Carbon Market Case Study. Carbon REFIT Case Study for the Southern African Power Pool Region. Martin Burian and Christof Arens

Transcription

1 Carbon REFIT Case Study for the Southern African Power Pool Region Martin Burian and Christof Arens Corresponding Author: Martin Burian Tel Carbon Market Case Study Wuppertal and Hamburg, October 2012

2 Publishers Information Published by: Subject editors: Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU), Division E II: Climate Protection, Berlin, Germany Wuppertal Institute for Climate, Environment and Energy, Wuppertal, and GFA Envest GmbH, Hamburg Authors: Martin Burian, Christof Arens Corresponding Author: Christof Arens, christof.arens@wupperinst.org Date: October 2012

3 Table of Contents ABBREVIATIONS AND ACRONYMS II 1 INTRODUCTION AND BACKGROUND Introduction to the Carbon REFIT Background 1 2 CARBON REFIT DESIGN AND IMPACT Design Options Determination of Carbon REFIT Potential Impacts of Carbon REFIT Environmental Integrity 7 3 CONCLUSION 9 REFERENCES 10 ANNEX I MODEL CASH FLOW FOR HPP 11 ANNEX II SAPP CAPACITY ADDITIONS 13 ANNEX III FINANCIAL BENCHMARKS FOR ENERGY PROJECTS IN THE SAPP REGION 15 List of Figures and Tables Figure 1: Revenue Streams of a Model Hydro Power Plant 6 Table 1: Import to Demand Ratio for Selected SAPP Countries 2 Table 2: SAPP Power Utility Members and Host Countries 2 Table 3: Summary of the Regional SAPP GEF 3 Table 4: Determination of Carbon REFIT 5 Table 5: Hydro Power Plant - Financial Evaluation 6 Table 6: Revenue Streams of a Model Hydro Power Plant 6 Table 7: Hydro Power Plant Input Parameters 11 Table 8: Hydro Power Plant - Basic Operating Parameter 12 Table 9: Hydro Power Plant - Cash Flow Calculation 12 Table 10: Hydro Power Plant - Financial Evaluation 12 Table 11: SAPP Capacity Additions 13 Table 12: UNFCCC IRR Benchmarks for Energy Projects 15 I

4 A B B R E V I A T I O N S A N D A C R O N Y M S ACAD BM BMU CDM CDM EB CER CO 2 e COP CPA DNA DOE DRC GEF GHG GW GWh IPP IRR kw LDC MW MWh NAMA NMM NPV OM PES PPA REFIT RSA SAPP SAPP CC SADC SBL SSA SSC UNFCCC USD African Carbon Asset Development Facility Build Margin German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety Clean Development Mechanism CDM Executive Board Certified Emission Reductions Carbon Dioxide and Equivalences measured in Carbon Dioxide Conference of the Parties to the UNFCCC CDM Programme of Activities Designated National Authority Designated Operational Entity Democratic Republic of Cong Grid Emission Factor Greenhouse Gases Giga Watt Installed Capacity Giga Watt Hour Independent Power Producer Internal Rate of Return Kilowatt Least Developed Country Megawatt Installed Capacity Megawatt Hour Nationally Appropriate Mitigation Action New Market Mechanism Net Present Value Operational Margin Project Electricity System Power Purchase Agreement Renewable Feed in Tariff Republic of South Africa Southern African Power Pool SAPP Coordination Centre Southern African Development Community Standardized Baseline Sub-Saharan Africa Small Scale United Nations Framework Convention on Climate Change US Dollars II

5 1 I N T R O D U C T I O N A N D B A C K G R O U N D 1. 1 I n t r o d u c t i o n t o t h e C a r b o n R E F I T Many African countries do not offer incentives for the promotion of renewable energy projects through a Renewable Energy Feed-in Tariff (REFIT). Usually, the revenues of Independent Power Producers (IPPs) are negotiated through Power Purchasing Agreements (PPAs). In those countries which introduced a REFIT, such as the Republic of South Africa (RSA), the feed-in tariffs are subject to political debates and were changed several times. Both options, PPA and REFIT, may not offer the financial security to develop renewable energy projects with a lifetime of, for example, 30 years. Carbon Finance, even though subject to price changes (i.e. /CERs) is linked to registering a renewable energy project under the UN Framework Convention on Climate Change (UNFCCC). Such revenues are per se independent from political changes and the development stages of the national renewable energy framework. This short study sketches the idea of a Carbon REFIT for Southern Africa, covering the region of the Southern African Power Pool (SAPP). As such, this REFIT could link nine countries, providing an independent framework for the promotion of renewable energies in the region. Based on the Grid Emission Factor (GEF) of the region and a price of carbon, this would result in a financial incentive (in USDc/kWh) payable for each renewable kwh fed into the grid. This incentive could be financed by Annex I countries, for example as supported Nationally Appropriate Mitigation Actions (NAMA) (with or without crediting ), or a sectoral New Market Mechanism (NMM), conceptualized for the electricity sector and potentially covering all nine countries. The Carbon REFIT may be designed with or without crediting of emission reductions, which may depend on the political preferences of Annex I countries as well as the outcome of further UNFCCC negotiations. But the payment may be based on the volume of renewable energy fed into the grid (i.e. performance oriented) B a c k g r o u n d In the Southern African Development Community (SADC) region, many countries depend on electricity imports, and electricity trade between countries is very common. In five countries, imports account for a particularly substantial share of their electricity demand (Table 1). The SAPP as a SADC entity manages electricity trades of all SAPP members through the SAPP Coordination Centre (SAPP CC) based in Harare, Zimbabwe. As a coordination center, the SAPP CC not only arranges regional electricity trades, but also fulfils regional coordination functions with respect to the planning of capacity additions and the development of energy regulations / policies. As such, the SAPP CC is an important hub for the development of a regional grid emission factor. SAPP currently comprises 15 power utilities as members (Table 2). These system-interconnections result in serious consequences for CDM project development. Countries with a high share of hydro power generation, such as Zambia or Democratic Republic of the Congo (DRC), encounter difficulties in showing that renewable energy projects conducted on their territory result in CO 2 emissions reductions (i.e. even though hydro power reduces CO 2 -intensive electricity imports and / or exports may replace CO 2 -intensive electricity generation in other countries). This is due to the Grid Emissions Factor, which is generally developed at the national level. 1

6 Table 1: Import to Demand Ratio for Selected SAPP Countries Botswana 63.5% Lesotho 28.5% Namibia 52.0% Mozambique 50.0% Swaziland 59.0% Source: Data provided by SAPP CC The GEF determines the amount of Certified Emission Reductions (CERs) that a renewable energy project can generate from feeding 1 MWh of electricity into the electricity grid. If the GEF amounts to, for example, 1 tco 2 /MWh, a CDM project generates one CER per MWh. In case the GEF is zero, renewable energy CDM projects cannot generate any CERs. Table 2: SAPP Power Utility Members and Host Countries No. Country Power Utility Abbreviation 1 Angola Empresa Nacional de Electicidade de Angola ENE 2 Botswana Botswana Power Cooperation BPC 3 DRC Societé Nacional d Electricité SNEL 4 Lesotho Lesotho Electricity Corporation LEC 5 Malawi Electricity Supply Commission of Malawi ESCOM 6 Mozambique Electricidade de Mozambique EDM 7 Mozambique Hidroelectrica de Cahora Bassa HCB 8 Mozambique Mozambique Transmission Company Motraco 9 Namibia NamPower NamPower 10 RSA Eskom Eskom 11 Swaziland Swaziland Electricity Board SEB 12 Tanzania Tanzania Electricity Supply Company TANESCO 13 Zambia Zambia Electricity Supply Corporation ZESCO 14 Zambia Copperbelt Energy Corporation CEC 15 Zimbabwe Zimbabwe Electricity Supply Authority ZESA As can be seen in the Table 2, there are 12 public utilities and three private sector power utility members in SAPP, which were admitted based on their substantial contribution to power trades in the SAPP region. The three private entities are: HCB, an IPP with an installed generating capacity of 2,075 MW in Mozambique, Motraco, the owner and operator of 1,450 MW cross-border transmission infrastructure from the Republic of South Africa (RSA), to Mozambique via Swaziland; CEC, the owner and operator of power infrastructure in the copper belt of Zambia that currently accounts for about 50% of ZESCO s demand. 2

