, 5 January 2007, available at www.rggi.org/docs/model_rule_corrected_1_5_07.pdf Zhang, Z. X. (2007) ‘Toward an effective implementation of clean development mechanism projects in China’, Energy Policy, vol 35, pp1088–1099 Wara, M. (2006) ‘Measuring the Clean Development Mechanism’s performance and potential’, Working Paper #56, Program on Energy and Sustainable Development, Stanford University, Stanford, CA Tanwar, N. (2007) ‘Clean Development Mechanism and off-grid small-scale hydropower projects: Evaluation of additionality’, Energy Policy, vol 35, pp714–721 Chomitz, K. M. (1998) ‘Baselines for greenhouse gas solutions: Problems, precedents, and solutions’, report for the Carbon Offset Unit, Development Research Group, World Bank, 16 July Muller, A. (2007) ‘How to make the Clean Development Mechanism sustainable: The potential of rent extraction’, Energy Policy, vol 35, issue 6, pp3203-3212 Sutter, C. (2001) Presentation at ‘Small is feasible: Designing small-scale CDM projects’, side-event at UNFCCC COP-7, 6 November, Marrakesh, Morocco
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20 Ecosecurities (2002) ‘Clean Development Mechanism: Simplified modalities and procedures for small-scale projects’, Final Report for the Department for International Development, May 21 Martens, J. W., Kaufman, S. L., Green, J. and Nieuwenhout, F. D. J. (2000) ‘Towards a streamlined CDM process for solar home systems: A review of issues and options’, report by Energy Innovation, Sunrise Technologies Consulting and IT Power, November 22 Ley, D. (2007) Interview with D. Ley, United Nations Consultant, Economic Commission for Latin America and the Caribbean, Mexico subregional office, Energy and Natural Resources Unit, 21 April
30 Summary of CDM Barriers
Major themes This book has endeavoured to address the barriers to Clean Development Mechanism (CDM) renewable energy projects at both thematic and countryspecific levels. The major themes of each barrier category are described briefly in this section. As mentioned in the ‘Executive Summary’ of this book, the two largest barriers for project implementation relate to the openness of the electrical market and willingness of state-run utilities to work with independent power producers (IPPs). Usually, state-run entities are reluctant to become involved in CDM projects because of their unfamiliarity with the Mechanism, lack of an incentive to earn extra profit because of the regulated nature of their tariff structure and profit margins, and the complications these entities have with proving regulatory and financial additionality. Therefore, it is only the IPPs that can successfully promote CDM activities; if the country prohibits or limits IPP involvement in generation, then renewable energy CDM projects will usually not succeed in that country. The next major barrier relates to the CDM rules that provide a disincentive for CDM host countries to address climate change with domestic policies. A country’s renewable energy legislation can be both a blessing and a curse for renewable energy development as it can provide additional financing or a mandate requiring renewable generation, but it can also complicate the process of showing project additionality. As the UNFCCC CDM rules currently stand, Project Design Document (PDD) authors must acknowledge these incentives and mandates when proving additionality, and this acknowledgement often undermines the additionality argument. The other major barriers that have been identified in this book are related to technical, social, financial, informational and small-scale-specific issues. The renewable energy technologies (other than hydro) in the region suffer from a lack of experience and are therefore unproven in the hurricane-prone climates of Central America and intermittent wind regimes of Oaxaca, Mexico and Patagonia, Argentina and Chile. Socially, CDM activities, especially landfill and hydro projects, are not always beneficial to the community and cause
330
FUTURE DEVELOPMENT
controversy among locals and headaches for developers. Financially, CDM revenues, in and of themselves, do not provide enough money to prompt development; therefore, some non-additional projects achieve registration, and a lack of ‘real’ greenhouse gas reductions results. Other times, renewable energy projects that would make ‘real’ reductions because they are not financially viable cannot rely on Certified Emission Reductions (CERs) to bolster project finances since there is risk in earning the CERs and the price of a CER is not sufficient. Informational barriers result from the Mechanism being better known in some, more developed, areas than others. Also, carbon brokers, Designated National Authority (DNA) offices with a commitment to promotion activities, and capacity building institutions are not found ubiquitously throughout the region, causing a discrepancy in access to CDM information and experts. Host country institutional barriers arise because of poorly created or restructured energy policies that do not provide adequate incentive for private investor participation or with rules that are complex and change often. Also, the renewable energy legislation of these countries is sometimes inadequate to promote development. The UNFCCC’s complex and changing methodologies and procedures are a formidable barrier to developers. Finally, small-scale projects suffer most from not being able to generate enough emission reduction revenues to cover the high registration transaction costs.
