CLEAN DEVELOPMENT MECHANISM PROJECT DESIGN DOCUMENT FORM (CDM-PDD) Version 03 - in effect as of: 28 July 2006 CONTENTS. Annexes

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1 page 1 CLEAN DEVELOPMENT MECHANISM PROJECT DESIGN DOCUMENT FORM (CDM-PDD) Version 03 - in effect as of: 28 July 2006 CONTENTS A. General description of project activity B. Application of a baseline and monitoring methodology C. Duration of the project activity / crediting period D. Environmental impacts E. Stakeholders comments Annexes Annex 1: Contact information on participants in the project activity Annex 2: Information regarding public funding Annex 3: Baseline information Annex 4: Monitoring plan

2 page 2 SECTION A. General description of project activity A.1 Title of the project activity: Project title: Fujian Longyan Tingzhou Hydropower Station Project PDD Version: 3.0 PDD completion date: 23/02/2009 Revision History: Version 1.0: First draft, submitted for validation / global stakeholder comments Version 2.0: Second draft, prepared based on corrective action requests by the DOE Version 3.0: Third draft, submitted for global stakeholder comments for the 2 nd time due to inconsistencies with the name in the Chinese LOA A.2. Description of the project activity: Description and purpose of the project activity The Fujian Longyan Tingzhou Hydropower Station Project (hereafter referred to as project or proposed project activity ) involves the construction and operation of a diversion-type hydropower station located at the main stream of the Tingjiang River in Guankeng Village of Yanggu Town, Changting County of Longyang Prefecture City, Fujian Province, China. The main objective of the project is to generate power from clean renewable hydropower in Fujian Province and contribute to the sustainability of power generation of the East China Power Grid. The hydropower station will install 3 turbine / generator units with an individual installed capacity of 8.5 MW, amounting to a total installed capacity of 25.5 MW. Baseline scenario and project boundary The baseline scenario for the proposed project activity is grid connected electricity generation in the East China Grid and the connected electricity system, which is identical to the scenario existing prior to the start of implementation of the project activity. The proposed project activity will displace electricity generation in the baseline. The CDM project activity falls within Sectoral Scope 1: Energy Industries (Electricity generation from hydropower) and will employ the approved consolidated baseline and monitoring methodology ACM0002 (Version 09). In line with the methodology, the greenhouse gasses accounted for are CO 2 emissions from electricity generation in fossil fuel fired power plants that is displaced due to the proposed project activity and CH 4 emissions from the reservoir. The spatial extent of the project boundary includes all power plants connected physically to the electricity system that the CDM project power plant is connected to, including the project power plant itself. Summary of employed technology The project design mainly consists of water diversion type hydropower station with a dam, a water diversion system with 2 diversion tunnels, a powerhouse, tailrace, and a transformer station. The expected effective operating hours are 3,221 hrs annually and annual power supply to the grid is

3 page 3 expected to be 77,643.3 MWh. The total flooded reservoir surface area of the proposed project activity equals 2,500,000 m 2 and the power density of the project is 10.2 W/m 2. Power generated by the project will be routed to the Fujian Provincial Power Grid through the Tingzhou 110 kv and Shanghang Jiuxian 220 kv transformer stations. The Fujian Provincial Power Grid is part of the East China Power Grid. Contribution to sustainable development The project activity s contributions to sustainable development are: Reducing the dependence on exhaustible fossil fuels for power generation; Reducing air pollution by replacing coal-fired power plants with clean, renewable power; Reducing the adverse health impacts from air pollution; Reducing the emissions of greenhouse gases, to combat global climate change; Contributing to local economic development through employment creation. Promote local fishery development utilizing the reservoir created by the proposed project activity Improve the climate conditions around the Hydropower Station and improve the local area biodiversity This project fits with the Chinese government objective to reduce the dependence on exhaustible fossil fuels for power generation, make the energy sector in general and the power sector in particular more sustainable. A.3. Project participants: The parties involved in the project are shown in Table A.1: Table A.1 Project participants Name of Party involved (*) Private and/or public entity(ies) project participants ((host) indicates a host (*) (as applicable) Party) People s Republic of China Longyan Tingzhou Hydropower Development Ltd. (host) United Kingdom and The Netherlands (as the Project Entity) Deutsche Bank AG, London Branch (as the Purchasing Party) the Party involved wishes to be considered as project participant (Yes/No) No No For more detailed contact information on participants in the project activities, please refer to Annex 1. A.4. Technical description of the project activity: A.4.1. Location of the project activity: A Host Party(ies): People s Republic of China

4 page 4 A Region/State/Province etc.: Fujian Province A City/Town/Community etc: Yanggu Town, Changting County A Detail of physical location, including information allowing the unique identification of this project activity (maximum one page): The proposed project is located on the main stream of the Tingjiang River, in Guankeng Village of Yanggu Town, Changting County of Longyan Prefecture City, Fujian Province, China. The dam site s approximate coordinates are east longitude of '42' and north latitude of 25 28'12", and the power house s approximate coordinates are east longitude of '43' and north latitude of 25 28'11".

5 page 5 Figure A.1: Map of Fujian Province and the project location The dam site s approximate coordinates -North latitude 25 28'12" and East longitude '42" Power house s approximate coordinates -North latitude of 25 28'11" and East longitude of '43"

6 page 6 A.4.2. Category(ies) of project activity: The project activity falls within Sectoral Scope 1: Energy Industries. - Electricity generation from renewable energy (hydropower) A.4.3. Technology to be employed by the project activity: Employed technology The project is a diversion type hydropower station with limited water storage capabilities of less than one day. The design mainly consists of a dam structure, two separate water diversion tunnels, powerhouse, tailrace, and an on-site step-up transformer station. Total installed capacity will be 25.5MW and expected effective annual operating hours are 3,221 hours. Net annual power supply to the grid is estimated to be 77,643.3 MWh. Total flooded reservoir surface area will be 2,500,000 m 2, corresponding to a power density of 10.2 W/m 2. The designed water head available for power generation is meters, and the water flow rate is 97.5m 3 /s. A dam structure has been constructed in the Tingjiang River and eight floodgates and two water intakes. The water intakes lead the water into two separate diversion tunnels with individual lengths of approximately 1 kilometre. The diversion tunnels will lead the water to the powerhouse. After passing through the turbines, the water will be returned to the river through a tailrace. At the powerhouse site a step-up transformer station will be constructed. The choice of axial-flow blade rotation turbines for the proposed project reflects the low water head nature of the project. Three turbine / generator units with an individual capacity of 8.5 MW will be installed, amounting to a total installed capacity of 25.5 MW. The specific technical data of the turbines and generators are listed in Table A.2. The technology consists of domestic hydropower technology produced by Nanning Power Generation Equipment Factory Co., Ltd., which has been used before in China and is appropriate for the proposed project. Table A.2 Technical data of the turbine / generator units Main Technical Data Value (per unit) Turbine (3 units) Type number ZZ580-LH-340 Type Axial-flow blade rotation turbine Nominal water head m Nominal flow rate 77.5 m 3 /s Capacity 9.67 MW Nominal rotation r/min Generator (3units) Type number SF /4600 Type Vertically mounted Nominal voltage 6.3 kv Nominal power 8.5 MW Load factor 0.8 Efficiency 8,500 kw

7 page 7 Grid connection, Baseline Scenario, and Sources and Gases in the Project Boundary Power generated by the project will be routed to the Fujian Provincial Grid through an on-site Tingzhou 110 kv booster Station and Shanghang Jiuxian 220 kv Transformer substation (owned by the grid company), which is located kilometres from the project site. The Fujian Provincial Grid is part of the East China Power Grid. The baseline scenario for the proposed project activity is grid connected electricity generation in the East China Grid and the connected electricity system, which is identical to the scenario existing prior to the start of implementation of the project activity. The proposed project activity will displace electricity generation in the baseline. The CDM project activity falls within Sectoral Scope 1: Energy Industries (Electricity generation from hydropower) and will employ the approved consolidated baseline and monitoring methodology ACM0002 (Version 09). In line with the methodology, the greenhouse gasses accounted for are CO 2 emissions from electricity generation in fossil fuel fired power plants that is displaced due to the proposed project activity and CH 4 emissions from the reservoir. The spatial extent of the project boundary includes all power plants connected physically to the electricity system that the CDM project power plant is connected to, including the project power plant itself. Training and maintenance requirements The project entity will employ experienced employees and can therefore be considered capable of constructing and operating a hydropower station. The key staff members (15 of them in total) received a training session on operations, maintenance, and safety regulations. For example, during May 15 th to May 19 th 2007, a training was conducted on Security regulations and Operational Practises on-site of the Jinshan Hydropower Station. A total or 15 staff members attended the training, most of them already experienced in the operation of a hydro power station for at least several years. 1 The training included both practical and theoretical aspects of the above mentioned subjects. The site of Jinshan hydropower station was chosen as this hydropower station installed and operates the same turbine as the proposed project activity (i.e. an axial-flow blade rotation turbine), and therefore the training s effectiveness could be enhanced through interaction with the staff of the Jinshan hydropower station and the actual experience of similar technology. Secondly, during June 2 nd to June 4 th 2007, 14 staff members went to the Xiamen Electric Control Company for a 2-day training on operations maintenance of the hi-voltage switches, arcdistinguishing equipments, related electric systems, as well as unlocking training for emergencies. Finally, from June 23 rd to June 26 th, 11 staff members attended a training provided by the equipment manufacturer focusing on operation, maintenance and basic functions of the turbine-generator system. According to the above we conclude that the operating staff is qualified to operate the hydropower station in a safe manner. Additionallly, the CDM consultants will provide training on CDM requirements regarding the monitoring of Net electricity and other parameters that require monitoring in accordance with the methodology (see section B.7 in this PDD), as soon as the project activity is registered. This can be verified during subsequent verification. Table A.3 provides more information on this training: 1 Staff members attending this training included: Mr Huang Bai Yuan, Tu Da Mei, Hu Jian, Huang Ying Chen, Huang Xiao Ping, Hu Lan Fen, Xu Yu Zhou, Duan Ding Yu, Liu Yao Chun, Xie Mei, Xu Hai Ying, Lin Da You, Liang Yong Hua, Liang Yang Sheng, and Xiong Sheng.

8 page 8 Table A.3 Information on training of key staff members: Date / period Subject of training Location Persons May 2007 Safety regulations, operational practise & maintenance On-site of the Jinshan Hydropower 15 staff members June kV switching systems control practise and maintenance and emergency training June 2007 Operations, maintenance and emergency procedures of generators 3 Station Xiamen Electric Control Company 14 staff members On-site of Equipment 11 staff members manufacturer After registration CDM monitoring requirements On-site Various 4 Implementation schedule Below we provide a summarized construction implementation schedule in table A.4. A more detailed implementation schedule including CDM consideration events and other important events is provided in Schedule B.1 at the end of Section B.4. Table A.4 Main implementation schedule of the proposed project activity: Time Events February 2005 Project construction started (preperational activities) March 2005 Start construction of the diversion system (i.e. tunnel) March 2005 Start construction of the dam site May 2005 Start construction of the power house September 2006 Start of installation of all 3 turbine / generator units September 2008 Formal start of operations A.4.4 Estimated amount of emission reductions over the chosen crediting period: A 7-year renewable crediting period (renewable twice) is selected for the proposed project activity. The estimation of the emission reductions in the crediting period is presented in Table A Staff members attending this training include : Mr Huang Baiyuan, Huang Xiaoping, Hu Lanfen, Hu Jian, Liu Yaochun, Xie Mei, Tu Damei, Xu Yuzhou, Duan Ding Yu, Xu Hai Ying, Huang Yingkun, Liang Yangsheng, Liang Yonghua, Lin Dayou. Staff member attending this training include : Mr Huang Yingkun, Liu Yaochun, Xie Mei, Tu Damei, Huang Xiaoping, Duan Dingyu, Huang Baiyuan, Xu Haiying, Hu Lanfen, Hu Jian, Xu Yuzhou Training will be given to persons responsibly for CDM monitoring, such as relevant plant operating staff, the monitoring officer, and Supervisor (see also section B.7.2 and Annex 4)

9 page 9 Table A.5 The estimation of the emission reductions in first crediting period Year The estimation of annual emission reductions (tco 2 e) Year 1: 01/06/ /05/ ,586 Year 2: 01/06/ /05/ ,586 Year 3: 01/06/ /05/ ,586 Year 4: 01/06/ /05/ ,586 Year 5: 01/06/ /05/ ,586 Year 6: 01/06/ /05/ ,586 Year 7: 01/06/ /05/ ,586 Total estimated reductions (tons of CO2e) 466,102 Total number of crediting years in 1st crediting period 7 Annual average reductions over the first crediting period (tco 2 e) 66,586 A.4.5. Public funding of the project activity: There is no public funding from Annex I countries available to the proposed project.

10 page 10 SECTION B. Application of a baseline and monitoring methodology B.1. Title and reference of the approved baseline and monitoring methodology applied to the project activity: Approved consolidated baseline and monitoring methodology ACM0002: Consolidated baseline and monitoring methodology for grid-connected electricity generation from renewable sources (Version 09). The methodology draws upon: Tool for the demonstration and assessment of additionality (version 05.2) Tool to calculate the emission factor for an electricity system (version 01.1) Tool to calculate project or leakage CO 2 emissions from fossil fuel combustion (version 02) For more information on the baseline and monitoring methodology we refer to the UNFCCC website: B.2 Justification of the choice of the methodology and why it is applicable to the project activity: The baseline and monitoring methodology ACM0002 is applicable to the proposed project, because the project meets all the applicability criteria stated in the methodology: The proposed project is a grid-connected renewable power generation project. The project is an electricity capacity addition from a hydro power plant. The project will create a small new reservoir with a power density greater than 4 W/m 2 (see also section B.3). 5 years of historical power supply data for the submerged hydropower station is available (see also Section B.6.3). The project does not involve an on-site switch from fossil fuels to a renewable source. The geographic and system boundaries for the relevant electricity grid can be clearly identified and information on the characteristics of the grid is available. The methodology will be used in conjunction with the tools referred to above. The latest version of ACM0002 (version 09) has been applied. B.3. Description of the sources and gases included in the project boundary The sources and gases included in the project boundary are described in Table B.1 as below:

11 page 11 Table B.1 Inclusion of gases and sources in the calculation of the emission reductions Source Gas Included? Justification / explanation Emission from electricity generation in fossil fuel fired CO 2 Yes Included as per the ACM0002 methodology. power plants connected to the CH 4 No Excluded as per ACM0002. East China Power grid, and emissions from electricity N 2 O No Excluded as per ACM0002. generation in fossil fuel fired power plants of imported electricity. Emissions from the reservoir CO 2 No Excluded as per ACM0002. Baseline Project Activity For all renewable energy plants, CO 2 emissions from backup power generation. CH 4 Yes Included as per the ACM0002 methodology. N 2 O No Excluded as per ACM0002. CO 2 Yes Included as per the ACM0002 methodology. CH 4 No Excluded as per ACM0002. N 2 O No Excluded as per ACM0002. In line with the methodology, the greenhouse gasses accounted for are CO 2 emissions from electricity generation in fossil fuel fired power plants that is displaced due to the proposed project activity, CH 4 emissions from the reservoir, and CO 2 emissions from backup power generation (on-site back-up diesel generator in the case of the project activity). As will be shown in Section B.6.1, the power density is above 10 W/m2, and therefore reservoir emissions (and hence project emissions) have been assumed at zero, and do not result in deductions from the proposed project emission reductions, in line with the methodology. The spatial extent of the project boundary includes all power plants connected physically to the electricity system that the CDM project power plant is connected to (as defined below), including the project power plant itself, which includes: Reservoir created by the project activity Dam structure including flood gates and water intake Water diversion system Power house Tailrace Switching / transformer station (owned by the project entity) Transmission lines to the grid Methodology ACM0002 refers to the Tool to calculate the emission factor for an electricity system for the definition of an electricity system. According to this tool, the relevant grid definition should be based on the following considerations: 1. Use the delineation of the project electricity system and connected electricity system as provided by the DNA of the host country if available; or 2. Use, where DNA guidance is not available and the electricity system does not have spot markets for electricity or where it is impossible to determine the operational rate of the transmission line, the following definition of boundary:

12 page 12 In large countries with layered dispatch system (e.g. state/provincial/regional/national) the regional grid definition should be used. In accordance with the above, the regional grid is selected as the project electricity system, which includes all power plants physically connected to this system. The proposed project activity is connected to the Fujian Provincial Grid, which is part of the East China Power Grid, which is selected as the project electricity system. The East China Power Grid includes the Provinces of Shanghai, Zhejiang, Jiangsu, Anhui and Fujian. The East China Power Grid imports electricity from the Central China Power Grid and North China Power Grid (through the import of power by Jiangsu Province from the Yangcheng power plant in Shanxi Province). Accordingly, we have selected the Central and North China Power Grids as the connected electricity system. For ease of reference, when we refer throughout this PDD to the East China Power Grid, this will take account of the emissions associated with the imports of power from the connected electricity system (i.e. the Central and North China Power Grids). Diagram B.1 flow diagram of the proposed project activity: A PJ Reservoir CH 4 Dam Backup diesel generator CAP pj Water diversion structure Turbine Generator PE FC,j,y TEG y Internal consumption On-site Transformer Station Project activity EG y Power Grid CO 2 Project boundary Flow of water Flow of electricity Backup system Monitoring variables Emission sources and gases included in the project boundary

13 page 13 B.4. Description of how the baseline scenario is identified and description of the identified baseline scenario: The baseline scenario is prescribed by the ACM0002 methodology as follows. The baseline scenario of the proposed project activity is the continued operation of existing grid-connected power plants and the addition of new generation sources on the East China Grid to meet electricity demand, as reflected in the combined margin (CM) calculations described in the Tool to calculate the emission factor for an electricity system. B.5. Description of how the anthropogenic emissions of GHG by sources are reduced below those that would have occurred in the absence of the registered CDM project activity (assessment and demonstration of additionality): The additionality of the project activity is demonstrated using the steps described in the Tool for the demonstration and assessment of additionality (version 05.2). See UNFCC website: Step 1. Identification of alternatives to the project activity consistent with current laws and regulations Sub-step 1a: Define alternatives to the project activity The methodology requires a number of sub-steps to provide realistic and credible alternatives to the project activity. There are only a few alternatives that are prima facie realistic and credible in the context of the East China Power Grid: Fossil fuel-fired power generation Wind power The proposed hydropower activity, without the support of CDM The same service of power supply is provided from grid (i.e. continuation of the present situation) These are credible and realistic alternatives and these alternatives are in accordance with the description of the methodology (the additionality tool requires that the proposed project activity be included as an alternative, without the benefit from CDM). Continuation of the present situation (no capacity addition to the project electricity system) is not realistic in the context of this project, because power demand has been increasing rapidly over the last few years. China has experienced severe power shortages, spurned by fast demand for power; and hence the grids have been expanding rapidly. Growth has been well over 10% annually; for example, thermal power supply on the East China Grid grew by 34.6% between 2004 and 2006 (from 414,795,263MWh in 2004 to 558,403,325MWh in 2006: see also Annex 3).

14 page 14 Sub-step 1b: Enforcement of applicable laws and regulations The second sub-steps involve the confrontation of the alternatives with China s applicable laws and regulations. Three of the four (all except the first: fossil-fuel fired power generation 5 ) identified above are in compliance with China s relevant laws and regulations. This may be demonstrated by referring to statistics, which show that each of these power supply options is used in China. The proposed project activity is consistent with national policies for environmental protection, energy conservation and sustainable development. However, there are no binding legal and regulatory requirements for this project type. The Renewable Energy Law adopted by the National People s Congress on 28 February, 2005 encourages and supports renewable-based power generation, but does not stipulate specific goals for local air quality improvement. Overall Conclusion Step 1: We conclude that three of the four alternatives are in compliance with local regulations (option 1 fossil-fuel fired power generation is not in compliance with the relevant Chinese laws and regulations). However, wind power is not a credible alternative, as 1) the project entity is not considering to invest in wind, and 2) the project location (i.e. Fujian Province) does not have sufficient wind resources and implementation of wind power is low. As there are alternatives to the project activity that are in compliance with the relevant Chinese laws and regulations, the project may be additional. Step 2. Investment analysis Sub-step 2a: Determine appropriate analysis method The analysis will be analyzed through Option III of the additionality tool, i.e. benchmark analysis. This method is applicable because: Option I: Simple cost analysis, does not apply as the project generates economic returns through the sales of electric power to the grid. Option II: Investment comparison analysis is not used as the project entity is not considering to invest in the construction of one of the other identified alternatives and the only credible alternative is grid-fired power generation, which is not an investment. Option III: Benchmark analysis is used as the return on investment relative to the industry benchmark was crucial for the decision to go ahead with the project. Conclusion: We conclude that option III is applicable to the project activity. Sub-step 2b Option III: Apply benchmark analysis The project faces a barrier to implementation due to the poor returns on investment. To illustrate this, we performed a benchmark analysis in which calculate the Internal Rate of Return (project IRR after 5 Conventional coal-fired power plants are consistent with regulations although the construction of smallscale thermal power plants with a capacity under 135 MW has been prohibited, see General Office of the State Council (2002), Notice of the General Office of the State Council concerning the Strict Prohibition of the Construction of Thermal Power Units with a Capacity of 135MW or Below, Guo Ban Fa Ming Dian (2002) Document No.6.

15 page 15 taxes) of the proposed project and compare this with the applicable and commonly used industry benchmark for large scale hydropower projects (i.e. the Interim Rules on Economic Assessment of Electrical Engineering Retrofit Projects), which in China is set at 8%. This benchmark is applicable for 3 main reasons: 1. The Feasibility Study Report (FSR) of the proposed project activity, which is used as main data source for the input values in the financial analysis, also lists an industry benchmark of 8% as applicable This 8% industry benchmark is primarily applicable to retrofit projects in the power industry and can be applied to power projects for which no relevant benchmark is available. This benchmark has therefore been applied to projects in the wind power, fossil-fuel fired power and large hydro power sectors as no relevant benchmark existed. 3. Finally, note that this industry benchmark is more conservative than the 10% industry benchmark for small scale hydropower stations and is therefore conservative to use compared to the 10% small scale benchmark. 7 To conclude, we will perform a benchmark analysis and compare the project IRR after taxes to an 8% benchmark. Sub-step 2c: Calculation and comparison of financial indicators For the calculation of the financial indicators for the proposed hydropower project, we used the parameters listed in Table B.2a. The input values listed are all fully consistent with the data listed in the Feasibility Study Report, with the exception of the power price. Table B.2b provides a break-up of the total static investment cost to provide more clarity on this input value used for the financial calculation. The FSR was issued in June 2004 by a certified design institute (i.e. the Fujian Water and Hydropower Investigation and Design Institute) and later approved by the Provincial Development and Reform Commission. As the FSR was issued by a certified and independent design institute, and subsequently approved by the government, the values in this document can be considered realistic. The power price is also realistic and was publicly known at an early stage in the project development (was published by the Fujian Provincial Price Bureau in 2004 and also obtained by all similar hydropower stations in the same project region in 2004). The project owner, as a realistic investor, did consider this power price for making an investment decision. In accordance with the Guidance on the Assessment of Investment Analysis (Version 02.1), all input values were known before the investment decision and can be considered realistic and appropriate values to be used in the financial calculation of the proposed project activity. 6 7 Note however, that the FSR does not refer to a specific benchmark document which provides this 8% benchmark. It does however clearly state that the applicable industry benchmark for the proposed project activity is 8% (in accordance with the applicable 8% benchmark listed in the Interim Rules on Economic Assessment of Electrical Engineering Retrofit Projects). The relevant benchmark for small scale hydropower stations is the Economic Evaluation Code for Small Hydropower Projects (SL16-95).

16 page 16 Table B.2a Parameters used in the calculation of the IRR Proposed Project Activity Item Value Source Installed capacity 25.5 MW FSR, p 1-8 Static total investment 198,410,000 RMB FSR, p Annual power supply 77,643.3 MWh FSR, p Annual O & M Cost year 3 3,193,000 RMB FSR, p Annual O & M Cost year ,225,000 RMB FSR, p Annual O & M Cost year 13 4,983,000 RMB FSR, p Annual O & M Cost last ,837,000 RMB FSR, p Investment horizon 33 years (incl. 3 years construction) FSR, p Expected Power price 0,30RMB/ KWh (incl. 17% VAT) Power Price Notice 11 Additional surges and taxes 9% of VAT FSR, p13-6 Income Tax 33% FSR, p According to the Annual Accounting Report for 2007, issued and stamped by the Fujian Changting Hexin Lianhe Accounting Firm, fixed assets on the 31 st of December 2007 (when construction was not finished yet) were 57,131,572 RMB. Combined with two other values also on the Debit side of the Balance sheet, i.e. prepaid cost for construction and services of 14,862,517 RMB, and construction work under progress of 134,394,716 RMB, it is clear that Investment cost on the 31 st of December of 2007 slightly exceeded 2 million RMB. As construction activities were not finished at this time and formal operations started in September 2008, it is clear that the estimated Static Total Investment in the FSR which is used for the IRR calculation is a conservative estimation (i.e. lower than actual static investment cost and therefore leading to an overestimation of the IRR). As the proposed project only recently started operations, no actual power generation/supply data are available. We can however confirm the appropriateness of the estimation, as power generation is estimated by the independent and certified design institute based on 15 years of Hydrological data (from the year 1967 to the year 1982) as measured by the local Guanzhuang Hydrological Station operated by the government (as indicated in page 2-8 to 2-22 of the FSR) and is therefore based on a strong statistical average. Additionally, losses and auxiliary consumption together compose of 0.5% of the effective power generation which is 95% of generation (see FSR, page 13-4) which is calculated based on theoretical annual operational hours and installed capacity. These losses and on-site electricity have been assumed by the independent design institute composing the FSR based on the average losses of the similar size hydro power stations in Fujian Province (FSR, page 13-4) and can be considered reasonable. Annual Operations and Maintenance cost have been estimated by the independent and certified design institute who prepared the FSR based on the Economic Evaluation Method and Parameters for project construction (Version 02) issued by China Planning department and China Construction Department (FSR, page P13-8). Furthermore, assuming a fixed flat power tariff over the lifetime of the project is appropriate as we will clarify below. The power price was publicly known as it was published by the Fujian Provincial Price Bureau in 2004 and also obtained by a number of similar hydropower stations in the same project region. Evidence has been provided to the DOE. We conclude that this power price is applicable at the moment of making the investment decision. Furthermore, assuming a fixed flat power tariff over the lifetime of the project is appropriate as we will clarify below. Although the income tax rate is not explicitly mentioned in the FSR of the proposed project activity, this is the same income tax rate that was used in the financial cash-flow table of the FSR of the proposed project activity. Additionally, this income tax rate of 33% was applicable at the time of issuing the FSR and at the time of making the investment decision : ( However, the current income tax rate (since 1st of January 2008) is 25%. We have therefore also performed an IRR calculation in which we used 25% as the income tax rate. The result (i.e. and IRR of 5.51%) remains significantly below the 8% benchmark.

17 page 17 Table B.2b Break-up of total static investment cost Break-up of total static investment cost (from Feasibility Study Report) Item Value Source Construction cost 109,620,000 FSR, p 1-20/23 Equipment purchasing and installation 40,230,000 FSR, p 1-20/23 Metal structure and equipment installation 9,060,000 FSR, p 1-20/23 Temporary projects 10,370,000 FSR, p 1-20/23 Basic preparation fee 9,070,000 FSR, p 1-20/23 Compensation 7,960,000 FSR, p 1-20/23 Others 12,100,000 FSR, p 1-20/23 Static total 198,410,000 FSR, p 1-20/23 The investment analysis compares the internal rate of return (project IRR after taxes) of the project with the benchmark defined in sub-step 2b. The main results of the investment analysis are presented in Table B.3, where the IRR for the proposed project has been calculated without taking into consideration CDM revenues. Table B.3 Main results of the IRR calculations Scenario IRR Project without revenues from the sale of CERs 5.35% Industry Benchmark IRR (FSR) 8% Project with revenues from the sale of CERs 9.09% From the results in Table B.3 it is clear that the return on investment for the proposed project activity without the revenues from the sales of CERs is considerably below the 8% industry benchmark that applies to hydropower stations of this scale. This demonstrates that the proposed project activity is not a commercially viable option to supply power. The detailed spreadsheet calculations are available to the validator. Sub-step 2d: Sensitivity analysis The Tool for the demonstration and assessment of additionality requires that a sensitivity analysis is conducted to check whether the financial attractiveness remains unaltered for reasonable variations in the critical assumptions. For the IRR (without CDM revenues), the following parameters were used as critical assumptions: Total static investment Annual power supply Annual operation and maintenance cost Grid power price In the sensitivity analysis, variations of ±10% have been considered appropriate variations in the critical assumptions, which is also specified in the Guidance for the Assessment and evaluation of project decisions for Registered Investment consulting engineers. This guidance which has been provided to the DOE is published by the China Planning Press (NDRC) and states that 10% sensitivities are appropriate. Besides being appropriate sensitivities commonly used by design institutes and prescribed by the government, we can also confirm that these sensitivities are unrealistic (as the input values are all realistic) and highly unlikely to occur as we have done in footnotes in Table B.2. The results of the sensitivity analysis for the IRR without CDM revenues are shown in Table B.4, while Figure B.1 provides a graphic depiction.

18 page 18 Table B.4 Sensitivity analysis; impact of variations in assumptions on the IRR without CDM revenues Percentage Variation -10% -5% 0% +5% +10% Critical assumption Total static investment cost 5.85% 5.59% 5.35% 5.12% 4.90% Annual power supply 3.70% 4.55% 5.35% 6.11% 6.84% Annual O&M cost 5.01% 5.18% 5.35% 5.52% 5.68% Grid power price 3.70% 4.55% 5.35% 6.11% 6.84% CER price 8.74% 8.92% 9.09% 9.26% 9.43% Figure B.1 Results of the sensitivity analysis 10.00% 9.50% 9.00% 8.50% 8.00% 7.50% IRR 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% -10% -5% 0% 5% 10% Percentage variation Total investment cost Grid tariff Annual O&M cost CER price Grid power supply The sensitivity analysis of the Internal Rate of Return confirms that the proposed project after realistic modifications to the critical assumptions remains commercially non viable without CDM revenues. As indicated in footnotes in Table B.2, these variations are not realistic and highly unlikely to occur as the input values taken from the FSR and power price notice, and used for the IRR calculation, are realistic values. Additionally, the IRR calculation is based on real and fixed values. The use of fixed input values is appropriate in case both the input values and the benchmark are defined in real terms (as opposed to nominal terms which refers to any price or value expressed in money of the day, as opposed to real values: the latter adjust for the effect of inflation) and when there is no expectation that the change in the nominal value of the input parameters will differ significantly from the rate of inflation. The use of fixed real input values (such as power price and O&M cost) is common practice in China and is in accordance with guidance for the preparation of feasibility studies which demonstrates that the benchmark is defined in real terms and therefore the application of fixed real input values is appropriate. The IRR calculation compares the real IRR with a real benchmark which in both cases takes out the effects of general price increases due to inflation. Furthermore, this

19 page 19 approach (i.e. the approach of applying real flat tariff and fixed real O&M cost) leads to a conservative interpretation of the additionality requirements, as it is expected to lead to an overestimation of the IRR. It is expected that O&M cost will increase at a higher rate than local inflation (inflation in Fujian Province over the last 6 years was 1.66% 13, compared to a annual increase approximately 10.55% in Wages 14 and 4.61 % in purchasing price of raw material, fuel and power 15 over the same period), and the power price is not expected to do so (it is expected that the price will be adjusted by the government in the future to correct for inflation and therefore the assumption that the power price will develop proportionally to the rate of inflation can be considered reasonable. However, as any of such corrections for inflation would lag behind actual inflation, assuming that power prices will be corrected for inflation instantaneously, as is done in our analysis, implies that actual real revenues from the sale of power are somewhat overstated). Hence this assumption also leads to a conservative interpretation of the additionality requirements. Conclusion Step 2: The Internal Rate of Return of the proposed project activity without CDM revenues remains well below the 8% benchmark. The conclusion may be clear that with reasonable modifications in the critical assumptions, the main results remain unaltered. The results of the sensitivity analysis therefore confirm that the project faces significant economic barriers without CDM revenues. The result of taking CDM revenues into consideration would lead to a significantly higher Internal Rate of Return, alleviating the lack of profitability of the proposed project activity. Step 3. Barrier analysis The project does not face other barriers besides the low economic returns. Therefore step 3 of the additionality tool is skipped. Step 4. Common practice analysis Sub-step 4a. Analyze other activities similar to the proposed project activity: For the common practice analysis, we have analyzed all hydropower projects located in Fujian Province with an installed capacity below 50MW that have been listed in the most recent available version of the Yearbook of China Water Resources, which has been provided to the DOE. The yearbook lists a total of 32 projects. According to the tool for the demonstration and assessment of additionally, projects are considered similar in case they are located in the same county/region, are of similar scale, and take place Average inflation from 2000 to 2006 was 1.6% ( calculated by averaging annual values ) sources from Average annual Wages in Fujian increased from RMB 10,583 in 2000 to RMB 19,319 in 2006, an annual increase of around 10.55%. Source: Annual purchasing price increase of Raw Material, Fuel and Power in Xinjiang from 2001 to 2007 was around 4.61% (average yearly values). Source :

20 page 20 in a comparable environment with respect to regulatory framework, investment climate, access to technology, access to financing, etc. We have included all hydropower stations located in Fujian Province. Please note that this selected geographical region is considerably larger than most countries (covering a population of million individuals). 16 Were it to be ranked as a separate country it would rank 37 th largest in the world in terms of population (above Canada). 17 Fujian province is different from neighboring provinces due to different natural and hydrological conditions, such as the availability and utilization rate of hydro resources (60% of its hydro power resource has already been developed by the year 2005 which is far beyond the average Chinese rate, subsequently only leaving less favorable sites for new hydro power stations to be built) 18 which affects the energy structure of the province, and especially the seasonal influences. Therefore, the administration and policy of the grid power price is different and we can conclude that Fujian province as geographical boundary of our project is reasonable and appropriate. 19 We have excluded all projects above 50MW as the Chinese government considers hydropower stations of 50MW and above as large scale hydropower stations with a different set of rules and regulations. Of the 32 projects listed in the Yearbook, 4 are above 50MW and have therefore been excluded from further consideration. Projects that started operation in 2001, or before, are excluded as they were developed under a market environment that is substantially different from the current market environment, which is, for independent power producers at least, considerably less attractive. 20 Of the 32 projects listed in the Yearbook, 13 started operations in 2001 or earlier. Of the remaining 8 projects, one is registered as a CDM project. 21 The remaining 7 projects have been listed in Table B.5 below: Economist Intelligence Unit (2003), China Hand, page This is the 25MW Beijing hydropower station, which was registered on the 5 th of May:

21 page 21 Table B.5 Similar hydropower stations in Fujian Province Start Installed Name Comment operation Capacity 1 Chengguan hydropower station MW Public entity 2 Dayan hydropower station MW Public entity 3 Ximen hydropower station MW Public entity 4 Xiayang hydropower station MW Public entity 5 Yuanping hydropower station MW Captive power station 6 Shuangkoudu hydropower station MW Supported 7 Wangkeng reservoir hydropower station MW Supported Source: Yearbook of China Water Resources (most recent applicable version; Version 06) Sub-step 4b. Discuss any similar options that are occurring: Chengguan hydropower station and the Ximen hydropower station have both been developed and operated by Huadian Fujian Power Generation Co., Ltd (Huadian Fujian), which is a subsidiary company of state-owned China HuaDian Corporation (China HuaDian). Dayan hydropower station was initiated by Fujian Jinhu Power Co., Ltd. (owned by HuaDian Fujian). Likewise, the Xiayang hydropower station is invested in by Fujian Minxing Hydropower Co., Ltd. which also belongs to the Huadian Fujian. State-owned companies, for several reasons, cannot be considered similar to privately owned entities such as the proposed project activity. The main reason being that public enterprises do not make investment decisions solely based on economic considerations but also take into account other considerations such as social welfare and external merits, and additionally do not face the same financing environment as private entities do. The Yuanping hydropower station was implemented as a captive power station owned and operated by the Fujian Nanping Rongping Chemical Co., Ltd. (this hydropower station did not plan and did not connect to the grid until 2007, when the local government required it to do so). A captive power station can not be considered similar to a grid-connected power station as the primer is considering the avoided power price and the latter considering a power sales price in the financial analysis. Finally, the Shuangkoudu hydropower station and the Wangkeng reservoir hydropower station have both been supported by the government as the primer was highly appreciated and advertised as a good example VIP project in Gutian County by the local Government, and the latter was considered an important investment project in the local city area and was assisted in arranging financing by public local authorities. Additionally, the Wangkeng hydropower station has been invested in by the state owned China National Automotive Import and Export Cooperation (Xiamen Branch), and was included in the Liu Qian water resource preserving and reservoir security enhancement plan for the Pingnan County during its construction period in the year 2004 to

22 page 22 We therefore conclude that no projects similar to the Tingzhou Hydropower Station Project have been implemented without the support of CDM and that the common practice analysis confirms the conclusions of the above additionality tests. Impact of CDM registration Registration of the project as a CDM project would result in additional revenues for the project, significantly improving the economic attractiveness of the project. This is the most important contribution of CDM to the project realization, removing the prohibitive barrier towards its realization. The income through CDM will raise the IRR for the proposed CDM project activity to above the industry benchmark, making it a financially feasible alternative. Serious and continuous CDM consideration: The project owner was aware of the possibilities of CDM at a very early stage of the project development and the prospect of CDM revenues has been a crucial factor in the decision to implement the project. In July 2004, after a written recommendation by the Longyan City Water Bureau, discussions and negotiations on CDM took place between the project owner and a CDM consultant (i.e. Xiamen Pengliqing Environmental Technology Development Ltd). Amongst others, a CDM Project Implementation Document was prepared by the CDM consultant and the Board of the project entity decided the proposed project activity could be implemented with additional revenues from the sale of CERs in December The decision to apply for CDM project status was based on the FSR issued in June 2004 and a realistic power price considerations (that was known publicly at the time and received by a number of similar hydropower stations in the project region), which together clearly showed the project activity would not be a financially attractive option. In January 2005, the investment decision was made and the equipment purchase contract was effectuated (i.e. promise money was paid after which the contract became effective in accordance with Chapter 9, Article 32, of the equipment purchase contract. The equipment purchase contract states that it would not be effective or binding until actual payments had been made. The contract is therefore merely an indication of technical parameters which the project entity required to start initial planning (i.e. composing FSR) of the project, and can by no means be considered a legally binding commitment). One month after the investment decision, in February 2005, the project activity received the construction approval and subsequently started construction activities. In accordance with the Glossary of CDM Terms, January 2005 is the earliest date that can be considered the start of the project activity. Ever since the starting date, the project entity has been taking real steps toward CDM project registration along side the project development, which is clear from the below Schedule B.1. Schedule B.1. CDM consideration and project implementation Time Event June 2004 Completion of Feasibility Study Report (FSR) by Fujian Water and Hydropower Investigation and Design Institute. July 2004 After written recommendation by the Longyan City Water Bureau, discussions and negotiations on CDM took place between the project owner and a CDM consultant (i.e. Xiamen Pengliqing Environmental Technology Development Ltd).