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

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1 CDM Executive Board 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 information

2 CDM Executive Board page 2 SECTION A. General description of project activity A.1 Title of the project activity: Title of the project: Gansu Yongchang County Donghewan Cascaded Hydropower Project Version of document: Version 04 The date of the document: 18/08/2008 Revision history of the document: Version of document Date of the document Reason for revision Version 01 17/04/2007 The document was revised Version 02 20/06/2007 according to the request of China s DNA. The document was revised Version 03 07/05/2008 according to the resolution of corrective action and clarification requests of TÜV SÜD. The document was revised Version 04 18/08/2008 according to the currently applicable version of ACM0002. A.2. Description of the project activity: The proposed cascaded project (hereafter referred as the Project ) is designed to construct 4 run-of-river hydropower projects (named Yueyaya Project, Donghewan Stage I Project, Donghewan Stage II Project and Donghewan Stage III Project) with an aggregate installed capacity of 29.7 MW developed by Yongchang County Minrong Hydropower Development Co., Ltd.. It is located on the up and middle stream of the Dongdahe River flowing continuously across Yongchang County and Sunan Yugu Autonomous County in Gansu Province, P. R. China, which will generate an annual output of 128,630 MWh and in turn provide on-grid power supply of 124,787 MWh to be connected to the Northwest Power Grid (NWPG). The detailed information about the sub-projects is shown below: No. Sub-project Installed capacity Annual output Annual on-grid power supply (MW) (MWh) (MWh) 1 Yueyaya ,190 14,736 2 Donghewan Stage I 15 64,300 62,379 3 Donghewan Stage II ,860 21,207 4 Donghewan Stage III ,280 26,465 Total , ,787 The area covered by NWPG is abundant with coal resource, and thermal power plant is the major power source in the Grid. The project makes advantage of zero-emitting renewable energy for power generation. It s estimated that the project will achieve an average GHG emission reduction of 109,438 tco 2 e annually when all the plants put into operation. By avoiding the operation of existing coal-fired power plants and future expansion of fossil fuel-based generation, the project will supply clean and stable

3 CDM Executive Board page 3 electricity to local area. The project contributes to local socio-economic development and sustainable development specified as the following: Supply clean and reliable electricity to local area; Contribute to local economic development by easing the power shortage in local area which had greatly hampered the industrial and agricultural development; Create job opportunity: a maximum of 1,925 positions are provided during the construction period, and 70 permanent staffs are needed during operation and maintenance period; Improve the living standard of local residents and further contribute to poverty alleviation in Yongchang County and Sunan Yugu Autonomous County which are minorities dominated and poverty-stricken areas; Reduce other air pollutants generated by combustion of fossil fuels and contribute to local environment protection; and Drive the harmonious development of population, environment, resources and economy in local area. A.3. Project participants: Name of Party involved (*) ((host) indicates a host Party) People s Republic of China (Host) Private and/or public entity(ies) project participants (*) (as applicable) Yongchang County Minrong Hydropower Development Co., Ltd. Kindly indicate if the Party involved wishes to be considered as project participant (Yes/No) Japan Mitsubishi Corporation No (*) In accordance with the CDM modalities and procedures, at the time of making the CDM-PDD public at the stage of validation, a Party involved may or may not have provided its approval. At the time of requesting registration, the approval by the Party(ies) involved is required. No For further details about project participants, please see Annex 1 of the PDD. 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 Gansu Province A Region/State/Province etc.: A City/Town/Community etc: Yongchang County and Sunan Yugu Autonomous County.

4 CDM Executive Board page 4 A Detail of physical location, including information allowing the unique identification of this project activity (maximum one page): The project is located on the up and middle stream of the Dongdahe River flowing continuously across Yongchang County and Sunan Yugu Autonomous County in Gansu Province, P. R. China. It is 34 km and 300 km away from Yongchang County centre and Sunan Yugu Autonomous County, respectively. The geographical coordinates of the powerhouses of the four sub-projects are: No. Sub-project Longitude Latitude 1 Yueyaya Donghewan Stage I Donghewan Stage II Donghewan Stage III Figure 1~2 below show the exact location of the projects: Figure 1: Map of Gansu Province

5 CDM Executive Board page 5 A.4.2. Category(ies) of project activity: The proposed project falls into: Sectoral Scope Number: 1. Energy Industry Figure 2: The location of the proposed project A.4.3. Technology to be employed by the project activity: The four run-of-river sub-projects developed as a cascaded hydropower project located on the same river employ similar technologies and project structures based on diversion conduit scheme. Based on the feasibility study, the main components of the four independent sub-projects are as follows: Water intake system; Fore bay; Powerhouse; Booster station; and Transmission line. Detailed information regarding the specific components of each plant is listed below: Yueyaya Plant A water intake system composed of a m-long trapezoidal channel and a m-long freeflow tunnel with designed intake flow of 18 m 3 /s; A fore bay composed of a rectangular section with a length of 14.5 m and normal water level of m, a discharge weir, a sluiceway and a sediment outflow channel;