Comprehensive renewable energy barriers for CDM development in Latin America Table 30.1 Technical barriers Type
Main points
General Hydro
Voltage fluctuations; grid outages; overtaxed transmission lines Hard to access; inclement weather; first-of-a-kind technology hard to prove; projects over 20MW for EU sales must complete more registration steps New and unproven for region; grid hook-in not always convenient; grid instabilities; intermittency in Patagonia; permit problems; turbine shortage High transport costs; contracts for year-round generation are difficult if relying on a crop with a harvest cycle High first costs; poor plant operations that deplete resource Difficulty coordinating various municipalities; unlined and unsorted dumps yield low gas amounts; stolen piping pH, water content, 25–30° Celsius, and low antibiotic requirements for biodigesters are hard to meet; flare not consistently lit; coordination of turbines and flare could be difficult
Wind Biomass Geothermal Landfill methane use Agro-industry methane use
SUMMARY OF CDM BARRIERS
331
Table 30.2 Social barriers Category
Main points
Stolen electricity Site security Permits Developer relationships Community resistance
Rich and poor neighbourhoods; neither distributor nor police can enforce Stolen parts Those living on land do not have deed and require relocation Inherent prejudices of developers, NGOs, and locals based on experience of previously implemented systems Community support usually necessary for CDM projects; new issues could arise with Programme of Activities for rural areas Landfills: garbage collectors left without jobs Hydro: dislocated people, wild rivers and source of water jeopardized
Table 30.3 Financial barriers Category
Main points
Renewable energy-specific Political/financial instability Low carbon prices
Feasibility studies unfunded; long payback of the projects due to high initial cost; perception of high risk for some technologies Wars with other countries and internal strife; devalued money; maximized foreign debt from development banks In general: most projects not additional because prices too low to stimulate development just for CDM revenues Development Banks: some funds reserved for public entities; institutional rigidities; low carbon prices Penalties for not producing a certain number of CERs; questions of legal authority for contracts; language barriers in contracts and negotiations with foreign carbon brokers; price information of CERs not always available; refinance schemes have questionable additionality
CDM-specific
Table 30.4 Informational barriers Category
Main points
DNA office
Promotion and regulation are not always balanced; some DNA offices add unnecessary layers of complexity to the process; lack of coordination between entities in DNA; CERs sometimes taxed Consists of UN organizations, development banks, industry associations, non-governmental organizations, governmental laboratories, regional organizations, carbon brokers and universities Contract terms; CER prices; language and understanding barriers
Other support networks Emission Reduction Purchase Agreements
Table 30.5 Host country institutional barriers Category
Main points
Lack of long-term policies Administration changes Market openness
Trial-and-error energy policy; short-term capacity additions elicited; limits on PPA length Lack of continuity in policies, programmes and personnel Limits on IPP participation; lack of state-run utility participation in CDM
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FUTURE DEVELOPMENT
Table 30.6 UNFCCC procedural and methodological barriers Category
Main points
Unstable CDM market Methodology confusion Low emission factors Imported energy Adjusting the build and operating margin Adjusting methodologies Changing methodology Regulatory and financial additionality Availability of DOEs and carbon brokers
Uncertainty after 2012; CER saturation in market Utilization of incorrect methodologies Countries with clean generation have little potential for reductions Counted as zero for emission reduction purposes Yields different numbers of CERs but is dependent on year-to-year generation mix Expensive and sometimes does not result in expected outcome if slightly changed by CDM Executive Board Developers and PDD authors are prepared to use certain methodology and then must readjust as methodologies change Difficult for state-run utilities to prove
Increases project costs if foreign firm is contracted
Table 30.7 Small scale barriers Category
Main points
Existing methodology Programme of Activities Transaction costs
Insufficiently simple for very small projects
Country-specific support/ disincentives
Has not yet been attempted Small industries or countries with low emission factors are at a disadvantage; VERs are an alternative, but command lower price Average grid emission factor studies for small-scale development; El Salvador, Costa Rica, Guatemala, Chile and the Dominican Republic have legislation that supports; Colombia and Ecuador have legislation that adds barriers
Country-specific challenges Within each country in Latin America, the prospects for the CDM are unique. Varying political structures, economic stability, generation mixes, renewable energy legislation, capacity-building institutions and other factors have led to the current landscape of CDM projects. Some generalizations about the region, however, can be made. Most countries in the region have privatized their energy sector since the 1990s. These experiments in privatization have had drastically different results, ranging from well-designed systems that incite adequate private sector participation, lower customer prices and better system performance to systems that have had to be modified several times with new legislation or revert to being state-run institutions in order to instigate adequate new capacity
SUMMARY OF CDM BARRIERS
333
Table 30.8 Country comparisons: Summary1 Country
Electricity rate Emission factor % or degree (residential (tonnes of generation ¢/kWh)a CO2/MWh) privatizationb
Biggest challenge
Best opportunity
Argentina
3.86
0.49
80%
Belize
44
n/a
Tax credits for renewable energy (RE); capacity needed High electricity prices
Bolivia
6.1
0.581
None, even though permitted by law 100%
Brazil
14.3
0.262
26%
Chile
10.9
0.358
100%
Colombia
9.7
0.385
57%
Financiers wary of investing after 2002 economic collapse State-run company a monopoly CERs taxed heavily by the DNA office; low electricity price Local component requirement for renewable energy implemented under new law Grids not interconnected; low emission factor Negative image for investment
Costa Rica
6.9
0.488
12%
Dominican Republic
13.9
0.7061
83%
Ecuador
9.7
0.64
Little
El Salvador
13.8
0.612
Advanced
Guatemala
15.1
0.824
68%
Honduras
8.3
0.74
65%
Mexico
8.4
0.6
19%
Nicaragua
12
0.709
69%
Panama
14.9
0.556
89%
Peru
4.34
0.54
66%
Uruguay
11.7
0.2 (estimated)
None, even though permitted by law
State utility dominates; low emission factor Poorly run distribution network; little CDM experience Generators not certain to get paid by distributors because of black losses and low fixed tariffs Small country with incremental capacity needs Political instability Price caps on amount RE can earn Public utility’s dominance and policies Political instability; lack of CDM knowledge Fewer resource opportunities
Highly developed national DNA office; plentiful resources Huge industries, constant demand, carbon broker interest New RE mandate; good investment climate Abundant resources; good recent market and governance Good investment climate; excellent resources New RE law provides strong support; huge wind potential High feed-in tariffs
High electricity prices and many IPPs in market Open market with many incentives for renewables New RE law with aggressive incentives; capacity needed Good resources and investment climate; high emission factor Capacity needed
Open market; aggressive incentives; high price of electricity; capacity needed Natural gas promotion Abundant resources; laws and hydro laws new RE legislation make an ambivalent could help promote climate for investors projects Little CDM Current elicitation experience; lack of for RE long-term policy commitment to RE
Source: a World Bank (2005) Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/ b ESMAP (2007) ‘Latin America and the Caribbean Region (LCR): Energy sector – retrospective review and challenges’, 15 June, Energy Sector Management Assistance Programme, World Bank, Washington, DC
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FUTURE DEVELOPMENT
additions and keep prices reasonable. Recently, rising fossil fuel prices have led several countries to implement new renewable energy legislation to stabilize energy prices. These new laws are being passed and revised so frequently that one must keep monthly tabs on each country to track these changes. The variety in renewable energy legislation, privatization schemes, political and economic histories, institutional support and indigenous renewable and fossil fuel resources has created a unique set of barriers and opportunities in each country. A summary of each country’s suitability for CDM development is provided in Table 30.8 above.