7 With the current changes in the regulatory frameworks in the SADC energy sector, it is expected that there will be more private sector actors such as Power Brokers and others in SAPP in the future. In the context of the African Carbon Asset Development (ACAD) facility, GFA ENVEST and the Coordination Center of the Southern African Power Pool developed a technical solution for the GEF problem: the regional GEF (Burian / Maviya 2012). It is based on an energy model covering the nine interconnected countries: Botswana, Democratic Republic of the Congo, Lesotho, Mozambique, Namibia, South Africa, Swaziland, Zambia and Zimbabwe. All these countries are members of the SAPP. The nine countries were included into one regional socalled Project Electricity System (PES). The PES is the geographical area for which the Build Margin (BM) and the Operating Margin (OM) are determined. The development of one regional PES was conducted in accordance with UNFCCC rules and procedures by proving that there are no transmission barriers according to the CDM EB s definition. Based on standard weighting of the BM and the OM, the SAPP region offers a GEF of tco 2 /MWh. Details can be found in Table 3. Guidance on the selection of alternative weights can be found in the tool (CDM EB63, Annex 19, page 18f). Table 3: Summary of the Regional SAPP GEF OM Emission Factor (in t-co 2 /MWh) BM Emission Factor (in t-co 2 /MWh) Wind and solar power generation project activities for the first crediting period and for subsequent crediting periods Weight of the OM Weight of the BM CM Emission Factor All other projects for the first crediting period All other projects for the second and third crediting period The GEF calculation was submitted to Carbon Check, a Designated Operational Entity (DOE) located in South Africa. The DOE validated the GEF according to all applicable rules and confirmed the final value in a validation statement. In an effort which was well coordinated by UNEP/ACAD, all nine countries submitted the GEF on 17 August 2012 as a Standardized Baseline (SBL) to the UNFCCC Secretariat. Following the CDM Executive Board s procedures (CDM EB66, Annex 49), an initial assessment was conducted in September Thereafter the SBL was evaluated by two members of the CDM Methodology Panel and forwarded as first SBL worldwide for consideration by the CDM EB. At its 70 th meeting the CDM EB noted: The Board welcomed the first standardized baseline Grid emission factor for the Southern African power pool submitted for its consideration (CDM EB70, 48) but requested the Secretariat to further work on issues such as institutional procedures for future updating. Thus, though being the most advanced SBL so far, the approval of the SAPP Grid Emission Factor is pending for the time being. 3

8 2 C A R B O N R E F I T D E S I G N A N D I M P A C T 2. 1 D e s i g n O p t i o n s The SAPP GEF Standardized Baseline defines baseline emissions for energy projects feeding electricity into the Southern African Power Pool grid. Therefore, it could be used as the baseline for a regional carbon finance scheme beyond the CDM incentivizing renewable energy projects. Different design options for such a sectoral scheme are theoretically possible: First, it could take the form of a regional supported NAMA (here: RAMA). NAMAs are defined as mitigation actions by developing countries... supported and enabled by technology, financing and capacity building, in a measurable, reportable and verifiable manner (Decision 1/CP.13). The current scientific discourse accompanying the UNFCCC negotiations comprises the concept of credited NAMAs which may generate offset credits. Such credits may be issued on the basis of the installation of renewable energy installations which were triggered by a national / regional REFIT scheme. The revenues made from selling the carbon credits would go directly into financing the feed-in tariff. As the baseline for the scheme would be the SAPP GEF standardized baseline, a regional NAMA or RAMA would be possible that covers all nine countries. Second, following the EU s suggestions for sectoral crediting mechanisms, the scheme could cover the sector (renewable) energy generation in the region. This mechanism would need to take the projected installation of renewable energy as baseline and would issue credits in case the scheme triggers a higher penetration rate of renewable energy projects. As such, the scheme would rather have a technology penetration target and would be based on the performance of the sector. Third, a combination of CDM and other policy instruments is possible. Puhl (2011) sketches a system that links a REFIT in Thailand with programmatic CDM and NAMAs/sectoral crediting schemes. This sketch is arranged in three major layers : The promotion of renewable energy through a REFIT results in additional costs covered by the electricity consumers through higher prices. The increase in electricity prices is subsequently reduced to an appropriate level by adding two more layers. Second Phul proposes the development of a CDM Programme of Activities under current rules. The carbon revenues are used to partially refinance the cost of the existing REFIT, so that the payments of consumers are reduced. On top of this scheme, a NAMA layer is put which helps limiting the price increase due to the REFIT. This NAMA support may set in once the additional cost burden for electricity consumers reach an appropriate level. From the outset, the RAMA option promises the best results as it directly targets the installation level and can therefore directly finance the feed-in tariff. Moreover, additionality matters can be addressed well under such regimes, see below. The layer-system is regarded as too complicated at first sight when considering the regional coverage that is intended here. The advantage of such a Carbon REFIT system would certainly be the existence of a reliable scheme incentivizing renewable energy production which would be independent from political preferences and debate in the different countries. The difficulties with the South African REFIT are a viable example of these constraints. A possible anchor point for the scheme would be the SAPP Coordination Centre. Being a SADC entity, it facilitates the operation of the common energy market and monitors the transactions between the members. Its technical knowledge and coordinating role may make it an appropriate hub for innovative energy projects in the region. 4

9 2. 2 D e t e r m i n a t i o n o f C a r b o n R E F I T In order to evaluate the potential impact of a Carbon REFIT (subsequently referred to as CR), the potential carbon revenue of such a scheme shall be estimated. This builds on: the grid emission factor, which was determined for the nine countries to amount to tCO 2 /MWh. That is, for the generation of one MWh, the regional electricity system emits approximately tCO 2. the price of one tco 2 e reduced, which was assumed to be at 10USD/tCO 2. This may be high compared to the current CER price but seems reasonable when using historical mid to long term CER prices as benchmark for the financial contributions under a future supported NAMA/NMM scheme. Based on above values, the CR is determined as follows: Following above formula results in Carbon REFIT of USDc/kWh. Please note that this REFIT may only be applicable to renewable energy projects which do not involve project emissions. For project types such as biogas (physical leakage) or biomass residues (transport emissions), related project emissions would need to be taken into account. The input and output data is presented in below table. Table 4: Determination of Carbon REFIT Item Unit Value Price of Emission Reduction USD/tCO Grid Emission Factor tco 2 /MWh Carbon REFIT USDc/kWh P o t e n t i a l I m p a c t s o f C a r b o n R E F I T This section evaluates the potential impacts of the Carbon REFIT. The evaluation builds on a model cash flow for a hydro power plant. The cash flow and its input parameters are presented in Annex I. The cash flow is based on an average discount rate (based on UNFCCC s financial benchmark data for the SAPP Region) as determined in Annex III. This cash flow gives a first and rough approximation of the financial framework for hydro power projects (which may be the financially most attractive renewable energy project type). Based on this cash flow, the financial attractiveness of a model hydro power plant is evaluated. As financial indicators, the Internal Rate of Return (IRR) and the Net Present Value (NPV) are determined. Both, IRR and NPV are determined for the scenario with and without carbon revenues. The findings of the financial evaluation are presented in table 5. 5

10 Table 5: Hydro Power Plant - Financial Evaluation IRR w/o Carbon Revenues in % 10.90% IRR with Carbon Revenues in % 15.70% NPV w/o Carbon Revenues in USD -3,995,979 NPV with Carbon Revenues in USD 3,766,217 In the without Carbon REFIT scenario, table 5 shows that the project s Internal Rate of Return amounts to 10.90% and its Net Present Value is negative. In CDM terms, in order to prove additionality, the project s IRR must be below the benchmark of 12.88%, as determined in Annex III. Hence, this model hydro power plant would qualify under the CDM. The with Carbon REFIT scenario shows a more favorable picture. Based on the Carbon REFIT, the proposed project s IRR lies significantly above the benchmark. Also the project s NPV becomes positive. Also in terms of significance, the Carbon REFIT may be a substantial contribution. The evaluation of the revenues of electricity sales and from the Carbon REFIT indicates that the REFIT may make up for approx. 29% of the model hydro power plant s revenues. Table 6: Revenue Streams of a Model Hydro Power Plant Item USDc/kWh % Electricity Revenue % Carbon Revenue % Total % Figure 1: Revenue Streams of a Model Hydro Power Plant 6

11 This first approximation shows that the above sketched Carbon REFIT may be central to promoting renewable energy projects in the region. Still, this issue may require a more detailed evaluation, such as the evaluation of cash flows for different technologies (wind, biomass residue projects, solar and hydro power plants of different sizes) as well as different business models (operation under a PPA or e.g. operation under the power pool) E n v i r o n m e n t a l I n t e g r i t y Within the system sketched above, two elements need to be accounted for when ensuring environmental integrity: the risk of double counting as well as the additionality of the emission reduction. These two issues are subsequently discussed in detail. Double counting occurs if a project applies for the Carbon REFIT while at the same time making use of the CDM. This would result in double counting of emission reductions, one time through the CDM, one time through the Carbon REFIT. This problem may besolved by requiring that projects covered by the Carbon REFIT must not apply for being registered under the CDM or under a similar mechanism. This may be documented e.g. by signing a respective agreement between the power project and the institution in charge for the management of the Carbon REFIT. Moreover this may be controlled by regularly screening of UNFCCC s CDM database. The question of additionality is a more complex and challenging task. The additionality proof usually is accomplished by demonstrating that the proposed CDM project s IRR is below the benchmark for (energy) projects as e.g. stipulated by the Guidelines on the Assessment of Investment Analysis (CDM EB62, Annex 5). Not considering additionality hence involves the risk that also projects with IRRs above the benchmark may be accounted towards the climate change mitigation objectives of Annex I countries. Subsequently two design options for managing additionality of a Carbon REFIT are briefly laid out. First, it may be agreed to define an eligibility list. Such a list may specify scales and types of projects which may be eligible for participating in the Carbon REFIT. In general terms, it shall be noted that all SADC countries are characterized by difficult investment climates for energy projects. Annex III evaluates the investment benchmark for energy projects for all nine SAPP countries as specified by the UNFCCC for the additionality proof. The benchmark ranges from 10.8% (Botswana) to 14.5 % (DRC and Mozambique), the simple average for the SAPP region amounts to 12.88%. Consequently, if a project is above this benchmark, it may not be additional. The small number of renewable energy projects developed in the past years indicates that these high investment benchmarks pose a financial barrier for project finance. Against this background, an eligibility list may be developed, in order to allow only for those projects under the Carbon REFIT, which may not be financially attractive with additional revenues. The subsequent list not only constrains eligibility to small (and hence potentially financially less attractive) projects, it may also ensure an ecological design. The list may be constrained to e.g.: Including a maximum size for hydro power plants, e.g. 100 MW, as small hydro schemes are tentatively more expensive (in USDc/kWh) than large power plants, Hydro power plants with an installed capacity of above 20 MW shall be compliant to the guidelines of the World Commission on Dams (WCD) (EC, 2004, Article 11a, 6); The power density of dams shall be at least 4W per square meter (as specified in ACM2 Grid Connected Electricity Generation from Renewable Sources, (CDM EB67) 7

12 Biomass projects shall be restricted to the use of biomass residues (as specified in ACM6 Consolidated Methodology for Electricity and Heat Generation from Biomass), or Biomass from dedicated plantations (e.g. reforestation) without the clearing of intact forest sites (e.g. AM42 Grid-connected Electricity Generation Using Biomass from Newly Developed Dedicated Plantations). Among above project types, hydropower is considered as the financially most attractive technology. Chapter 2.3 above provides a model cash flow for a 50MW hydro power station, which has been adapted to the region. As discussed above, even though hydropower being the financially most attractive technology, the cash flow shows that due to the high financial costs, such a project may be additional under current CDM rules. The above approach shall be considered as a first sketch and will need further evaluation and close coordination with local stakeholders. The second design option for additionality may build on a CDM-style investment analysis and a barrier analysis (Okubo et al. 2011). As for the investment anaylsis, one would need to calculate the difference between the REFIT and the electricity price. On top of that, the difference between renewable electricity generation costs and the costs of fossil fuel-based energy would need to be assessed. The investment analysis would be passed as long as both values are positive. The barrier test would look at the capital investments needed and assess whether the existence of the crediting scheme helps removing the investment barriers by increasing revenues. Finally, it may be the case that the overall emissions of the regional electricity system increase, even despite the financial support through the Carbon REFIT. This may be as new fossil fuelled power plants are commissioned and / or the load of the existing fossil power plants is increased. In this regard, the sketched Carbon REFIT may not be considered as a sectoral benchmark for Southern Africa with an absolute or relative baseline. It is merely an instrument for promoting and supporting renewable energy on a project-by-project case similar to a CDM Programme of Activities for Southern Africa. 8

13 3 C O N C L U S I O N This short study outlines the opportunities for using the SAPP GEF Standardized Baseline for a regional carbon crediting scheme. Especially when designed as a regional version of Nationally Appropriate Mitigation Action (RAMA), the scheme looks promising, as many prerequisites for a possible NAMA crediting are fulfilled. These include a well calculated baseline emissions factor (the SAPP GEF), excellent monitoring conditions (renewable electricity produced), and good options for assessing additionality. Such a scheme would help promoting renewable energy in southern Africa and would align perfectly with feed-in programmes already under consideration (such as in Zambia) and with existing schemes facing implementation difficulties as in RSA. Another option to be explored could be a pilot scheme for a New Market Mechanism as currently discussed under the AWG-LCA in the climate negotiations. Further research would be needed in order to develop a robust approach for such a scheme. Inter alia, conceptual detail needs to be analyzed further, such as different design options or the evaluation of cash flows for different technologies. At the international level, questions such as whether policy-based actions such as REFIT could qualify as a NAMA need to be answered. The impact of varying carbon prices is a major issue. This could be accounted for, e.g. by defining the scheme as a strategic partnership between Annex I and Non-Annex I countries. This partnership would guarantee the purchase of the credits generated at a fixed carbon price. Further questions relate to the entity administering the regional scheme. The SAPP Coordination Centre may be well suited for this task. On the other hand, one has to account for, inter alia, different national approval procedures and laws. Therefore, it might be better to chose a light umbrella framework and have national schemes under it. Taking these two issues together, it might be worth exploring whether a regional development bank could administer the scheme in the form of a fund or facility. This could take away the responsibility from the national governments which are confronted with budget constraints and limited capacities. This approach would also help securing a fixed carbon price. One option would be a partnership with a regional development bank and the German KfW which both has a wealth of experience with incentive schemes and is active in the region. 9

14 R E F E R E N C E S Burian, Martin and Johnson Maviya (2012): Unlocking CDM Development in Southern Africa Developing a Regional Grid Emission Factor. In: German Federal Environment Ministry (Ed.): Mitigating Climate Change, Investing in Development. Berlin. CDM EB70 (2012): Meeting Report CDM Executive Board Seventieth Meeting, Version 1, Date of Meeting: 10 to 23 November 2012, Place of Meeting: Doha, Qatar. CDM EB69 (2012): ACM6 Consolidated Methodology for Electricity and Heat Generation from Biomass, Version , UNFCCC. CDM EB67 (2012): ACM2 Grid Connected Electricity Generation from Renewable Sources, Version 13, UNFCCC. CDM EB66, Annex 49 (2011): Guidelines for Quality Assurance and Quality Control of Data used in the Establishment of Standardized Baselines, Version 1, UNFCCC. CDM EB62 Annex 5 (2011): Guidelines on the Assessment of Investment Analysis, Version 5, UNFCCC. CDM EB55, (2010): AM42 Grid-connected Electricity Generation Using Biomass from Newly Developed Dedicated Plantations, Version 2.1, UNFCCC EC, 2004, Directive 2004/101/EC of the European Parliament and of the Council of 27 October 2004 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. Okubo, Yuri, Daisuke Hayashi and Axel Michaelowa (2011): NAMA crediting: how to assess offsets from and additionality of policy-based mitigation actions in developing countries. In: Greenhouse Gas Measurement & Management, 1, 2011, Puhl, Ingo (2011): Linking Domestic Incentives (feed-in-tariff) with Carbon Market Mechanisms and NAMA to Deliver Renewable Energy at Scale. Presentation at IETA side event, 5 Dec 2011, UNFCCC COP 17. Durban. 10

15 A N N E X I M O D E L C A S H F L O W F O R H P P In order to evaluate the potential impact of a Carbon REFIT, this section presents a model cash flow for a hydro power plant. This model builds on the Levelized Electricity Cost model of the World Bank and was adopted to a hydro power plant of 50MW installed capacity. The discount rate was determined at 12.88%, based on the UNFCCC benchmarks for energy projects in the SAPP region, please refer to Annex III. The electricity price was estimated at 2.5 USDc/kWh and shall reflect the revenues that an IPP can realize under a PPA. Table 7 below presents the basic input parameters. Table 7: Hydro Power Plant Input Parameters Item Unit Project Case Installed Capacity MW De-Rating by Use in % 0.40% Project's Own Electricity Demand in % 0.30% Net Effective Capacity Load Factor MW 40.00% Net Electricity Generation GWh/yr Total Investment Million USD Non-Fuel Variable Cost USD/MWh 0.11 Fixed OM Cost Million USD/yr 0.12 Plant Life Years Discount rate in % 12.88% Electricity Price USDc/kWh 2.25 Grid Emission Factor tco2/mwh 0.92 Price of Emission Reduction USD/tCO Carbon Revenue USDc/kWh 0.92 Amortization Million USD/yr 0.60 Profit Tax in % 0.20 Calculated based on the Levelized Electricity Generating Cost Model of the World Bank included in Islamic Republic of Iran - Power Sector Note, World Bank, 2006, Annex 5. 11

16 The below table shows the basic operating parameters of the model hydro power plant ranging from investment costs up to the potential revenues from a Carbon REFIT. These revenues and costs are presented from year 1 to year 50 (i.e. the end of the plant life time). Table 8: Hydro Power Plant - Basic Operating Parameter Item Investment Net Electricity Generation Non-Fuel Variable Cost Fixed OM Cost Total Annual Costs Amortization Electicity Revenues Emission Reductions Carbon Revenues Unit\Yea r USD/yr GWh/yr USD/yr USD/yr USD/yr USD/yr USD/yr tco2/yr USD/yr ,000,000 15,000, ,137 19,137 19,137 19,137 19, , , , , , , ,000 15,121,000 15,121, , , , , , , , , , ,000 3,914,406 3,914,406 3,914,406 3,914,406 3,914, , , , , , ,596,382 1,596,382 1,596,382 1,596,382 1,596,382 Based on the above operating parameter, the below table presents the cash flow of the model hydro power plant. Amortization, as determined in Table 4, was added back to the cash flow. The results are presented twice, as Net Profit with Carbon Revenues and Net Profit w/o Carbon Revenues. Table 9: Hydro Power Plant - Cash Flow Calculation Electicity Revenues USD/yr - - 3,914,406 3,914,406 3,914,406 3,914,406 3,914,406 Carbon Revenues USD/yr - - 1,596,382 1,596,382 1,596,382 1,596,382 1,596,382 Total Annual 15,121,000 15,121, , , , , ,311 Costs USD/yr Amortization USD/yr , , , , , Gross Profit USD/yr 15,121,000 15,121,000 5,970,477 5,970,477 5,970,477 5,970,477 5,970,477 Profit tax USD/yr 1,194,095 1,194,095 1,194,095 1,194,095 1,194,095 Net Profit with Carbon Revenues USD/yr 15,121,000 15,121,000 4,776,381 4,776,381 4,776,381 4,776,381 4,776,381 Net Profit w/o Carbon Revenues USD/yr 15,121,000 15,121,000 3,499,276 3,499,276 3,499,276 3,499,276 3,499,276 Based on above cash flow, it is possible to determine the financial attractiveness of the hydro power plant. The financial attractiveness is expressed through the Internal Rate of Return (IRR) and the Net Present Value (NPV). Both, IRR and NPV are determined for the scenario with- and without carbon revenues. The findings of the financial evaluation are presented in below table. Table 10: Hydro Power Plant - Financial Evaluation IRR w/o Carbon Revenues in % 10.90% IRR with Carbon Revenues in % 15.70% NPV w/o Carbon Revenues in USD -3,995,979 NPV with Carbon Revenues in USD 3,766,217 12

17 A N N E X I I S A P P C A P A C I T Y A D D I T I O N S Table 11: SAPP Capacity Additions No. Country Project Name Capacity [MW] Expected Commissioning Date 1 Angola Mambas Angola Gove rehabilitation Angola Cambambe II Angola Cambambe II Botswana Orapa Botswana Morupule B Expansion (Phase1) Botswana Mmamabula (MDDP) DRC Inga 1 Rehabilitation DRC Nseke DRC Inga 1 Rehabilitation DRC Inga 2 Rehabilitation DRC Nzilo DRC Busanga DRC Inga Lesotho Lesotho Wind Lesotho Muela II Malawi Kapichira Malawi Songwe Malawi Lower Fufu Malawi Ngana Malawi Mpatamanga Mozambique Moamba Mozambique Moatize Mozambique Benga Mozambique Moatize Mozambique Benga Mozambique Moamba Mozambique HCB North Bank Mozambique Mphanda Nkuwa (Phase I) Namibia Anixas 22, Namibia Ruacana Namibia Wind Namibia Orange River Namibia Kudu Namibia Baynes New Swaziland Lubhuku Swaziland Magududza South Africa Komati South Africa Eskom Co-generation South Africa Komati South Africa OCGT IPP

18 42 South Africa OCGT IPP South Africa Ingula Pumped Storage South Africa Eskom Solar South Africa Medupi South Africa Ingula Pumped Storage South Africa Kusile South Africa Medupi South Africa Kusile South Africa Medupi South Africa Eskom Coal South Africa Kusile South Africa Medupi South Africa Eskom Coal South Africa Kusile South Africa Eskom Coal South Africa Eskom Coal Tanzania Singida Wind Tanzania Sao Hill Co-generation Tanzania Ubongo Tanzania Mwanza Tanzania Kiwira Tanzania Mnazi Bay Tanzania Kiwira Tanzania Kinyerezi Tanzania Mchuchuma Tanzania Ngaka Tanzania Ruhudji Zimbabwe Hwange 1& 2 Rehabilitation Zimbabwe Small Thermals Rehabilitation Zimbabwe Chisumbanje Zimbabwe Chisumbanje Zimbabwe Kariba South Extension Zimbabwe Hwange Zimbabwe Hwange Zimbabwe Lupane Zimbabwe Lupane Zimbabwe Gokwe North Zimbabwe Batoka Zambia Lunsemfwa Hydro Zambia Kariba North Bank Extension Zambia Itezhi-Tezhi Zambia Kabompo Zambia LHPC Zambia Kalungwishi Zambia Kafue Gorge Lower Source: SAPP Power Pool provided by SAPP CC 14

19 A N N E X I I I F I N A N C I A L B E N C H M A R K S F O R E N E R G Y P R O J E C T S I N T H E S A P P R E G I O N Table 12: UNFCCC IRR Benchmarks for Energy Projects No. Country Benchmark (in %) 1 Botswana 10.80% 2 DRC 14.50% 3 Lesotho N.A. 4 Mozambique 14.50% 5 Namibia 12.90% 6 RSA 10.90% 7 Swaziland 12.90% 8 Zambia 13.25% 9 Zimbabwe 13.25% Average 12.88% Source: CDM EB62, Annex 5, Guidelines for the Assessment of Investment Analysis, Appendix 'Default values for the expected return on equity', 8 15

20 CDM in African LDCs - The Project The German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) has commissioned Wuppertal Institute and GFA Envest a research project on suitable supporting activities that contribute to the enhancement of CDM in sub-saharan African least developed countries. The main aim of the research is to assist BMU in developing its strategy for climate change mitigation activities on the African continent. The results and findings of the research project will be published and circulated to all project developers, political decision makers, companies, financial institutions and everyone else interested in finding ways of how to best approach the CDM in Africa. More information on the project, all publications and further resources can be found at The Project Consortium Wuppertal Institute for Climate, Environment and Energy P.O. Box Wuppertal GERMANY GFA Envest Eulenkrugstraße Hamburg GERMANY 16

21 This study was commissioned by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety.