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2 GRC Transactions, Vol. 33, 2009 Realizing the Economic Benefit of CDM for Geothermal Energy David G. Newell, Dwita Prihantono, Dauly Winnusa and Kastoni Chevron Keywords Geothermal energy, Darajat III, carbon credits, CDM, greenhouse gas, Indonesia Abstract The Darajat III Geothermal Power Project was registered with the United Nations Framework Convention on Climate Change (UNFCCC) as Clean Development Mechanism (CDM) Project No in December, The process leading to Validation and the first Verification were time-consuming, and required substantial expenditure of effort. However, the experiences gained provided valuable learning that will be applied on future projects. Overview of the Darajat III Project Darajat III is the third generating unit installed at the Darajat field, located in the Garut Regency, in the Province of West Java, on Indonesia s Java Island. The unit has a nominal rated gross capacity of 110 MW. Chevron develops and operates the vapor-dominated Darajat steam field under a Joint Operations Contract with Pertamina, Indonesia s state oil company, and sells (with Pertamina) geothermal steam to Indonesia s state electric utility for Unit I, which began operations in From 1996 to 1998, Chevron constructed Unit II, which is operated by Chevron and whose electricity output is also sold to PLN. Following the 1997/1998 Asian financial crisis and the dramatic devaluation of the Indonesian Rupiah, the price of steam and electricity from the Darajat project became unaffordable to PLN, whose tariffs were limited by the government of Indonesia. Figure 1. The Darajat III Geothermal Power Project. 25 Along with every other private power producer in Indonesia at that time, Chevron entered into a renegotiation of its long-term contract with PLN. An agreement was reached in April 2000 that allowed the existing Units I and II to continue operating, but with a sales price that made further expansion uneconomic. However, Indonesia needed new electricity generation capacity to enable economic growth and to replace outmoded oil-fired generating units, and the Darajat field clearly possessed the opportunity for further expansion. Evaluation of the opportunity to construct Darajat III started in At that time, the Kyoto Protocol had not yet entered into force and the rules governing the CDM were not known. Nonetheless, the CDM presented the opportunity for a new source of value to be added that could be used to enable further development. Chevron began initial engagement with the Indonesian government at that time on the path forward to realize CDM benefits. CDM benefits were a critical value driver in allowing the project to be built at a price that was competitive with coal-fired generation tapped as the backbone for generation capacity growth

3 in Indonesia. Another change to the Darajat contract was negotiated with PLN in late 2004 that explicitly recognized that any greenhouse gas mitigation value to be realized from the construction of future units was to be utilized by Chevron, in return for a price PLN felt was affordable. Chevron began construction of Darajat Unit III in Commercial operation was achieved in June Darajat Unit III is Chevron s first project to be registered under the terms of the Clean Development Mechanism of the Kyoto Protocol, which entered into force in February The project utilizes a double flow steam turbine with a design inlet pressure of 15.2 bara, and a direct contact condenser. The CDM Validation and Registration Process A comprehensive process for preparing the project design document and conducting a Validation is described on the UN- FCCC CDM website ( As defined by the UNFCCC, Validation is the process of independent evaluation of a project activity by a designated operational entity against the requirements of the CDM on the basis of the project design document (CDM-PDD). This PDD, prepared by the project proponent, must clearly describe how the project will cause a reduction in greenhouse gas emissions greater than would occur in the absence of the CDM project. This involves describing the project and calculating its contributions to greenhouse gas reductions in a standardized manner using a methodology approved by the CDM Executive Board. An analysis must also be performed that demonstrates that the project reduces overall GHG emissions. The Kyoto Protocol defines this as [r]eductions in emissions that are additional to any that would occur in the absence of the certified project activity. The CDM EB has adopted a methodology that describes a process for the determination of additionality that evaluates whether a project is financially attractive without the CDM benefits ( Investment Analysis ) or if there are other barriers that prevent the project from proceeding without CDM ( Barrier Analysis ). All of these processes and methods, as well as complete records of submittals on all of the CDM projects registered or under development, are maintained on the CDM website. However, at the time the decision to invest in Darajat III was being evaluated starting in 2000, the rules and regulations for CDM registration were not yet finalized. The UNFCCC agency overseeing the CDM (the Executive Board) had not been created, nor was Indonesia s Designated National Authority (DNA) - which must approve any CDM project in Indonesia. However, drafts of processes were under discussion and enough information was available that Chevron decided to begin the work needed for Validation. Part of the Validation process requires the hiring of a third party Validator (known as a Designated Operational Entity, or DOE in UNFCCC parlance). This DOE can be any of several firms whose reputation and work processes have been approved by the CDM EB. Acting on preliminary guidance from the UN, Chevron proposed a methodology for calculating the GHG reduction benefit of the project to its DOE by assuming that a geothermal plant newly constructed would displace the construction of the most economical alternative, which in Indonesia is expected to be coal-fired generation for many years. This methodology was accepted by the DOE and submitted to the UN for approval in April Unfortunately, this early action was unproductive, as the Abbreviations used in this paper: CDM: CERs: DNA: DOE: EB: GHG: PDD: PLN: UNFCCC: Clean Development Mechanism Certified Emission Reductions Designated National Authority Designated Operational Entity Executive Board (of the CDM) Greenhouse gas(es) Project Design Document Perusahaan Listrik Negara (State Electricity Company) United Nations Framework Convention on Climate Change newly-formed EB realized that the numerous methodologies being developed and proposed by project proponents were resulting in too much variation, and decided to limit project proponents to using one of a handful of approved standard methodologies. Chevron s initial PDD was rejected with advice to re-propose the project using the newly-developed Consolidated methodology for grid-connected electricity generation from renewable sources (ACM0002). This new methodology required that the GHG emissions of all generation sources connected to the grid into which the renewable energy power plant connects be determined and used as the baseline against which the emissions of the CDM project are compared. At that time, no comprehensive analysis had been performed of the GHG emissions for the electrical grids in Indonesia, and a substantial effort was required to gather and validate the relevant data on plant type and fuel consumption from the state electric utility (PLN) and government departments within the Ministry of Energy. The process took in excess of 12 months, and culminated in a presentation workshop in which participants from a variety of government institutions participated. The process of determining the grid baseline was then transferred to the Directorate General of Electricity and Energy Utilization which now has the responsibility for maintaining and updating the emissions baseline calculation. The baseline of the Java-Bali-Madura electrical grid, with 19,347 MW of capacity in 2004, was calculated as metric tons CO 2 -equivalent per MWh. Against this baseline, at the expected project emissions of metric tons CO 2 -equivalent per MWh, the Darajat III project was estimated to produce 652,000 Certified Emission Reductions (CERs) per year - each representing one metric ton CO 2 -equivalent of GHG reduction. Another requirement for CDM registration is a formal recognition by the host country government that the project meets national criteria for sustainable development. The Darajat III project was one of the first CDM projects in Indonesia. Once again, as the government s internal processes for such approval were just being developed, a substantial amount of coordination with the Indonesian DNA was required. Starting in 2003 (with a Public meeting in the host regency of Garut attended by stakeholders from local and central government, non-governmental organizations, and Universities) until 2006, Chevron worked intensively with Indonesian authorities to recognize Darajat III as a CDM project that meets Indonesia s national sustainable development criteria. In 2006, approval was obtained from the Indonesian DNA that 26

4 the project meets National Sustainable Development Criteria. Approval of a so-call Annex 1 Party to the Kyoto Protocol, which was the United Kingdom for the Darajat Unit III Project, was obtained later that year. Another part of the requirements for the PDD is the preparation of a Monitoring Plan that describes the methods and practices that will be used to gather the data needed to establish the reduction of GHG emissions on the interconnected electricity grid due to the operation of the project, to monitor the GHG emissions from the project and present methods of measuring any leakage (i.e. emissions that occur outside the project boundaries as a result of project activity). The monitoring of the Darajat III project is relatively straightforward, as the emissions are primarily noncondensable gases that are contained in the steam to the plant, which is measured using a venturi meter on the turbine inlet combined with laboratory analysis of the noncondensable gas content. The revised PDD was re-submitted for approval in March The Validation review led to another revision of the PDD which was completed in June 2006 and the Validation was completed at the end of September Finally, on December 11, 2006, the CDM EB officially accepted the Darajat III Geothermal project as registered CDM Project No The journey leading to successful Validation and Registration encompassed six years. Much of this time was spent working through the issues associated with developing a CDM project in advance of the completion of the required rules and processes. Now that such processes are in place, a new project registration would take substantially less time. Experiences in the Monitoring and Verification Process The Darajat III power plant began generating electricity in June 2007, and achieved commercial operation in mid-july. CDM rules call for the realization of the GHG reduction benefit to be monitored by the Project Proponent and then verified by a different DOE than was engaged during the Validation process. The hiring of a different DOE for the Verification process is required by the CDM EB to prevent conflicts of interest that might arise when the same party performs both Validator and Verifier roles for a single project. Based on reported experiences of other CDM developers of the value of early experience with the Verification process, Chevron decided to call for the Initial and First Periodic Verification of the project after only a few months of operation, and selected August 31, 2007 as the end of the First Monitoring Period. The CDM EB required the preparation of formally documented procedures and processes for monitoring of all GHG emissions and leakage, comparable to those employed for custody transfer metering in the oil and gas industry. However, GHG emissions and leakage are largely produced from sources that are traditionally monitored only by routine plant instruments, or in some cases not monitored at all. As an example, one source of fugitive emissions for the project is a pressure bleed-off valve on the steam header into the turbine that is activated when header pressures exceed a present control point. This flow rate is usually zero, and is therefore traditionally unmeasured. However, for purposes of monitoring the plant GHG emission, emissions from this point need to be monitored and recorded as part of the plant GHG emissions. Because the flow is usually negligible but can increase rapidly under upset conditions, a single flow meter could not cover the range of possible flow rates with any accuracy, and modifying the piping system and instrumentation to accurately measure such a wide flow rate range was prohibitively expensive. Instead, a procedure was devised to calculate the steam flow by using an algorithm using the steam pipeline pressure and the control valve plug position. After discussion, the Validator was convinced that this approach would provide an adequate method of monitoring and estimating the amount of GHG emissions from this small source. Nonetheless, as they are a part of the CDM Monitoring program, these usually inconsequential instruments (and others like them) are now monitored with almost the same rigor used for the revenue meters, substantially increasing the workload of plant operating personnel. A Monitoring Report was prepared in accordance with the approved Monitoring Plan and submitted to the new DOE in December That Monitoring Report noted that due to a problem with the venturi meter that occurred soon after startup, the measurement of steam flow to the turbine was unreliable. Procurement of a replacement meter was initiated soon after startup, but since installing the new meter would entail a shutdown of the entire plant, a decision was made to postpone that installation until the first planned unit shutdown after 12 months of operation. Since the turbine steam consumption could easily be estimated with reasonable accuracy by reference to turbine performance curves, a revised measurement procedure was developed and noted in the First Monitoring report as a deviation from the approved Monitoring plan. After internal review and evaluation of the Monitoring report, the DOE visited the project site, in February 2008 to inspect the project documentation and equipment, as part of their Verification. This site visit report noted a few minor deficiencies in monitoring processes and suggested improvements, which were duly implemented. The DOE informed Chevron in March 2008 that, although the engineering arguments advanced for the requested deviation from the approved Monitoring Plan for steam measurement were technically sound, they would not be acceptable to the CDM EB, based upon experience. Instead, the appropriate course of action would be to submit a revised Monitoring Plan to the EB for formal review and approval. In June 2008, this revised Monitoring Plan was submitted to the DOE, who reviewed and submitted it to the CDM EB for approval in July. A 60 day turnaround period was anticipated for such requests. However, in this instance the process took 141 days. Finally, on November 28, 2008, the CDM EB formally approved the revised Monitoring Plan, clearing the way for a submittal of a revised First Monitoring Report to the DOE, who would then, after review, submit a Request for Issuance to the CDM EB the last hurdle before the first CERs for the project would be issued. Unfortunately, in the same meeting in which the CDM EB approved the revised Monitoring Plan, it suspended the DOE for the project, for perceived shortcomings in its internal processes for managing and controlling its work. This led to another 77 day delay while the DOE corrected the deficiencies noted by the CDM EB. The DOE was re-instated in February, 2009 and a 27

5 revised First Monitoring Report was submitted simultaneously to the DOE. After completing its review, a Request for Issuance was submitted by the DOE to the CDM EB on April 22, Following its internal procedures for reviewing the submittal for completeness, and with no objections raised to CER issuance from CDM Executive Board members, the EB issued the first CERs for the Darajat III project on June 11, The journey from the close of the first Monitoring Period to issuance encompassed 650 days. Subsequent Verifications are expected to be much shorter, on the order of 180 days, as the issues causing most of the delays in the first Verification were onetime events that should not be repeated. Monetization of CERs While the project will produce about 650,000 CERs per year, 2% of the issued CERs will be retained by the UNFCCC for its Adaptation Fund, in order to finance concrete adaptation projects and programmes in developing country Parties to the Kyoto Protocol that are particularly vulnerable to the adverse effects of climate change. 1 Net CERs from the project, when received, will be sold on the secondary markets, with some fraction possibly being used to satisfy a part of the GHG emissions reduction compliance obligations of Chevron s business operations in countries participating in the Kyoto Protocol. This approach is being taken instead of selling pre-issuance (or primary ) CERs with the belief this will optimize the value derived from CDM sales. Lessons Learned A number of lessons have been learned (and are still being learned) on this project on how to effectively implement the CDM component of a renewable energy project: 1. With respect to CDM Validation activities, the importance of establishing close relationships with the DNA and related agencies in the host country is crucial. For Darajat III, the relationships established during the baseline emissions evaluation and the activities undertaken to achieve Indonesian government approval and agreement on the Baseline emission factor for the Java-Bali Madura interconnected grid greatly helped to streamline the process of seeking host country approval. By working with the relevant agencies early in the preparation of the PDD, concerns and issues were addressed in a manner that avoided delays. 2. In preparing the Monitoring Plan, project proponents should provide for alternative methods of determining GHG emissions in the event of unforeseen problems with plant instrumentation. In the instance of Darajat III, the changes needed in the revised Monitoring Plan to incorporate the needed flexibility were minor. For lack of those words in the original Monitoring Plan, the project suffered a nine month delay in CER issuance of CERs from this cause alone. 3. Early Verification after a short period of operation is invaluable as a way of identifying and correcting deficiencies in project processes and controls, and gives invaluable experience that will save time and money later. 4. Expect the unexpected, and build into schedules ample contingencies, particularly for activities being undertaken for the first time. Acknowledgements The authors wish to acknowledge and thank Paul Quinlivan, Clean Energy Advisor of Sinclair Knight Merz, Ltd. for his invaluable contributions to the successful registration and verification of the Darajat III CDM project, plus Arthur Lee, Andrew Mingst and Kate McGinnis of Chevron for their advice on Climate Change policy and institutional framework, project Validation and Verification. References UNFCCC website, mechanism/adaptation_fund/items/3659.php 28