Comprehensive list of solutions to barriers Table 30.9 Solutions for project developers Technical
Social Financial
Train local experts; create system for ordering parts; include a budget for replacement parts; create strict quality control; and include technical best practices in monitoring plan Follow documented best practices of groups experienced with Latin American RE development Utilize a CER insurance product to ensure delivery
Table 30.10 Solutions for host country governments / DNA offices Social
Financial
Informational
Small scale
Provide incentives for municipalities to develop projects; mandate that communities be part owners of projects in exchange for water or land permit; offer income tax exemptions if some CERs are reinvested in community; have companies comply with international standards for environmental responsibility; create incentives to stimulate a culture of paying for electricity; and make a policy for how developers should handle land and water permit disputes Have DNA office explain value of CERs to local banks; provide money for feasibility studies; create incentives for the same developer or DOE to engage in more than one CDM project; reduce excessive paperwork for renewable energy interconnection in grid; require power wheelers to charge uniform transmission and distribution rates; eliminate the import tax on system requirements and annual income tax; require CDM revenues to be included in future state-run least-cost planning processes; and incorporate CDM in the long-term energy policy strategy Have DNA offices take a small percentage of CERs and use it for advertising, assisting project developers in the early CDM stages, and the creation of clear registration guides in the host country language, CDM workshops, CDM webpages, CDM databases and CER price guides. Host countries could also pressure CDM capacity building organizations for equal access to information. Require generators to buy from systems under 15MW at a fixed price that is higher than the spot price; offer tax breaks for utilities that buy renewable energy under 15MW; require DNAs to keep a list of emission factors for simplified small-scale project baseline calculation creation; and offer a financial bonus for small-scale projects that state-run utilities connect to their grid
SUMMARY OF CDM BARRIERS
335
Table 30.11 Solutions for the UNFCCC Social Technical Financial
UNFCCC procedural and methodological
Small scale
Create basic guidelines for social incorporation of project and make verification of these steps part of the verification process Provide a better definition of ‘proven technology’ Create an insurance product that guarantees the value of CERs generated in future years and create incentives for DNAs and DOEs to be involved in a certain number of high quality projects each year Make changes to methodologies at a few, designated times; oversee or eliminate the selection of baselines and build/operating margin ratio; accept proposed methodologies only exactly as they are submitted; provide a way to consider the future emissions from new capacity additions in calculating the emission reductions produced that is perhaps based on the country’s future energy plan; provide clear guidance on how PoA must demonstrate additionality; give incentives for DOEs to be involved in PoA projects; create clear additionality requirements that do not create a perverse incentive for non-Annex I countries not to address climate change with domestic legislation that is perhaps based on a ‘positive list’; allocate CERs based on how close the project comes to achieving the host country’s definition of sustainable development; issue CERs based on the gas mitigated; have a sliding scale of additionality for countries in different stages of development; and create a definition of ‘sustainable’ Change the definition of small scale; make small-scale projects exempt from the leakage requirement; offer a more relaxed methodology for some underrepresented technologies; allow technologies with low capacity factors to qualify as small scale with higher capacity ratings; use an average emission factor for off-grid projects with difficult-to-determine baseline calculations; and consider using a future emission factor for off-grid projects that will have future needs met by either the grid or diesel generators
Note 1 Citations for the information in this table (except for the columns labelled ‘electricity rate’ and ‘% or degree of generation privatization’) can be found in each country-specific chapter.
Index
Acción Ecológica 220 ACMs see Approved Consolidated Methodologies ACR see Ambiente de Contracao Regulado additionality 11, 14, 244 biodigester projects 59 financial barriers 80, 83 hydro energy 20, 44 informational barriers 90, 91 methodological barriers 111–12, 117–21 small-scale barriers 129, 135–6 AgCert 55, 57, 58, 60, 96–7, 135 AGER see Asociación de Generadores de Energía Renovable agro-industries 53–61 AHPPER see Asociación Hondureña de Pequeños Productores de Energía Renovable Aislado grids 162 allowances 3, 5–6, 7, 11, 83, 109 see also EU Allowances Ambiente de Contracão Regulado (ACR) 170 AMs see Approved Methodologies anaerobic lagoons 54–5 Andean Carbon Hubs 89 Andean Center for Environmental Economics (CAEMA) 91, 112 Annex I countries 3–4, 5, 7 financial barriers 82 industrial gas mitigation projects 8, 10 methodological barriers 109–10 small-scale barriers 135–6 approval processes 12, 13, 14, 15, 90 see also validation processes Approved Consolidated Methodologies (ACMs) 114–15, 116
Approved Methodologies (AMs) 114–15 Argentina 151–7 background 151–3 biomass projects 49 carbon brokers 155 challenges/opportunities 153–5 Designated National Authorities 153–4 financial barriers 77 informational barriers 88, 89, 90, 91 institutional support 154–5 legislation 153 portfolios 153 privatization 151–3 renewable energy potential 155 vital statistics 151 wind energy 21 Asia 10, 15–16 Asociación de Generadores de Energía Renovable (AGER) 93 Asociación Hondureña de Pequeños Productores de Energía Renovable (AHPPER) 93 Australia 109–11 bagasse 48–50 Bahamas 300 ‘Bali Action Plan’ 7 banking 79–83, 92–3, 253 see also World Bank Barbados 300 barriers 4–5, 11, 13, 181–2, 319–28 financial 75–86, 320, 321–2, 323 informational 87–100, 322 institutional 101–8 methodological 109–26 small-scale 127–44, 322, 325–6 social 65–74, 319–20, 323 technical 43–64, 319, 323
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RENEWABLE ENERGY PROJECT DEVELOPMENT
baseline emission calculations 12, 14, 48, 112–15, 119–20, 129–30 BEL see Belize Electricity Limited Belize 159–68 background 159–60 challenges/opportunities 160 institutional barriers 106 portfolios 160 privatization 159–60 vital statistics 159 Belize Electricity Limited (BEL) 159–60 Berlin Geothermal Power Plant 21 biodigesters 54–60, 120, 255–6 biofuels 172–3, 245 biomass projects 23, 48–50, 67, 103, 245, 246 Chile 180 Costa Rica 201 Ecuador 217 El Salvador 227 Honduras 245, 246 Blackout Reduction Programme (PRA) 208 boilers 48, 49 Bolivia 161–8 background 166 carbon brokers 164 challenges/opportunities 163–6 informational barriers 91 institutional support 164 legislation 162 methodological barriers 114 portfolios 163 privatization 161–2, 166 renewable energy potential 164 vital statistics 161 Brazil 169–76 background 169–70 carbon brokers 173 challenges/opportunities 172–5 Designated National Authorities 172 institutional barriers 103 institutional support 172–3 legislation 170–1 methane capture 22 portfolios 171–2 privatization 169–70 renewable energy potential 173–4 vital statistics 169 bribery 67 build margin adjustments 113–14
bundling mechanisms 55, 129–30, 131, 135 CAEMA see Andean Center for Environmental Economics CAF see Corporacíon Andina de Fomento Canada 109–10, 111 Capacity Development for the CDM (CD4CDM) 92 carbon brokers 6–7, 11, 12, 13 Argentina 155 Bolivia 164 Brazil 173 Chile 182 Colombia 191 Costa Rica 201 country-specific profiles 150 Dominican Republic 210 Ecuador 219 El Salvador 227 Emission Reduction Purchase Agreements 97, 98 financial barriers 78–9, 80, 82–3 Guatemala 235 Honduras 246 informational barriers 96–7 methodological barriers 112, 113, 114, 122 Mexico 257 Nicaragua 268 Panama 274 Peru 284 small-scale barriers 132–3 social barriers 72 Uruguay 292 carbon dioxide 51, 56, 57 see also greenhouse gases carbon markets 5–6, 257 financial barriers 78–9, 80, 81, 83 methodological barriers 109, 110, 111 Caribbean countries 298–300 CD4CDM see Capacity Development for the CDM CDE see Corporación Dominicana de Electricidad CEL see Comisión Hidroeléctrica Ejecutiva del Río Lempa Central National Grid (SIN), Bolivia 162
INDEX
Centro de Estudios del Sector Privado para el Desarrollo Sustentable (CESPEDES) 257 Centro de Producción más Limpia 234 CERs see Certified Emission Reductions certification bodies 133–5 certified emission reductions (CERs) 3, 4, 5–17, 53–4 Bolivia 163, 164–5 Brazil 173–4 Chile 183 Costa Rica 202–3 financial barriers 78–9, 80–1, 82–3 Honduras 244 hydro projects 45 informational barriers 91, 97 institutional barriers 107 methane capture 60 methodological barriers 109–11, 112, 113–15, 117–18, 119 Mexico 255–6, 258–60 small-scale barriers 128, 132–3, 134, 135, 136, 137–8 Certified Emission Reduction Unit Procurement Tender (CERUPT) 82 CESPEDES see Centro de Estudios del Sector Privado para el Desarrollo Sustentable CFE see Comisíon Federal de Electricidad Chacabuquito 114–15, 183–4 Chile 177–86 background 177–8 carbon brokers 182 challenges/opportunities 181 Designated National Authorities 181 institutional barriers 103–4, 106 institutional support 181–2 legislation 179 methodological barriers 114–15 portfolios 180–1 privatization 177–8 renewable energy potential 181 small-scale barriers 137 vital statistics 177 The Chilean Economic Development Agency (CORFO) 181–2 China 10 CIFs see Climate Investment Funds CIMGC see Comissao Interministerial de Mudança Global do Clima
339
Cleaner Production Centres 234 Clean Technology Fund 81, 93 climate change 3, 7–8 development banks 92–3 methodological barriers 118–20 United Nations organizations 91–2 Climate Change Consultative Committee (OCIC) 201 Climate Investment Funds (CIFs) financial barriers 81–2 informational barriers 93 closed flares 116 closed markets electricity 106 Cochabamba 166 coffee farms 23 co-firing 49–50 Colombia 187–96 background 187–8 carbon brokers 191 challenges/opportunities 189–93 Designated National Authorities 189–90 financial barriers 77 informational barriers 89, 90, 96 institutional support 190–1 landfill gas projects 22, 70 legislation 188–9 portfolios 189 privatization 187–8 renewable energy potential 192 small-scale barriers 137 social barriers 70, 71–2 vital statistics 187 Comisíon Federal de Electricidad (CFE) 20, 117–18, 251, 252, 254–5, 258–62 Comisión Hidroeléctrica Ejecutiva del Río Lempa (CEL) 223–4 Comissão Interministerial de Mudança Global do Clima (CIMGC) 172 communication 58, 70–1 community acceptance/resistance 67–9, 70–1, 219–20, 236 community development 80–1 Consejo Nacional de Electricidad (CONELEC) 214, 215, 219 Consejo Nacional del Ambiente (CONAM) 112, 282–3 consultants 14–15, 96–7 see also carbon brokers
340
RENEWABLE ENERGY PROJECT DEVELOPMENT
CORDELIM see Oficina Nacional de Promoción del Mecanismo de Desarrollo Limpio CORFO see Chilean Economic Development Agency Corporacíon Andina de Fomento (CAF) 79, 80, 92 Corporación Dominicana de Electricidad (CDE) 207–8 corruption 67–8 Costa Rica 197–206 backgrounds 197–9 biomass projects 23 carbon brokers 201 challenges/opportunities 200–4 Designated National Authorities 200–1 geothermal projects 21 institutional barriers 102–3, 104, 105, 106 institutional support 201 landfill gas projects 22, 52, 53, 70 legislation 199, 203 methodological barriers 112, 117, 118–19, 120 portfolios 200 privatization 197–9, 202–3 renewable energy potential 202 small-scale barriers 132–3, 136–7 social barriers 66, 70, 71 vital statistics 197 wind energy 20 Costarricense de Electricidad (ICE) 197–8, 202–3 country-specific profiles 147–301 Cristalería Toro 180–1 Cuba 299 dairy farms 58, 255–6 dams Chile 179, 183 Honduras 248 hydro projects 45 methodological barriers 114–15 Mexico 260, 262 small-scale barriers 136 desalination plants 80–1 Designated National Authorities (DNAs) 11, 12, 14, 15, 149, 320–2 Argentina 153–4 Bolivia 163
Brazil 172 Chile 181 Colombia 189–90 Costa Rica 200–1 Dominican Republic 210 Ecuador 218 El Salvador 226 Guatemala 234 Honduras 245 informational barriers 87–91 institutional barriers 105 methodological barriers 112 Mexico 256 Nicaragua 267 Panama 274 Peru 282–3 small-scale barriers 137–8 Uruguay 291–2 Designated Operational Entities (DOEs) 11, 12, 14–15, 121, 122 Det Norske Veritas (DNV) 112, 122 development banks 92–3 digesters see biodigesters distribution 65–6, 213–14, 232 DNAs see Designated National Authorities DNV see Det Norske Veritas DOEs see Designated Operational Entities domestic institutional support Argentina 154–5 Bolivia 164 Brazil 172–3 Chile 181–2 Colombia 190–1 Costa Rica 201 Dominican Republic 210 Ecuador 218 El Salvador 226–7 Guatemala 234–5 Honduras 245 Mexico 257 Nicaragua 267 Panama 274 Peru 283–4 Uruguay 292 Dominican Republic 137, 207–12 background 207–8 carbon brokers 210 challenges/opportunities 210–11 Designated National Authorities 210
INDEX
institutional support 210 legislation 208–9 portfolios 209–10 privatization 207–8 renewable energy potential 210 vital statistics 207 drilling 51 dumps 52–3, 69 see also landfill gas projects EB see Executive Board Ecoelectric 49 Ecoinvest 132–3 economic instability/stability 15, 16, 77–8, 165, 219 Ecosecurities 89 Ecuador 213–22 background 213–15 carbon brokers 219 challenges/opportunities 218–20 Designated National Authorities 218 financial barriers 78 hydro projects 69 illegal activity 65–6 informational barriers 88–9, 90, 91 institutional support 218 landfill gas projects 52–3 legislation 216 portfolios 217 privatization 213–15 renewable energy potential 219 small-scale barriers 137–8 social barriers 65–6, 69, 71 vital statistics 213 EISs see Environmental Impacts Statements El Coronado 67, 248 El Salvador 223–30 background 223–4 carbon brokers 227 challenges/opportunities 226–7 Designated National Authorities 226 geothermal projects 21 institutional support 226–7 legislation 224–5 portfolios 225–6 privatization 223–4 renewable energy potential 227 small-scale barriers 136 vital statistics 223 Emission Reduction Purchase
341
Agreements (ERPAs) 82–3, 97–8 Emission Reduction Units (ERUs) 83, 110, 111 Empresa Nacional de Electricidad (ENDE/ENEL) 107, 161 Empresa Nacional de Energía Eléctrica (ENEE) 241–3, 246–7, 248 Empresas Públicas de Medellín (EPM) 53–4, 80–1, 83, 191 Empresas Varias de Medellín 71–2 ENDE see Empresa Nacional de Electricidad ENEE see Empresa Nacional de Energía Eléctrica ENEL see Empresa Nacional de Electricidad Environmental Impacts Statements (EISs) 155 environmentalists 69 EPM see Empresas Públicas de Medellín ERPAs see Emission Reduction Purchase Agreements ERUs see Emission Reduction Units ETSs see European Trading Schemes EU Allowances (EUAs) 5–6, 83, 109 eucalyptus trees 49 European Trading Schemes (ETSs) 5, 6, 11 excrement-based methane capture see hog farms Executive Board (EB) 12, 15, 118–19 feasibility studies 14, 75, 181–2 Fedepalma 53 feed-in tariffs 170, 199, 216, 310–11, 312 fertilizer 49 financial barriers 75–86, 320, 321–2, 323 financial instability/stability 15, 16, 77–8, 165, 219 flares 22, 51–2, 57, 58, 116, 128 Fondo Nacional del Ambiente (FONAM) 89, 282–3 ‘free-riders’ 135–6 French Guiana 300 generators Argentina 152 Colombia 188 Costa Rica 202–3
342
RENEWABLE ENERGY PROJECT DEVELOPMENT
Ecuador 214–15 financial barriers 75–6 Guatemala 232 Honduras 242, 246–7 illegal activity 65–6 institutional barriers 105–7 landfill gas projects 51 methane capture 58–9, 60 Mexico 253 small-scale barriers 137 technical barriers 43–4, 51, 58–9, 60 geothermal energy 21 Costa Rica 200 Ecuador 217 El Salvador 227 Honduras 246 Mexico 256 technical barriers 50–1 Global Village Energy Partnership (GVEP) 94 Gold Standard 9, 133–4 Granada 300 greenhouse gases 3–6, 7–9, 10, 16–17 Colombia 190–1 development banks 92–3 financial barriers 81 methane conversion 51 methodological barriers 118–21 Mexico 251–2 small-scale barriers 132–3, 135–6 Guatemala 231–40 background 231–2 carbon brokers 235 challenges/opportunities 234–7 Designated National Authorities 234 geothermal projects 21 hydro projects 69 informational barriers 93 institutional barriers 102–3, 105, 106 institutional support 234–5 legislation 232–3, 235–6 portfolios 233 privatization 231–2 renewable energy potential 235 small-scale barriers 137 social barriers 69 vital statistics 231 wind energy 20 Guyana 300
GVEP see Global Village Energy Partnership HFCs see hydrofluorocarbons hog farms 54–7, 59–60, 255–6 Emission Reduction Purchase Agreements 97 informational barriers 96 methodological barriers 120 small-scale barriers 135 Honduras 241–50 background 241–3 carbon brokers 246 challenges/opportunities 245–8 Designated National Authorities 245 financial barriers 76 hydro projects 44 informational barriers 89, 93 institutional barriers 102–3, 105–6 institutional support 245 legislation 243–4, 247–8 portfolios 244–5 privatization 241–3 renewable energy potential 246 vital statistics 241 human rights groups 69 hurricane damage 44, 45 hydrocarbons 8–9, 10, 16–17, 208–9 hydrofluorocarbons (HFCs) 8–9, 10, 16–17 hydro projects 19–20 Bolivia 165–6 Brazil 169–70 Chile 178, 179, 180 Costa Rica 198–9, 200, 202, 203–4 Ecuador 215, 217, 219–20 El Salvador 227 Guatemala 233, 236 Honduras 244, 246, 248 institutional barriers 103 methodological barriers 112, 114–15 Mexico 260, 262 small-scale barriers 127–8, 130, 136 social barriers 68–9, 70–1 technical barriers 44–5, 47 wind project compatibility 47 Iberdrola 118 ICE see Instituto Costarricense de Electricidad
INDEX
illegal activity 65–6, 70, 192, 208, 213–14 imported energy 113 incentives biodigesters 60 biomass projects 48 Bolivia 164–5 Brazil 170, 171, 172, 174–5 Dominican Republic 209 Ecuador 216 El Salvador 224–5 methodological barriers 118–20 small-scale barriers 136–7 Incentives Programme for Alternative Sources of Electric Energy (PROINFA) 103, 170, 171, 172, 174–5 INDE see Instituto Nacional de Electrificación independent power producers (IPPs) Costa Rica 197–8 Dominican Republic 207–8 Honduras 246–7 institutional barriers 105–7 methodological barriers 118 Mexico 252, 260–1, 262 industrial gas mitigation projects 8–11, 16–17, 110 Industrias Metalúrgicas Pescarmonia S.A. 46 informational barriers 87–100, 322 institutional barriers 101–8 institutional support 149–50 Argentina 154–5 Bolivia 164 Brazil 172–3 Chile 181–2 Colombia 190–1 Costa Rica 201 Dominican Republic 210 Ecuador 218 El Salvador 226–7 Guatemala 234–5 Honduras 245 informational barriers 87–97 Mexico 257 Nicaragua 267 Panama 274 Peru 283–4 Uruguay 292 Instituto Costarricense de Electricidad (ICE) 105, 106, 117
343
Instituto Nacional de Electrificación (INDE) 231, 236 Instituto Nacional de Technología Agropequaria (INTA) 154 Instituto Nacional de Tecnología Industrial (INTI) 154 INTA see Instituto Nacional de Technología Agropequaria Interconnecíon Eléctrica S.A. 188 internal rates of return (IRRs) 78–9 INTI see Instituto Nacional de Tecnología Industrial investors 14, 46, 75–8, 80, 235–6, 319–28 IPPs see independent power producers IRRs see internal rates of return Jamaica 299 Joint Implementation (JI) 200–1 financial barriers 83 methodological barriers 110, 111 Kyoto Protocol 3, 5, 7–8, 9 La Babilonia 67, 248 LAFRE (Ley para el Aprovechamiento de las Fuentes Renovables de Energía) 253–5 lagoons 54–5, 60 landfill gas projects 22 Chile 180 Colombia 193 El Salvador 227 methodological barriers 120, 122 Mexico 256 social barriers 70 technical barriers 51–3, 60 see also methane capture land ownership 66, 248 language barriers 83, 97, 98 least-cost planning 152, 259 legislation 149 Argentina 153 Bolivia 162 Brazil 170–1 Chile 179 Colombia 188–9 Costa Rica 199, 203 Dominican Republic 208–9 Ecuador 216 El Salvador 224–5
344
RENEWABLE ENERGY PROJECT DEVELOPMENT
Guatemala 232–3, 235–6 Honduras 243–4, 247–8 institutional barriers 102–4 Mexico 252–5 Nicaragua 266 Panama 272–3 Peru 281 regional trends 305–7, 309–12 small-scale barriers 136–7 social barriers 66 Uruguay 290–1 Letter of Approval processes 90 Ley para el Aprovechamiento de las Fuentes Renovables de Energía (LAFRE) 253–5 low emission factors 112–13 mandates 118–20, 170, 171, 172, 174–5, 309–11 see also legislation mandatory programmes 119 market openness 105–7 merit order dispatch systems 183–4 methane capture 22 Argentina 154 informational barriers 96 methodological barriers 116, 120 Mexico 255–6 scavengers 70 small-scale barriers 128, 135 technical barriers 51–61 methodological barriers 109–26 Methodology panels 15 Mexico 251–64 carbon brokers 257 challenges/opportunities 256–62 Designated National Authorities 256 financial barriers 76 geothermal energy 21 informational barriers 88, 89, 91, 94–5 institutional support 257 legislation 252–5 methane capture 22, 54–61 methodological barriers 117–18, 120 portfolios 255–6 privatization 251–2 renewable energy potential 257–8 social barriers 67 vital statistics 251 wind projects 20, 46–7
microhydro projects 127–8, 130 mining 69, 236 Momotombo 21, 51 multilateral development banks 79–82 N2O see nitrous oxide national laboratories 94–5 National Renewable Energy Laboratory (NREL) 94 National Rural Electric Cooperative Association (NRECA) 234–5 natural disasters 44, 45, 227 natural gas 152, 178 negative pressure digesters 56 NGOs see non-governmental organizations Nicaragua 265–70 background 265–6 carbon brokers 268 challenges/opportunities 267–9 Designated National Authorities 267 financial barriers 76, 77 geothermal projects 21, 50–1 institutional barriers 102 institutional support 267 landfill gas projects 22, 70 legislation 266 portfolios 266–7 privatization 265–6 renewable energy potential 268 social barriers 70 Verified Emission Reductions 134 vital statistics 265 nitrous oxide (N2O) 8–9, 10, 16–17 node prices 179, 242–3, 246–7, 248 non-Annex I countries 3, 10 non-governmental organizations (NGOs) Brazil 173 Ecuador 219, 220 Guatemala 236–7 industrial gas mitigation projects 9 informational barriers 93–4 social barriers 69 non-harvest seasons 50 NRECA see National Rural Electric Cooperative Association NREL see National Renewable Energy Laboratory
INDEX
Oaxaca 46, 67, 118, 257–8, 259, 260–2 OCIC see Climate Change Consultative Committee odour ordinance 59–60 off-gassing requirements from landfills 51–2 off-grid systems 199 offset providers 134 off-takers 76 Oficina Nacional de Promoción del Mecanismo de Desarrollo Limpio (CORDELIM) 218 open flares 116 open markets 106, 149 operating margins 113–14, 183–4 ornithologist interference 46–7 palm products 53, 245, 246 Panama 271–8 background 271–2 carbon brokers 274 challenges/opportunities 274–6 Designated National Authorities 274 institutional barriers 102–3 institutional support 274 legislation 272–3 methodological barriers 120 portfolios 274 privatization 271–2 renewable energy potential 275 social barriers 71 vital statistics 271 Paraguay 298 Paramonga 112 Patagonia 46, 155 PCF see Prototype Carbon Fund PDDs see Project Design Documents penalties 82, 179, 200–1 permitting procedures 46, 247–8 Peru 279–88 background 279–81 carbon brokers 284 challenges/opportunities 282–5 Designated National Authorities 282–3 informational barriers 88, 89, 90, 91 institutional support 283–4 legislation 281 portfolios 282 privatization 279–81 renewable energy potential 284 vital statistics 279
345
wind projects 46 perverse incentives 118–20 petroleum 178 pH 57 pilot lights 57, 58 PINs see Project Idea Notes PoA see The Programme of Activities political parties 104–5 instability/stability 15, 16, 77–8, 165 task division 104 portfolios 147, 149 Argentina 153 Belize 160 Bolivia 163 Brazil 171–2 Chile 180–1 Colombia 189 Costa Rica 200 Dominican Republic 209–10 Ecuador 217 El Salvador 225–6 Guatemala 233 Honduras 244–5 Mexico 255–6 Nicaragua 266–7 Panama 274 Peru 282 Uruguay 291 positive pressure digesters 56 Power Purchase Agreements (PPAs) 102, 148 Dominican Republic 207 Ecuador 214–15 financial barriers 76 Guatemala 231–2 Honduras 246–8 methodological barriers 118 Mexico 261 PPAs see Power Purchase Agreements PRA see Blackout Reduction Programme pressure digesters 56 privatization 147–9 Argentina 151–3 Belize 159–60 Bolivia 161–2, 166 Brazil 169–70 Chile 177–8 Colombia 187–8 Costa Rica 197–9, 202–3 Dominican Republic 207–8 Ecuador 213–15
346
RENEWABLE ENERGY PROJECT DEVELOPMENT
El Salvador 223–4 financial barriers 80 Guatemala 231–2 Honduras 241–3 institutional barriers 106 Mexico 251–2 Nicaragua 265–6 Panama 271–2 Peru 279–81 regional trends 303–4 social barriers 69 Uruguay 289–90 Production Tax Credits (PTCs) 120, 153, 310, 312 The Programme of Activities (PoAs) 121, 130–1 PROINFA see Incentives Programme for Alternative Sources of Electric Energy Project Design Documents (PDDs) 4, 11–12, 14–15, 17, 149 methodological barriers 112, 121 small-scale barriers 129–30 project developers 14, 319–20 communication 58 Costa Rica 202–3 financial barriers 78–9, 82, 83 methodological barriers 113, 116 Project Idea Notes (PINs) 11, 14–15 promotional arms 153, 154 Prototype Carbon Fund (PCF) 79–80, 92 PTCs see Production Tax Credits refinancing schemes 83 regional analyses 18–19 regional offices 234–5 regional organizations 94, 95–6 regional trends 303–16 registration 4–5, 12, 15, 116, 149 Argentina 154 Bolivia 162 Brazil 171 Chile 180 Colombia 189 Costa Rica 200 Dominican Republic 209 Ecuador 217 El Salvador 225 Guatemala 233 Honduras 244 methodological barriers 116
Mexico 255 Nicaragua 267 Panama 274 Peru 282 small-scale barriers 131, 135 Uruguay 291 regulatory arms 153–4, 218 reservoirs 45 retroactive project registration 116 revenues 4, 5 financial barriers 78 informational barriers 97, 98 institutional barriers 106 small-scale barriers 133, 134 Río Azul 52, 53, 66, 70 Rio de Janeiro 10 Risø Centre 91–2, 98 run-of-river projects 45, 71 rural populations 130–1, 147, 162, 171, 234–5 St. Lucia 300 Sandía National Lab 95 San Jacinto 21, 50 SECCI see Sustainable Energy and Climate Change Initiative secondary CER markets 7 security 66, 75 self supply schemes 253 SIFER see System for the Promotion of Renewable Energies in Small-Scale Projects SIN see Central National Grid slaughterhouses 60, 255–6 small-scale barriers 13, 127–44, 322, 325–6 social barriers 65–74, 319–20, 323 solar energy 57, 130, 227, 246 stakeholders 236–7 state-run entities 105–7, 117–18, 148–9 geothermal projects 21 Guatemala 231, 236 Honduras 241–3, 246–7, 248 methodological barriers 117–18 Mexico 251, 252, 254–5 wind energy 20 steam extraction 50–1 step-down transformers 67 Strategic Climate Fund 81, 93 support networks Argentina 154–5
INDEX
Bolivia 164 Brazil 172–3 Chile 181–2 Colombia 190–1 Costa Rica 201 country-specific profiles 149–50 Dominican Republic 210 Ecuador 218 El Salvador 226–7 Guatemala 234–5 Honduras 245 informational barriers 87–97 Mexico 257 Nicaragua 267 Panama 274 Peru 283–4 Uruguay 292 Suriname 300 sustainable development 9–10, 11, 12, 15 informational barriers 88, 89–90, 92–3, 95–6 institutional barriers 105 Sustainable Energy and Climate Change Initiative (SECCI) 92–3 System for the Promotion of Renewable Energies in Small-Scale Projects (SIFER) 225 tariffs 170, 188, 199, 216, 310–11, 312 taxation 310, 312 Argentina 153 Bolivia 164 Colombia 188–9 Dominican Republic 208–9 El Salvador 224–5 Honduras 243 informational barriers 91 institutional barriers 102–3 methodological barriers 120 small-scale barriers 136, 138 technical barriers 43–64, 319, 323 temperature 56–7, 115, 116, 227, 246 thermal generation 115, 227, 246 Tobago 300 Trinidad 300 turbines 20–1, 43–4, 45, 46–7, 48, 180–1 turbo-generators 51 UN see United Nations unbundling projects 128
347
UNDP see United Nations Development Program UNEP see United Nations Environment Programme UNFCCC see United Nations Framework Convention on Climate Change Unidad de Pleanación Minerio Enérgetica (UPME) 191 United Nations Development Programme (UNDP), informational barriers 91 United Nations Environment Programme (UNEP), informational barriers 91–2, 98 United Nations Framework Convention on Climate Change (UNFCCC) 3–5, 8–10, 11–12, 14–15, 17, 323–6 financial barriers 78 procedural 109–26 small-scale barriers 135 United Nations (UN) 91–2 university contributions 71–2, 96 UPME see Unidad de Pleanación Minerio Enérgetica Uruguay 289–96 background 289–90 carbon brokers 292 challenges/opportunities 291–4 Designated National Authorities 291–2 financial barriers 82 informational barriers 88–9 institutional barriers 103 institutional support 292 legislation 290–1 portfolios 291 privatization 289–90 renewable energy potential 292 vital statistics 289 wind projects 46–7 ‘use it or lose it’ policy 47 validation processes 12, 14, 15, 149 Argentina 154 Bolivia 162 Brazil 171 Chile 180 Colombia 189 Costa Rica 200 Dominican Republic 209 Ecuador 217
348
RENEWABLE ENERGY PROJECT DEVELOPMENT
El Salvador 225 Guatemala 233 Honduras 244 informational barriers 89–90 Mexico 255 Nicaragua 267 Panama 274 Peru 282 small-scale barriers 131 Uruguay 291 VCS see Voluntary Carbon Standard Venezuela 297–8 verification processes 12, 14, 131 Verified Emission Reductions (VERs) 93–4, 133–5, 202 Voluntary Carbon Standard (VCS) 134 Voluntary Emission Reductions (VERs) see Verified Emission Reductions voluntary programmes 119 waste see hog farms watch groups 9, 15 water 53–4 biodigester location 57 Costa Rica 199 Ecuador 220 effluent fines 59
Guatemala 233 institutional barriers 104 methodological barriers 114, 115 social barriers 68 valuation 114, 115, 183 wholesale electricity markets 76 wind energy 20–1 Argentina 155 Chile 180 Costa Rica 200 Dominican Republic 210 El Salvador 227 Honduras 246, 247 institutional barriers 103 methodological barriers 117, 118 Mexico 256, 257–8, 259–60, 261–2 small-scale barriers 132–3 technical barriers 46–8 Winrock International 94–5 the World Bank 259–60 financial barriers 79–81 informational barriers 92 methodological barriers 109–10 Zámbiza dump 52 Zambizá landfill gas site 122