6 CDM Executive Board page 6 A powerhouse installed with 3 sets of hydro-generator units (1.2 MW 3) and a booster station at the right side of the powerhouse; and One set of 110 kv transmission lines lined up to Jiahe Substation within NWPG. Donghewan Stage I A diversion weir mainly consisting of a head gate, a flood discharge silt releasing sluice, a spillway and a water retaining dam with normal water level of m and designed flood water level of m; A water intake system mainly composed of a rectangular pressure-free tunnel with the designed water flow of 18.0 m 3 /s and flow rate of 1.96 m/s; A powerhouse installed with 3 sets of hydro-generator units (5 MW 3) and a booster station at the right side of the powerhouse; and One set of 110 kv transmission lines lined up to Jiahe Substation within NWPG. Donghewan Stage II A diversion weir mainly consisting of a head gate, a flood discharge silt releasing sluice, a spillway and a water retaining dam with normal water level of m and designed flood water level of m; A water intake system composed of a channel of m-long with designed water flow of 18.0 m 3 /s and a rectangular pressure-free tunnel of 769-m-long with designed water flow of 18.0 m 3 /s and flow rate of 1.96 m/s; A powerhouse installed with 3 sets of hydro-generator units (1.7 MW 3) and a booster station at the right side of the powerhouse; and One set of 110 kv transmission lines lined up to Jiahe Substation within NWPG. Donghewan Stage III A water intake system composed of a channel of m-long with designed water flow of 18.0 m 3 /s and a rectangular pressure-free tunnel of m-long with the designed water flow of 18.0m 3 /s; and A powerhouse installed with 3 sets of hydro-generator units (2.0 MW 3) and a booster station at the left side of the powerhouse; and One set of 110 kv transmission lines lined up to Jiahe Substation within NWPG. Main technical data of the turbines and generators are presented in the table below: Table 1: Technical Parameters of the Turbines and Generators

7 CDM Executive Board page 7 Item Turbine Generator Yueyaya Plant Donghewan I Donghewan II Donghewan III Employed units Type HLA551-LJ-104 HLA194-WJ-92 HLA551C-WJ-96 HLA551C-WJ-95 Rated Output(kW) Rated Water Head(m) Rated Water Flow(m 3 /s) Manufacturer Ganzhou Complets Yibin Fuyuan Sets of Power Generating Generating Equipments Equipment Co., Ltd. Manufacture Co., Ltd. Yibin Fuyuan Generating Equipment Co., Ltd. Relevant contract not signed yet Employed units Type SF /2150 SFW5000-8/1730 SFWE /1730 SFW /1730 Rated Capacity(kW) Operation Hour(h) Manufacturer Sub-project Ganzhou Complets Chongqing Electric Sets of Power Machinery Works Generating Equipments Co., Ltd. Manufacture Co., Ltd. Yibin Fuyuan Generating Equipment Co., Ltd. Relevant contract not signed yet All the equipments employed are manufactured domestically without technology transfer. In order to ensure the safe, smooth and efficient operation of the Project, the project owner carried out a project-specified technical training lasted for 4 months from April 2007 to July The training program mainly focused on security knowledge of hydropower project, main structure of the Project, operation of turbine-generator units and management of hydropower plants. All the leaders and staffs trained not only got a profound understanding of technical knowledge of hydropower, strengthened consciousness of safe operation but also intensively comprehended the technique request of power plant operation to safeguard the efficient operation of the power plant. All the staffs involved in the training program passed the required tests, and the anticipated training purpose was fulfilled. The time schedule of the implementation of the Project is shown as follows: Time Milestone 04/06/2004 Project owner officially established; 20/01/2005 Took part in Seminar on financing and development of CDM projects held by Jinchang Development and Plan Committee; 26/01/2005 Board resolution adopted to develop the Project as CDM project activity; 04/2005 FSR of the cascaded hydropower project finished; 09/07/2005 Conference with the grid company held, and a new tariff was proposed; 13/06/2005 FSR approved; 15/07/2005 Letter of loan commitment gained; 23/07/2005 Further board resolution to develop the Project as CDM project activity; 12/08/2005 Equipment purchase contract of Donghewan Stage I signed; 10/2005 EIA of the cascaded hydropower project finished; 31/10/2005 EIA approved; 12/11/2005 Construction of the Donghewan Stage I began. 17/12/2005 CDM consulting contract signed; 09/02/2006 Construction of the Donghewan Stage II began.

8 CDM Executive Board page 8 12/03/2006 Equipment purchase contract of Donghewan Stage II signed; 17/04/2007 Version 01 of the PDD finished; 26/04/2007 Equipment purchase contract of Yueyaya Project signed; 04/09/2007 ERPA 22/11/2007 Construction of the Yueyaya Project began. 08/2008 Anticipated starting date of construction activities of Donghewan Stage III; A.4.4 Estimated amount of emission reductions over the chosen crediting period: The project chooses 7 3-year renewable crediting period, the annual emission reductions are 109,438 tco 2 e, resulting in a total GHGs mitigation of 756,397 tco 2 e throughout the first 7-year crediting period specified as follows: Years Annual estimation of emission reductions in tonnes of CO 2 e 01/01/2009~31/12/ ,768 01/01/2010~31/12/ ,438 01/01/2011~31/12/ ,438 01/01/2012~31/12/ ,438 01/01/2013~31/12/ ,438 01/01/2014~31/12/ ,438 01/01/2015~31/12/ ,438 Total estimated reductions (tonnes of CO 2 e) 756,397 Total number of crediting years Annual average over the crediting period of estimated reductions (tonnes of CO 2 e) 7 109,438 A.4.5. Public funding of the project activity: No public fund from Annex I countries is involved in this project. SECTION B. Application of a baseline and monitoring methodology B.1. Title and reference of the approved baseline methodology applied to the project activity: The project applies ACM0002: Consolidated baseline methodology for grid-connected electricity generation from renewable sources (ACM0002/ Version 07, Sectoral Scope: 1, EB36); Tool to calculate the emission factor for an electricity system (Version 01.1) and Version 05.1 of the tool for demonstration and assessment of additionality, respectively. Please refer to UNFCCC website for the methodologies mentioned above: For ACM0002/ Version 07:

9 CDM Executive Board page 9 KM7P For Tool to calculate the emission factor for an electricity system (Version 01.1): For the Tool for the demonstration and assessment of additionality (Version 05.1): B.2 Justification of the choice of the methodology and why it is applicable to the project activity: The proposed project is a grid-connected zero-emission renewable power generation activity and meets all the conditions stated in the methodology ACM0002 as the following: The proposed project is a new grid-connected run-of-river hydropower project where no reservoir will be created; The proposed project is not an activity that involved switching from fossil fuels to renewable energy at the project site; The geographic and system boundaries for the relevant electricity grid (NWPG) can be clearly identified and information on the characteristics of the gird is available. B.3. Description of how the sources and gases included in the project boundary The table below shows the gases and sources included in the project boundary: Baseline Project Activity Source Gas Included? Justification / Explanation Electricity CO 2 Yes Main emission source generation in CH 4 No Minor emission source. baseline N 2 O No Minor emission source. (NWPG) Emission CO 2 No Minor emission source. from the CH 4 No As the project is a run-of-river hydropower project, project and no reservoir will be created, there is no emission activity inside from reservoir. the project N 2 O No Minor emission source. boundary The proposed project will be connected to Northwest Power Gird (NWPG). NWPG consists of several sub-grids including Shaanxi, Gansu, Qinghai, Ningxia and Xinjiang, within which there is clearly defined spatial and geographical extent of the power plants connected with NWPG and transmission system, all electricity can be dispatched without significant transmission constraints. Moreover, NWPG is also defined as a regional grid according to the 2008 baseline emission factors for regional power grids in China issued by China s DNA. Also, the geographic boundary of the NWPG is clear. Therefore, NWPG is considered as the grid boundary for the proposed project for determining the build margin (BM) and operating margin (OM) emission factors. In addition, as a stable grid, the basic data (e.g. electricity generation, electricity dispatch and its grid connection information) of NWPG are available and have been well recorded historically, which are used

10 CDM Executive Board page 10 for OM and BM calculation. Figure 3 below shows the structure of NWPG, including the provinces that make up the power Grid (Shaanxi, Gansu, Qinghai, Ningxia and Xinjiang). Figure 3: Structure of Northwest Power Grid B.4. Description of how the baseline scenario is identified and description of the identified baseline scenario: In the absence of the proposed project, the possible alternatives comprising the baseline scenario would be as the following: 1. Construction of a fossil fuel-fired power plant with equivalent amount of installed capacity or annual electricity output; 2. Construction of a power plant using other sources of renewable energy with equivalent amount of installed capacity; 3. The proposed project activity not undertaken as a CDM project activity; and 4. Provision of equivalent amount of annual power output by the grid (NWPG) which the proposed project is connected with. For alternative 1, According to China s power regulations, coal-fired power plants of less than 135MW, if without special permission, are prohibited for construction in the areas covered by large grids 1 and the installation of coal-fired power units less than 100 MW is under tight control 2. Thus, alternative 1 is not a realistic and credible alternative to the proposed project. And all the other alternatives comply with current mandatory laws and regulations. 1 Notice on Strictly Prohibiting the Installation of Fuel-fired Generators with the Capacity of 135MW or below, issued by State Council Office, decree no The Temporary Stipulation of the Construction Management of Small Scale Units of Fuel-fired Power Generation (August, 1997).

11 CDM Executive Board page 11 For Alternative 2, the proposed project is located in Gansu Province, where it is provided with other renewable energy resources such as wind power, solar power and biomass. However, considering the financial feasibility of those alternatives, all of them are less attractive comparing with the proposed project. The generation cost for small-scale hydropower project in China is similar with conventional thermal power plants. Whereas, the generation costs of wind power and solar power are around RMB 0.4~0.6 yuan/kwh, and RMB 3.5 yuan/kwh 3, respectively, about 1.5 and 10 times of thermal power. The generation cost for biomass power generation project is also higher as much as 1.5 times more than the thermal power plants 4. Therefore, alternative 3 is not financial attractive, and is not a feasible baseline scenario. According to the Step 2 Investment Analysis in section B.5., this alternative 3 is not financially attractive. Thus, this alternative is not a feasible baseline scenario. Alternative 4 Provision of equivalent amount of annual power output by the grid (NWPG) which the proposed project is connected with is in accordance with the regulations and policies that are currently governing the Chinese power market and economically feasible. Therefore, alternative 4 is the only feasible baseline scenario for the proposed project. The NWPG is abundant in coal resource and dominated by thermal power. Until the end of 2006, the total installed capacity of NWPG was 44,100 MW, among which thermal power was 29,627 MW, accounting for 67.2% 5. During , the capacity addition for thermal power accounted for 69.70% of the total (See Annex 3). It is expected that thermal power especially coal power with its most mature technologies and economically competitiveness in the power market will be the dominated power generation category in the Grid. This situation will not be changed in the near future. In the absence of the proposed project activity, electricity generation would be produced by the continued use of fossil fuel based electricity from NWPG. Therefore, the baseline scenario for the proposed project is the continuing operation of the existing and future expansion of the thermal power plants within NWPG that the proposed project connected with in the absence of the electricity generation of the proposed project electricity to meet the increased demand electricity. 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): According to the latest version of Tool for the Demonstration and Assessment of Additionality approved by CDM EB, the following steps are used to demonstrate the additionality of the Project. Step 1: Identification of alternatives of the project activity consistent with current laws and regulations The step is to define realistic and credible alternatives to the proposed project activities that can be (part of) the baseline scenario through the following steps: hj&blockalias=zjzjsd&filename=/doc/zjzjsd/ xml baseline emission factors for regional power grids in China.

12 CDM Executive Board page 12 Sub-step 1a: Define alternatives to the project activities: In the absence of the proposed project, the proposed alternatives would be as the follows: 1. Construction of a fossil fuel-fired power plant with equivalent amount of installed capacity or annual electricity output; 2. Construction of a power plant using other sources of renewable energy with equivalent amount of installed capacity; 3. The proposed project activity not undertaken as a CDM project activity; 4. Provision of equivalent amount of annual power output by the grid (NWPG) which the proposed project is connected with. As stated in B.4. above, the generation costs of other renewable sources are much higher than that of hydropower without financial competitiveness, hence alternative 2 is not a credible and feasible option, and should be excluded from the consideration. Sub-step 1b. Consistency with mandatory laws and regulations: According to China s power regulations, coal-fired power plants of less than 135MW, if without special permission, are prohibited for construction in the areas covered by large grids 6 and the installation of fossil fuel-fired power units less than 100 MW is under tight control 7. Thus, construction of a fossil fuelfired power plant with limited installed capacity 29.7 MW cannot comply with the regulations. Furthermore, if generating the same annual output of 128,630 MWh, the installed capacity of a fossil fuel-fired power plant should be much lower than that of a run-of-river power plant. From this point, option 1 is not a realistic and credible alternative to the proposed project. And all the other options comply with current mandatory laws and regulations. Step 2: Investment Analysis This section is to analysis whether the proposed project activity is economically or financially less attractive without additional revenue/funding, possibly from CDM revenues. Sub-step 2a: Determine appropriate analysis method According to the Tool for the demonstration and assessment of additionality, there are three options for investment analysis as following: Option I: Simply cost analysis; Option II: Investment comparison analysis; and Option III: Benchmark analysis. The simple cost analysis method (Option I) is not appropriate because the proposed project will get the revenues not only from the CDM but also from the electricity sales. The investment comparison analysis (Option II) is also not applicable for the proposed project, as the project owner has no investment options to compare with. The baseline scenario of the proposed project is the continuing operation of the power 6 Notice on Strictly Prohibiting the Installation of Fuel-fired Generators with the Capacity of 135MW or below, issued by State Council Office, decree no The Temporary Stipulation of the Construction Management of Small Scale Units of Fuel-fired Power Generation (August, 1997)

13 CDM Executive Board page 13 mix of NWPG rather than a similar investment project alternative to the proposed project, so investment comparison analysis method (Option II) is neither appropriate. As a result, Option III- Apply benchmark analysis is chosen to demonstrate and assess the additionality, since the data on the total investment IRR of Chinese power industry is available. Sub-step 2b: Benchmark Analysis Method (Option III) According to Economic evaluation code for small hydropower projects (SL 16-95) issued by Ministry of Water Resources, the benchmark of FIRR for small scale hydropower project in China is at 10% (after tax), only those projects whose FIRR equals or exceeds the benchmark will be identified to be financially acceptable. This Code is widely used for power project investment evaluation in China; therefore, this benchmark is currently used for financial appraisal of this project. Sub-step 2c: Calculation and comparison of financial indicators (1) The main parameters for the calculation of financial indicators are as follows: Parameters Unit Value Data source Installed Capacity MW 29.7 Approved FSR Annual Electricity Generation MWh 128,630 Approved FSR Total Investment million yuan Approved FSR Total Project Lifetime Years 22 Approved FSR Construction Period Years 2 Approved FSR Operation & Maintenance Period Years 20 Approved FSR Annual O&M cost million yuan million yuan 5.29 Approved FSR VAT tax % 6% Approved FSR Prospective bus-bar tariff (With Vat) yuan/kwh Income Tax Rate % 33 Approved FSR (2) Calculation and comparison of financial indicators Based on benchmark analysis (Option III), if the financial indicator of the Project is lower than the benchmark, the proposed project is not attractive. Based on the data above, the IRR without CDM sales revenue are shown in the following table. It is clear that without CDM sales revenue, the IRR of the Project is only 6.89%, obviously lower than the benchmark of 10%. Therefore, the proposed project is not financially attractive. However, the extra income from CDM will improve the economic competitiveness of the Project if it is registered as a CDM project activity. The IRR (including expected CDM revenue) will be increased to 12.40% which is higher than the benchmark, making the Project financially feasible. Without CDM revenue Benchmark With CDM revenue IRR 6.89% 10% 12.40% 8 The bus bar tariff is determined in accordance with the Summary of the Coordination Conference with the Grid Company.

14 CDM Executive Board page 14 Sub-step 2d. Sensitivity analysis The objective of the sensitivity analysis is to show whether the conclusion regarding financial attractiveness is robust to reasonable variations in the critical assumptions. The following key parameters have been selected as sensitive indicators fluctuating in the range of -10%~10% 9 to test the financial attractiveness for the Project. (1) O&M cost; (2) Annual output; (3) Bus bar-tariff; and (4) Total investment. Table 2 and Figure 4 below show the fluctuating situation of IRR of the Project with reasonable variations in the critical assumptions. It is shown that the IRR will never exceed the benchmark of 10% even if the annual output or the bus bar-tariff increased or the O&M cost or the total investment decreased favourably. Therefore, the sensitivity analysis strongly and consistently supports the conclusion that the Project activity is unlikely to be financially attractive. Table 2: Sensitivity analysis of the Project (without CDM) Range Parameter -10.0% -7.5% -5.0% -2.5% 0.0% 2.5% 5.0% 7.5% 10.0% O&M cost 7.15% 7.08% 7.02% 6.96% 6.89% 6.83% 6.77% 6.70% 6.64% Annual output 5.76% 6.04% 6.33% 6.61% 6.89% 7.17% 7.45% 7.72% 7.99% Bus bar-tariff 5.75% 6.04% 6.33% 6.61% 6.89% 7.17% 7.45% 7.73% 8.00% Total investment 7.96% 7.68% 7.40% 7.14% 6.89% 6.66% 6.43% 6.21% 5.99% 9 The officially approved FSR applied this variation range when conducting the sensitivity analysis. Also, the fluctuation range is prevailing in China.

15 CDM Executive Board page % 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -10.0% -7.5% -5.0% -2.5% 0.0% 2.5% 5.0% 7.5% 10.0% O&M cost Annual output Bus bar-tariff Total investment Figure 4: Sensitivity analysis of the Project (without CDM) In conclusion, the Project is not financially competitive. Without CDM support, the proposed project would unlikely occur. Step 4: Common Practice Analysis Common practice analysis is a credibility check to complement the investment analysis. The common practice analysis is identified and discussed through the following sub-steps: Sub-step 4a: Analyze other activities similar to the proposed project activity All hydropower projects in the relatively independent administrative region of Gansu Province where similar investment environment with comparable regulatory framework, access to financing with regard to hydropower investment exists were included in the common practise analysis. All hydropower projects under construction or existing with similar installed capacity (under 100 MW) after 2002 when China started the electric sector reform to a more transparent and dynamic market are identified in the following table: No. Project Name Installed Capacity (MW) Table 3: Similar Projects in Gansu Province Annual Commissio Generation Location ning Time (GWh) 1 Gucheng Longshou Stage I Taohe River in Minxian County Heihe River in Sunan County Memo Major construction project of Gansu

16 CDM Executive Board page 16 Province 10 3 Xiacheng Included in the Taohe River in Under Investment Promotion Weiyuan construction Scheme of Dingxi County City 11 Major construction 4 Dagushan , project of Zhangye Heihe River in City, also included in Zhangye City the MFF assistance program of ADB Shuiboxia , Controlled by Gansu Bailongjiang Electricity Investment River in Diebu Group (Provincial County level, state-owned) 13 (Data source: Yearbook of China Water Resources (2006, 2007) and Planning of Hydropower projects in Gansu Province (2007~2017) prepared by Gansu Water Resources and Hydropower Survey and Research Institute.) Sub-step 4b. Discuss any similar options that are occurring There are essential distinctions between the proposed project and the other projects demonstrated above. Gucheng Project harnessed the most technically exploitable and financially attractive resource in Gansu Province. The annual operation hours of the project is calculated to be 4,933 hours, much higher than that of the proposed project activity (4,331 hours). Higher operation efficiency promises more output and sales revenue and further make the project financially feasible; Longshou Stage I and Xiacheng Projects were identified to be Major Construction Project of Gansu Province and Investment Promotion Project of Dingxi City, respectively, which were guaranteed preferential policies such as fees remission, tax exemptions and financial supports 1415, making the projects more financially attractive than other similar projects under the same investment climate; Dagushan Project was selected to be a Major construction project of Zhangye City which implies preferential policies; in addition, the project was included in the multi-tranche financing facility (MFF) assistance program of ADB which promises longer credit period and lower interest rate; Shuiboxia Project is controlled by the policy-related large scale state-owned energy giant of Gansu Electricity Investment Group invested by the government of Gansu Province. It can be seen that the project can easily get access to investment and other financial incentives from national and local

17 CDM Executive Board page 17 government, and have stronger ability against financial risk. It is not necessary to consider the issues of principle repayment and payment of interest on loans. Compared with the projects analysed above, the Project is located on a reach with poor exploitable conditions in a remote and poverty-hit region, it just can guarantee annual operation period of 4,331 hours. The Project also does not get any favourable policy supports regarding to tax or financing. As a result, the benefit return of the Project is so poor that cannot prove its financial feasibility, which has already been demonstrated in Step 2 before, and it is difficult for the project owner to raise investment without CDM incentives. Therefore, it can be concluded that the existence of these project activities does not contradict the claim that the proposed project activity is financially unattractive. Early consideration of CDM On 20 Jan., 2005, the project owner took part in a seminar on financing and development of CDM projects held by Jinchang Development and Plan Committee. At the conference, the CDM concept, its application procedures, the regulatory requirements and other technical issues were fully introduced. Perceiving that the Project is a clean and renewable power source targeted by CDM, and the possible incentives derived from CDM development, the project owner held a board meeting on 26 Jan., 2005 to decide to proceed the project as CDM project activity. All the attendants agreed that the company should quicken the research of Kyoto Protocol, get hold of CDM operational procedures and develop the Project in accordance with CDM rules to enhance the financial attractiveness of the Project. In April 2005, the FSR of the Project was finished and on 9 July, 2005, local grid company together with the project owner held a conference to discuss the issues with regard to grid connection, power clear price and etc. about Donghewan Project. However, a limited tariff of 0.20 yuan/kwh (VAT included) was formally proposed at the conference, making the Project financially unattractive. And on 15 July, 2005, after careful appraisal of the Project based on the FSR and the negotiated bus bartariff, local bank issued a letter of loan commitment which stated that the Project was basically feasible if developed as CDM project activity, and agreed to provide financial services on condition that the Project developed as CDM project activity. Perceiving the necessity and urgency of the CDM incentives, the project owner held a board meeting on 23 July 2005 finally to decide to seize the financial supports derived from CDM incentives. Then on 17 Dec., 2005, the project owner signed the CDM consulting contract, and officially began to develop the Project as CDM activity. On 17 April 2007, the draft version of the PDD was finished after intensive study on baseline and careful calculation of emission factors; and on 4 Sep., 2007, the ERPA was finally countersigned after detailed negotiations. Therefore, it strongly demonstrates that the CDM incentives are essential to the successful development of the Project and that the project owner seriously and eagerly needs the Project be registered as CDM project activity to alleviate the potential risks. From all these steps included in this section B.5., it can be concluded that the Project is additional, not (part of) the baseline scenario. Without CDM support, the Project would unlikely occur.

18 CDM Executive Board page 18 B.6. Emission reductions: B.6.1. Explanation of methodological choices: 1. Project emissions (PE y ) The project activity is the installation of a new hydropower plant that involves no construction of reservoir. In accordance with ACM0002, project emissions need not be accounted. Hence, the project emission is zero. 2. Baseline emission (BE y ) Baseline emissions include only CO 2 emissions from electricity generation in fossil fuel fired power plants within NWPG that are displaced due to the Project activity, calculated as follows: Where: BE y EG y EG baseline BE y = (EG y -EG baseline ) EF grid,cm,y (1) = Baseline emissions in year y (tco 2 /yr). = Net electricity supplied by the Project activity to the grid (MWh). = Baseline electricity supplied to the gird in the case of modified or retrofit facilities (MWh). For new power plants this value is taken as zero. EF grid,cm,y = Combined margin CO 2 emission factor for grid connected power generation in year y calculated using the latest version of the Tool to calculate the emission factor for an electricity system. As the Project activity is the installation of a new hydropower plant, formula (1) above is transformed to: Where: BE y = EG y EF grid,cm,y (2) EG y = EG out -EG in where: EG out EG in = Electricity supplied by the Project activity to the grid (MWh). = Electricity purchased by the Project activity from the grid (MWh). The Combined margin CO 2 emission factor (EF grid,cm,y ) is calculated by applying the following six steps in accordance with the Tool to calculate the emission factor for an electricity system. Step 1. Identify the relevant electric power system As the electric power system of the Project activity has been identified in section B.3 above, this step can be skipped. Step 2. Select an operating margin (OM) method

19 CDM Executive Board page 19 There are four options to calculate the operating margin (a) Simple OM; or (b) Simple adjusted OM, or (c) Dispatch Data Analysis OM, or (d) Average OM. For the Project activity, because the dispatch data of the Grid (including the NWPG) in China is not available to the public, options (b) and (c) can t be adopted. Furthermore, since low-cost/must-run power sources constitute 23.06%, 18.77%, 19.92%, 25.36% and 24.71%, less than 50% of the NWPG from 2002~2006, option (a) (simple OM) is the only reasonable and feasible method among the four options. This PDD chooses ex-ante method to calculate the OM emission factor of NWPG by using the latest 3 years data vintage. Step 3. Calculate the OM emission factor according to the selected method The Simple OM emission factor (EF OM, simple,y ) is calculated as the generation-weighted average emissions per electricity unit (tco 2 /MWh) of all generating sources serving the system, excluding those low-cost/must-run power plants/units. It may be calculated: Based on data on fuel consumption and net electricity generation of each power plant / unit (Option A), or Based on data on net electricity generation, the average efficiency of each power unit and the fuel type(s) used in each power unit (Option B), or Based on data on the total net electricity generation of all power plants serving the system and the fuel types and total fuel consumption of the project electricity system (option C). Option C is only feasibly and selected to calculate OM emission factor of NWPG due to the following reasons: The necessary data for option A and option B are not available such as data of fuel consumption and net electricity generation of each power plant/unit serving the system; The low-cost/must-run power sources in NWPG only refer to hydropower and wind power; and The quantity of electricity supplied to NWPG by different sources is available. According option C, the simple OM emission factor is calculated based on the net electricity supplied to NWPG by all power plants serving the NWPG, not including low-cost/must-run power plants/units, and based on the fuel type(s) and total fuel consumption of NWPG, as follows: EFgrid,OMsimple,y = FC i NCV EG iy, iy, y EF CO2, i, y (3) Where: EF grid,omsimple,y : Simple operating margin CO 2 emission factor in year y (tco 2 /MWh);

20 CDM Executive Board page 20 FC i,y : NCV i,y : EF CO2,i,y : EG y : i : y : Amount of fossil fuel type i consumed in the project electricity system in year y (mass or volume unit); Net calorific value (energy content) of fossil fuel type i in year y (GJ / mass or volume unit); CO 2 emission factor of fossil fuel type i in year y (tco 2 /GJ); Net electricity generated and delivered to the grid by all power sources serving the system, not including low-cost / must-run power plants / units, in year y (MWh); All fossil fuel types combusted in power sources in the project electricity system in year y; The three most recent years for which data is available at the time of submission of the CDM-PDD to the DOE for validation (ex ante option) This PDD calculates the Operating Margin (OM) emission factors of NWPG in 2004, 2005 and 2006, respectively. Then, the OM emission factor of NWPG is calculated as the weighted average of the three years. Step 4. Identify the cohort of power units to be included in the build margin (BM) The sample group of power units m used to calculate the build margin consists of either: (a) The set of five power units that have been built most recently, or (b) The set of power capacity additions in the electricity system that comprise 20% of the system generation (in MWh) and that have been built most recently 16. Because it is very difficult to obtain the data of five most recently built power plants as these data are considered as confidential business information in China, the power plant capacity additions in the electricity system that comprise 20% of the system generation (in MWh) and that have been built most recently is selected as as the sample group m. The power plants which are CDM projects are not included in sample group m. However, even for those built most recently power plants that comprise 20% of the system generation, it is also difficult to obtain the specific data regarding to fuel consumption and electricity generation additions by each power sources as confidential reason. Considering this situation, the following clarifications are given by EB for deviation in use of methodology AM0005 and AMS-I.D by several project activities in China when estimating BM emission coefficient: 1) Use of capacity additions during the last 1~3 years for estimating the build margin emission factor for grid electricity; 2) Use of weights estimated using installed capacity in place of annual electricity generation; and 3) It is suggested to use the efficiency level of the best technology commercially available in the provincial/regional or national grid of China, as a conservative proxy, for each fuel type in estimating the fuel consumption. Thus, the most recent built power plants are calculated as the difference of total installed power capacities in the year 2006 and If 20% falls on part capacity of a unit, that unit is fully included in the calculation.

21 CDM Executive Board page 21 In terms of vintage of data, ex-ante method is employed in this PDD to calculate the BM emission factor for the first crediting period based on the most recent data available in NWPG from 2004~2006. Step 5. Calculate the BM emission factor According to Tool to calculate the emission factor for an electricity system and the clarifications by EB, the main steps for BM calculation are as following: Sub-step 1: Calculation of weights of CO 2 emissions by coal-fired, oil-fired and gas-fired plants in total CO 2 emissions of NWPG. Where: F i,j,y : λ λ λ coal oil Gas = = = iecoal, j i, j ieoil, j i, j F iegas, j i, j F F F COEF i, j, y i, j COEF i, j, y i, j COEF i, j, y i, j COEF i, j, y i, j F F COEF i, j, y i, j COEF i, j, y i, j is the total amount of fuel i (in a mass or volume unit) consumed by Province j in NWPG for power generation in year y; COEF i,j y : is the total amount the CO 2 emission coefficient of fuel i (tco 2 /mass or volume unit of the fuel), taking into account the carbon content of the fuels used by relevant power sources j and the oxidation rate of the fuel in year(s) y. (4) (5) (6) This PDD employs the CO 2 emission weights by coal-fired, oil-fired and gas-fired plants of total CO 2 emission of NWPG in 2006 As result, the coal, oil and gas are calculated as 98.49%, 0.11% and 1.41%, respectively. Sub-step 2: Calculation of emission factor of thermal power (EF thermal power ) of NWPG. The EF thermal power is calculated as a weighted emission factor as the following formula: EFThermal = λcoal EFCoal, Adv + λoil EFOil, Adv + λgas EFGas, Adv (7) Where: EF Coal,Adv, EF Oil,Adv and EF Gas Adv are the emission factors of the best technology for coal, oil, gas fired power plants commercially available in China, which are calculated based on the efficiency level of the best technology for each fuel type commercially available in China (see details in Table B1 Annex 3).

22 CDM Executive Board page 22 According to the data issued by China DNA, the efficiency levels of domestic sub-critical 600 MW coal power unit and the 200 MW combined cycle power unit are taken as the efficiency levels of the best technology for coal-fired power plants, and oil and gas fired power plants commercially available in China, which are at 37.28% and 48.81%, respectively. Sub-step 3: Calculation of Build Margin (BM) emission factor of NWPG. Finally, weighted average build margin emission factor (EF_BM,y) are calculated by multiplying the EF thermal power with the weight of new capacity addition by thermal power of total capacity addition in NWPG. EF CAP = EF (8) CAPTotal Thermal BM, y Thermal Where: CAP Total : the total capacity addition of NWPG between 2004~2006; CAP Therma: the capacity addition by thermal power of NWPG between 2004~2006. The method of OM and BM calculation above refer to official website: issued by China DNA. Step 6. Calculate the combined margin (CM) emissions factor The final step is to calculate the weighted average baseline emission factor of the Project as follows: EFgrid, CM, y = EFgrid, OM, y WOM + EFgrid, BM, y WBM (9) Where: EF grid,bm,y : Build margin CO2 emission factor in year y (tco2/mwh); EF grid,om,y : Operating margin CO2 emission factor in year y (tco2/mwh); w OM : Weighting of operating margin emissions factor (%); and w BM : Weighting of build margin emissions factor (%). For the Project, w OM and w BM, by default, are 50% (i.e., w OM = w BM = 0.5), and EF OM,y and EF BM,y are calculated as described in Steps 3 and 5 above. 3. Leakage (LE y ) According to ACM0002 (Ver 07), leakage needs not be considered. 4. Emission reductions (ERy) Emission reductions are calculated as follows: ER y = BE y PE y - LE y (10)

23 CDM Executive Board page 23 Where: ER y = Emission reductions in year y (t CO 2e /yr). BE y = Baseline emissions in year y (t CO 2e /yr). PE y = Project emissions in year y (t CO 2 /yr). LE y = Leakage emissions in year y (t CO 2 /yr). Since the project emission and the leakage emission (LE y ) of the Project are zero. The emission reductions (ER y ) is equal to the baseline emission (BE y ) presented in the following formula: ER y =BE y (11) B.6.2. Data and parameters that are available at validation: Data / Parameter: FC i,j, 2004~2006 Data unit: Ton or m 3 Description: The total amount of fuel i (in a mass or volume unit) consumed by Province j in NWPG for power generation in year 2004, 2005 and Source of data used: China Energy Statistical Yearbook (2005~2007) Value applied: See Annex 3. Justification of the choice of data or description of measurement methods and procedures actually applied : Any comment: The data selected comply with the Tool to calculate the emission factor for an electricity system. For OM and BM calculation. Data / Parameter: GEN j 2004~2006 Data unit: MWh Description: The electricity output (MWh) supplied to the grid by the Province j in NWPG in year 2004, 2005 and Source of data used: China Electric Power Yearbook (2005~2007) Value applied: See Annex 3 Justification of the choice of data or description of measurement methods and procedures actually applied : Any comment: The data selected comply with the Tool to calculate the emission factor for an electricity system. For OM calculation. Data / Parameter: NCV i Data unit: kj/kg or kj/m 3 Description: the net calorific value (energy content) per mass or volume unit of a fuel i Source of data used: China Energy Statistical Yearbook 2007 Value applied: See Annex 3 Justification of the choice of data or description of measurement methods According to Tool to calculate the emission factor for an electricity system, the national value is used.

24 CDM Executive Board page 24 and procedures actually applied : Any comment: For OM and BM calculation. EF co2, i Data / Parameter: Data unit: tc/tj Description: CO 2 emission factor per energy unit of fuel i. Source of data used: Table1.3 Default Value of Carbon Content, Page 1.21, Page 1.22 Chapter 1, Volume IPCC Guidelines for National Greenhouse Gas Inventories Value applied: See table A1-2, A2-2,A3-2 in Annex 3. Justification of the choice of data or description of measurement methods and procedures actually applied : Any comment: According to Tool to calculate the emission factor for an electricity system, when the national value is unavailable, IPCC default is used. For OM and BM calculation. OXID i Data / Parameter: Data unit: Description: The oxidation factor of the fuel. Source of data used: Table1.4 Default CO 2 Emission Factor For Combustion, Page 1.23, Page 1.24 Chapter 1, Volume IPCC Guidelines for National Greenhouse Gas Inventories Value applied: See Annex 3. Justification of the choice of data or description of measurement methods and procedures actually applied : Any comment: This data is based on IPCC default value because the national specific value is unavailable. Data / Parameter: Installed Capacity j 2003, 2004, 2005, 2006 Data unit: MW Description: The installed capacity of the power sources j in the provinces in NWPG in year 2003, 2004, 2005 and Source of data used: China Electric Power Yearbook (2004~2007) Value applied: See Annex 3. Justification of the choice of data or description of measurement methods and procedures actually applied : Any comment: The data selected comply with Tool to calculate the emission factor for an electricity system. For BM calculation. Data / Parameter: Adv, i Data unit: % Description: The efficiency level of the best technology for each fuel type commercially available in China. Source of data used: Official website of China DNA: