CLEAN DEVELOPMENT MECHANISM PROJECT DESIGN DOCUMENT FORM (CDM-SSC-PDD) Version 03 - in effect as of: 22 December 2006 CONTENTS

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1 CLEAN DEVELOPMENT MECHANISM PROJECT DESIGN DOCUMENT FORM (CDM-SSC-PDD) Version 03 - in effect as of: 22 December 2006 CONTENTS A. General description of the small scale 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 proposed small scale project activity Annex 2: Information regarding public funding Annex 3: Baseline information Annex 4: Monitoring Information 1

2 Revision history of this document Version Date Description and reason of revision Number January 2003 Initial adoption 02 8 July 2005 The Board agreed to revise the CDM SSC PDD to reflect guidance and clarifications provided by the Board since version 01 of this document. As a consequence, the guidelines for completing CDM SSC PDD have been revised accordingly to version 2. The latest version can be found at < December The Board agreed to revise the CDM project design 2006 document for small-scale activities (CDM-SSC-PDD), taking into account CDM-PDD and CDM-NM. 2

3 SECTION A. General description of small-scale project activity A.1 Title of the small-scale project activity: >> Sungai Rek Mini Hydro, Kuala Krai, Kelantan, Malaysia Version 1.0 Date: 29/08/2008 A.2. Description of the small-scale project activity: >> Description and purpose of the project activity: The proposed project involves implementation and operation of run-of-river type with installed capacity of 3.2 MW mini hydro grid-connected renewable energy project on the Sungai Rek, in the district of Kuala Krai, Kelantan state, Malaysia. The mini hydro project will be developed by I.S. Energy Sdn. Bhd. The main objective of the project is to generate clean electrical energy in a sustainable manner, optimizing the utilization of renewable resource, water, and contribute to climate change mitigation measures. The installed capacity of the project is 3.2MW, employing 2 units of turbine, each with a rated capacity of 1,684 kw able to produce an average annual electricity generation of 20,849 MWh/yr. The electricity generated will be sold to the national utility, Tenaga Nasional Berhad (TNB) under a 21-year Renewable Energy Power Purchase Agreement (REPPA). Thus, the electricity generated by the mini hydro power plant will displace part of the electricity generated by the grid dominated by the conventional fossil fuel-fired power plants. The estimated annual GHG emissions reduction is 12,926 tons CO 2 e. The project activity is part of the Government of Malaysia s initiative in Small Renewable Energy Power Programme (SREP) which aims at encouraging the development of electricity generation from renewable sources. In the SREP program, small power generation plants which utilise renewable energy can apply to sell the electricity to the national Utility through the Distribution Grid System. Maximum capacity of a SREP project designed for sale of power to the grid must be 10MW. Contribution to sustainable development: The project will generate renewable and clean electricity and thus, contributes to sustainable development which includes: Environmental sustainability The project activity will have a positive impact on the environment as it will displace part of electricity generated by the conventional power plants in the national grid, thus avoid environmental pollution caused by the burning of fossil fuel and lead to an increased sustainability in the power generation sector. The hydro electric project has no negative environmental impacts because it relies on existing river release and it does not involve any tree cutting or any submersion etc. The project activity will also contribute towards meeting the target of the Ninth Malaysia Plan to achieve 350MW of electricity from renewable sources by the end of Social sustainability 3

4 Generation of direct and indirect employment would occur due to the project activity. There will be a need for both skilled and unskilled labour, thus creating job opportunities to the locals during construction and operations of the power plant. The workforce will have to be trained to operate the new plant and new qualified staff will be employed. Economy spill over of the project will also increase business opportunities for local suppliers in transportation, maintenance and repair, parts supply, food and other services. Economic sustainability The project activity will lead to economic sustainability as the fuel source i.e. water is a sustainable, indigenous resource, which helps conserve the country s foreign exchange by reducing reliance on imported fossil fuels for electricity generation. The project has created business opportunities for local stakeholders such as bankers, consultants, suppliers, manufacturers, contractors, etc. A.3. Project participants: >> Name of Party involved (*) ((host) indicates a host Party) Private and/or public entity(ies) project participants (*) (as applicable) Malaysia (host) Private entity: I.S. Energy Sdn. Bhd. No Kindly indicate if the Party involved wishes to be considered as project participant (Yes/No) 4

5 A.4. Technical description of the small-scale project activity: >> >> Malaysia A.4.1. Location of the small-scale project activity: A Host Party(ies): >> Kelantan >> Kuala Krai A A Region/State/Province etc.: City/Town/Community etc: A Details of physical location, including information allowing the unique identification of this small-scale project activity : >> 5

6 The project is located on the main stream of Sungai Rek (Rek River), Kampung Catel Damai, Kuala Krai, Kelantan, Malaysia. The exact location of the project is defined using GPS coordinates; i.e. the water catchment location at N E and the Powerhouse location at N E

7 A.4.2. Type and category(ies) and technology/measure of the small-scale project activity: >> Type and category of the small-scale project: Type I Renewable Energy Projects Category I.D. Grid connected renewable electricity generation According to Appendix B of the simplified procedures for small scale activities, the proposed project activity falls under Category 1.D based on the following reasons: The proposed project makes good use of the water head to generate electricity with installed capacity of 3.2 MW, less than 15 MW, and accords with the eligibility of small scale CDM Project activities. It will not increase the installed capacity beyond 15 MW at any point during the crediting period. The plant will sell its generated electricity to the national grid that would have otherwise been supplied by at least one fossil fuel fired generating unit. Technology description: The project is located on the Rek River near Kuala Krai town. The river tributaries rise in the forested mountains south west of Kelantan and flows north east past four important towns, Pasir Mas, Tumpat, Kuala Krai and the state capital Kota Bharu, which lies near the mouth of the river. It is a water-retaining type run-of-river hydropower project with a total installed capacity of 3.2MW and a designed operation lifetime of 21 years. The project consists of the construction of Power Intake and Weir Structure, a Penstock and a Powerhouse. The main features of the project are further detailed in the table below: Hydrology Intake Location N E Power Station Location N E Catchment Area 45 km 2 Name of Hydrological Region Climate: i) Average Annual Rainfall ii) Rainfall Region iii) Annual Potential Evapotranspiration Potential Water Resources Geology Physiographic Intake Structures Intake span Settling Basin Overflow weir Water Head Flow Normal Operating Mode Penstock Kampung Catel Damai,Kuala Krai, Kelantan, Malaysia i) 3050 mm ii) West Malaysia iii) mm mm/yr Granitic Hilly and mountain Complexes 35m across stream The 35m intake has a settling basin designed to allow sufficient time for 0.2 m size particles to settle and flush out 4m height constructed across the river to divert water into settling basin 285 m 1.4 m 3 /sec Base Load 7

8 Length 2100 mm Diameter 1000 mm Material Steel Pipe coated with epoxy Support Concrete support 7m c/c and thrust blocks at bends. Power Station Location 30m from the river banks Structure Reinforced concrete sub-floor structure with a light timber framed and galvanised iron clad and roofed superstructure. Power house To house 2 generating units of 1.6 MW each. Water Turbine Equipment and Auxiliaries Turbine Type : PELTON Two units of 1,684kW, 690V each Turbine Auxiliaries Generator Generator Auxiliaries Transformers Switch Gear Equipment Electrical System Power connection to grid i) Turbine Inlet Valve ii) Generator switch gear iii) Low voltage control system Type : Synchronous Units : Two units of 3.3 kv, 1.6MW each i) 2 units of 690V, 1970kVA, 0.8 p.f. generators ii) 2 units excitation system iii) 2 units lubrication system Step up transformer complete with auxiliaries and cooling system 2 units of 11kV, 26kA, 3 second single bus indoor metal clad switchgear complete with control and protection panels. The generator 690V terminals are connected to the generator transformer Low Voltage side terminals. The outgoing terminals of the step up transformer (High Voltage) are connected to the 11kV circuit Breaker and to the grid via the 150mm 2 Aerial Bundled Cable to Lata Rek 11kV substation located 9 km away from the power house.. Synchronization to the grid would be done at the 690V generator circuit breaker. 8

9 A.4.3 Estimated amount of emission reductions over the chosen crediting period: >> The project activity will employ a 7 year renewable crediting period. Total estimated emission reductions in the crediting period are 90,482 tonnes of CO 2 equivalent, as tabulated below. Years Annual estimation of emission reductions in tonnes of CO 2 e 1 12, , , , , , ,926 Total estimated reductions 90,482 (tonnes of CO 2 e) Total number of crediting years 7 Annual average of the estimated 12,926 reductions over the crediting period (tco 2 e) Table A.2 : Total CER s generated where Year 1 starts from 1 st May 2009 until 31 st March 2010 A.4.4. Public funding of the small-scale project activity: >> The Project has not received public funding from Parties included in Annex I. Project is implemented with equity of project proponent and long term debt by Bank Pembangunan (M) Berhad. Bank Pembangunan (M) Berhad has financed this project for RM 20 million based on debt to equity ratio of 80% :20% basis at interest rate of 8.75% per annum. A.4.5. Confirmation that the small-scale project activity is not a debundled component of a large scale project activity: According to Appendix C of the Simplified Modalities and Procedures of Small-Scale CDM project activities, a proposed small-scale project activity shall be deemed to be a debundled component of a large project activity if there is a registered small-scale project activity or an application to register another small-scale project activity: With the same project participants; In the same project category and technology/measure; Registered within the previous 2 years; and Whose project boundary is within 1km of the project boundary of the proposed small-scale project activity at the closest point. The project owner has not developed other small-scale projects within a distance of 1 km of the proposed project. Thus, the proposed small-scale project activity is not a debundled component of a large scale project activity. 9

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 small-scale project activity: >> Small-scale methodology AMS-I.D. Grid connected renewable electricity generation Type I Renewable Energy Projects Sub Category I.D Grid connected renewable electricity generation (Version 13). The reference has been taken from the list of small scale CDM Project activity categories contained in Indicative and Simple Baseline and monitoring methodologies for small scale CDM project activities - Version 13, dated 14 December B.2 Justification of the choice of the project category: >> The project category: AMS I.D. Grid connected renewable electricity generation is chosen based on its compliance with the applicability criteria below: Applicability criterion This category comprises renewable energy generation units, such as photovoltaics, hydro, tidal/wave, wind, geothermal and renewable biomass, that supply electricity to and/or displace electricity from an electricity distribution system that is or would have been supplied by at least one fossil fuel fired generating unit. If the unit added has both renewable and nonrenewable components (e.g. a wind/diesel unit), the eligibility limit of 15MW for a small-scale CDM project activity applies only to the renewable component. If the unit added co-fires fossil fuel, the capacity of the entire unit shall not exceed the limit of 15MW. Combined heat and power (co-generation) systems are not available under this category. In the case of project activities that involves the addition of renewable energy generation units at an existing renewable power generation facility; the added capacity of the units added by the project should be lower than 15MW and should be physically distinct from the existing units. Project compliance with the criterion The project activity comprises renewable energy generation unit, i.e. hydroelectric and the electricity generated is supplied to the grid that is or would have been supplied by at least one fossil fuel fired generating unit (TNB s Peninsular Malaysia grid), thus it meets the criterion. This is not applicable as the project activity does not have any non-renewable component. The project activity is not co-generation system. This is a greenfield power project with an installed capacity of 3.2 MW which is lower than the 15 MW thresholds

11 Applicability criterion Project activities that seek to retrofit or modify an existing facility for renewable energy generation are included in this category. To qualify as a small-scale project, the total output of the modified or retrofitted unit shall not exceed the limit of 15MW. The Project boundary encompasses the physical, geographical site of the renewable generation source. Project compliance with the criterion This is a greenfield power project with an installed capacity of 3.2MW which is lower than the 15 MW thresholds. The project boundary essentially covers the diversion weir, penstock, powerhouse & tailrace and the transmission line including the interconnection point with TNB substation. Based on the discussion in the table above, the Mini Hydro Project clearly falls under the category: AMS I.D. Grid connected renewable electricity generation. B.3. Description of the project boundary: >> According to the AMS I.D. the project boundary encompasses the physical, geographical site of the renewable generation source. Hence the project boundary essentially covers the diversion weir, penstock, powerhouse & tailrace and the transmission line including the interconnection point with TNB substation. No emissions have been envisaged within the project boundary as there is no construction of dam,. The project boundary is illustrated in the following diagram: Mini Hydro plant Electricity to grid Auxiliary consumption Electricity to end-users Project boundary 11

12 Source Gas Included? Justification/Explanation Baseline Project Activity Power from the grid Power from the grid Dam Fossil Fuel CO 2 Yes Emissions from generation of electrical power in the grid are included in the baseline CH 4 No Excluded for conservativeness N 2 O No Excluded for conservativeness CO 2 No The power generated by the mini hydro will replace power from the grid CH 4 No Excluded for conservativeness N 2 O No Excluded for simplicity expected to be minimal CO 2 No No reservoir or dam is built as this is a mini hydro project. CH 4 No There will not be any emission from degradation of organic mater as this project does consist construction of a reservoir or dam. N 2 O No Excluded for simplicity expected to be minimal CO 2 Yes A diesel generator set for start up or back up will be used in this project. CH 4 No Excluded for simplicity expected to be minimal N 2 O No Excluded for simplicity expected to be minimal Table B.2.: Sources and types of GHG emissions in baseline and project scenarios B.4. Description of baseline and its development: >> The baseline of the project is determined based on the methodology AMS I.D. The plausible baseline scenarios for the proposed project activity are as tabulated below: Table 2: Possible realistic and credible alternatives for power generation: Plausible baseline scenarios for power generation A1 Description Comments Realistic and credible alternative? (Yes/No) The proposed project activity not undertaken as a CDM project activity. This is a realistic and credible alternative. However, there exist investment barriers and will be discussed further in Section B.5. Yes A2 Continue current situation the electricity will continue to be generated by the existing generation mix operating in the grid In the absence of the project activity, the equivalent power generated by the project activity would be generated in the grid for the use of third parties. Hence, this is a realistic and credible alternative. Yes 12

13 Plausible baseline scenarios for power generation A3 Description Comments Realistic and credible alternative? (Yes/No) The installation of a new fossil fuel fired power plant at the project site with equivalent installed capacity or equivalent annual power generation. Installation of new fossil fuel fired power plant at the project site conflicts with Malaysia s current regulation. The installed capacity of the project is 3.2MW, considering the same annual electricity generation, the alternative for the project should be a fossil-fuel fired power plant with the same capacity. Further, as the project is a grid connected hydro power generation project, the alternative must be a grid connected fuel fired power generation project. No A4 The installation of new power plant utilising other renewable sources at the project site with equivalent installed capacity or equivalent annual power generation. Other renewable energy resources such as wind power, solar power, geothermal and biomass are relatively spare considering the location of this project activity is on a hilly terrain, by a waterfall. The location is not feasible for construction of any of the above mentioned power generation plants. Furthermore, electricity generation from other renewable resources also face difficulties and barriers of technology and investment. The economic return of other renewable power plants with similar amount of capacity should be of little attractiveness. Furthermore, the project proponent is a hydro power investor. No Based on the table above, only alternatives A1 and A2 are identified as realistic and credible alternatives to the proposed project activity. However, after applying barrier analysis as discussed in Section B.5 below, alternative A1 would face investment barriers and thus not considered viable in the absence of CDM. Thus, it can be deduced that alternative A2 is the only feasible and credible baseline scenario. In conclusion, the baseline scenario of this project is: electricity delivered to the Peninsular Malaysia Grid by the project activity would have otherwise been generated by the operation of grid-connected power plants and by the addition of new generation sources. Therefore, in accordance with AMS I.D. the baseline of the project is the kwh produced by the renewable generating unit multiplied by an emission coefficient (measured in kg CO 2 e/kwh) of the national grid calculated in a transparent and conservative manner as: 13

14 (a) A combined margin (CM), consisting of the combination of operating margin (OM) and build margin (BM) according to the procedures prescribed in the Tool to calculate the emission factor for an electricity system ; (b) The weighted average emissions (in kg CO 2 e/kwh) of the current generation mix. The data of the year in which project generation occurs must be used. The baseline emission factor used in this project was based on the most recent report Study on Gridconnected Electricity Baselines in Malaysia Year conducted by Pusat Tenaga Malaysia, January The data used for the calculations originated from official sources; therefore the result of the study was made available ( The study uses approved methodologies of ACM0002 (Version 6) and AMS I.D. (Version 11) applicable to grid-connected electricity generation projects that use renewable sources. Calculations are detailed out in section B.6. below. 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 small-scale CDM project activity: Justification for application of simplified methodologies to the project activity The installed capacity of the project is 3.2MW, which is less than the limiting capacity of 15MW and its thus eligible to use small scale simplified methodology. Further, the project activity is generation of electricity of grid system using hydro potential. Therefore, the type and category of the project activity matches with I.D. as specified in Appendix B of the indicative simplified baseline and monitoring methodologies for small scale CDM project activities Justification for additionality of the project. The crediting period will start after the project is registered. CDM revenue was considered from the early stages of the project s development, and it is an integral part of the financial package of the project. National Grid, Malaysia is the primary electricity transmission network linking the electricity generation, transmission, distribution and consumption in Malaysia. It is operated and owned by Tenaga Nasional Berhad (TNB). More than 420 substations in Peninsular Malaysia are linked together by the extensive network of transmission lines operating at 132, 275 and 500 kilovolts (kv) respectively. Power generated by Tenaga Nasional and independent power producers is carried by the National Grid towards customers connected to the various distribution networks. OR A total of 23 licenses are approved for mini hydro projects in Malaysia, with generation capacity and Grid Connected Capacity of 93.2MW 3.Of this total approval, only 34.48MW or 37% has been connected to the grid. Thus, the bulk of the potential (63%) remains yet to be developed. 2 Study on Grid-connected Electricity Baselines in Malaysia Year Pusat Tenaga Malaysia, January Electricity Supply Industry in Malaysia, Performance and Statistical Information, (Energy Commission)

15 In accordance with Attachment A to Appendix B of the simplified modalities and procedures for smallscale CDM project activities, a qualitative analysis demonstrating that the project activity would not occurred anyway due to at least one of the following barriers: 1. Investment barrier; 2. Technological barrier; 3. Barrier due to prevailing practice; 4. Other barriers. The additionality of the proposed project is demonstrated and assessed by the investment barrier analysis. Investment barrier The proposed project is a small scale hydropower project. Due to the small installed capacity and low project IRR, the proposed project faces the obvious investment barrier. The calculation and analysis of financial indicators of the proposed project are as follows: Alternative A1: The proposed project activity not undertaken as a CDM project activity. The Government of Malaysia has set a target of 350MW of new grid connected electricity generation capacity for renewable energy sources by the end of 2010 in the 9 th Malaysia Plan 4. Table B.1 below lists the status of SREP implementation in Malaysia, as of end Table B.1 : Status of SREP implementation in Malaysia Target in 9 th Malaysia Plan 300 MW for Peninsular Malaysia and 50 MW for Sabah. Active Approvals from SCORE 5 REPPA s Signed REPPA s under negotiation Commissioned (MW) = 45 projects 39 MW ( 7 projects) 35.8 MW (7 projects) To date only 2 projects commissioned : 2MW (1 landfill project in Peninsular Malaysia and 10MW (1 biomass powered project in Sabah). From Table B.1 above, it is very clear that the Small Renewable Energy Power Program (SREP) has failed to deliver significant volumes of electricity generated in Peninsular Malaysia. One of the main barriers faced in implementation of renewable energy is the financial barrier that incorporates the following 6 : 1. Tariff offered by the National Utility (TNB) not meeting market IRR expectations; 4 9 th Malaysia Plan , Economic Planning Unit, Prime Ministers Department, 2006 : Pg 408, Section SCORE - Special Committee on Renewable Energy (SCORE), set up under the Ministry of Energy, Communications and Multimedia. 6 Erik Dugstad et al 2007: Options for implementation of the RE target in 9th Malaysia Plan. Page 3 Summary Downloaded from 15

16 2. Lack of financing; and 3. Certain provisions in Renewable Energy Power Purchase Agreement (REPPA) unacceptable to SREP developers. 16

17 Tariff offered by TNB are insufficient to make the SREP projects viable. The cost of planning, site study, surveying, designing, developing and construction of this project is intensive whilst the electricity selling price is low. The selling price of energy to the national utility is fixed at 16.7 cents/kwh for the next 21 years, according to Renewable Energy Power Purchase Agreement (REPPA) offered by TNB to I.S Energy Sdn. Bhd. 7 Thus, the revenue generated from the selling of electricity to the national utility (TNB) alone does not generate attractive returns and the payback period for the project is too long. Without the income from CER, the project Internal Rate of Return (IRR) is only 9.1% with a payback period of 14 years which deems to be financially unattractive and made it difficult to obtain financing from the banks. The Debt Service Cover Ratio (DSCR) for the project without income from CER is at average 0.4. For any project to be viable in I.S. Energy, the accepted DSCR must be average 1.0 and above. With income from CER, the DSCR for this project is average These financial risks fall stronger on small scale projects, which in any case are subject to greater technological risk, having a higher installed cost per MWh of electricity generated. The project proponent required investing RM 25 Million, with debt to equity ration of 80:20. This equates to an investment of RM8.9 millions per MW which is high compared to investment required for conventional power plants. Even though the operating cost is low for hydropower projects, getting finances for the project is difficult due to the risk associated with hydropower projects such as banks lack of familiarity with Renewable Energy projects and the project cost. The basic parameters for evaluating the financial status of the project are listed in Table B.2 below. Table B.2: Key parameters for financial analysis Parameters Value Data Resource Installed capacity (MW) 3.2 Technology providers specification Annual power supplied to grid (MWh) 20,849 Based on 85% load factor Total investment (RM million) 25 Project financial model Electricity tariff (RM/kWh) REPPA Budgeted CER price (Euro/tCO 2 e) throughout Kyoto commitment period (Until end 2012) Budgeted CER price (Euro/tCO 2 e) post Kyoto commitment period (2013 onwards) Operation period (years) ERPA 8 Water royalty tax to state government (RM 84,000 Kelantan Economic 6 7 REPPA(Renewable Energy Power Purchase Agreement) between I.S. Energy and Tenega National Berhad. offer letter by TNB to I.S. Energy Sdn. Bhd. (Ref No: TNB/REK/LITK/9/1/38, Dated 15 th December 2005) 8 Emission Reduction Purchase Agreement between CER buyer and Project Proponent. 17

18 p.a) Annual O&M Cost (RM p.a) 50,000 with 5% escalation rate Planning Unit approval dated 28 th Sept 2004 Ref no: UPEN KN D200/02/488/4/(29) Project financial model Table below shows the financial analysis for the project without and with CDM financing. Table B.3: Comparative table of the financial indicators with or without CER s income. Financial indicator Without CDM With CDM Project IRR 10 years 3.32% 6.55% Project IRR 20 Years 9.10% 11.42% Debt Service Cover Ratio Average (DSCR) As observed from Table B.3, registration of the project activity as a CDM project activity is critical to ensure a commercially reasonable return of 12.%, which is relatively comparable to standard return in the market for independent power producers of 12.0% 9. In addition, it can be justified that CDM will help to overcome the major barriers based on the financial contribution to the project activity. The income from sale of CERs can be calculated as RM/kWh 10 as average for the 10-years crediting period. This can be compared with the value of the sales price for power exported to the grid of RM/kWh. Thus, the sale of CERs gives an increase to21% in the value of the power produced. Sensitivity Analysis A sensitivity analysis was also conducted to assess whether under reasonable variations in the critical assumptions, the results of the analysis remain unaltered. Variations of ±10% have been considered in the critical assumptions, the result of which is depicted in the table below: 9 Para 1, Page 21 of 28 of the report The IPP Investment Experience in Malaysia by Jeff Rector 10 Based on 85% load hours and sale of CER s as budgeted 11 Euro and exchange rate of RM5.1 per EURO ( ).. 18

19 Table 6: Result of sensitivity analysis Variables -10% No change +10% Project IRR (%) Total Investment 10.9% 9.10% 7.6% Electricity Tariff 7.1% 9.10% 11.2% Net Electricity Generation 7.1% 9.10% 11.2% Annual O&M Cost 9.2% 9.10% 7.0% There is theoretical possibility of exceeding the benchmark IRR caused by the variation of total investment, tariff or annual operating hour, however, the practical possibility of each variation is discussed in the table below. Table B.6 : Practical Possibility assessment of critical factors Variation range Variation Practical assessment of the practical factors. and assessment range to reach factor benchmark Total investment - 13% When total investment of project decrease, the IRR will increase, As there is no change in the component of total investment, the total investment of project is mainly subject to the industrial product price indices. The cost of project component is summarised in Annex 3 and clearly shows increase in investment cost from the time the REPPA was signed to the time of actual project implementation. In some cases, the component cost has almost doubled making this project financially unattractive with revenue from CDM. Therefore, based on the escalation cost of construction and project components, it is highly unlikely the total investment of project will decrease more that 13%. Electricity Tariff +15% When the electricity tariff increases, the IRR will also increase. This means that the equity IRR will equal to benchmark IRR only when the electricity tariffs are are increased to 19.2cents/kWh (+15%) compared to current 16.7cents/kWh. But increase in electricity tariff is not possible. As per the Power Purchase Agreement, the tariff is fixed for the next 21 years with a clause of no change. Thus the 15% increase in electricity tariff is unlikely to occur. When the electricity generation increases, the IRR will also increase. Electricity Generation +13% The current project is designed to generate 2.8MW with a load factor of 85%. In order to increase the electricity generation by 13% to meet the benchmark IRR, the load factor must be increased to minimum 96%. As in most hydro electricity projects, the electricity 19

20 generation is based on water resource at the site and to run at load factor of 96% is not possible from the hydrological data available. Annual Operating and Maintenance cost NA IRR for the project would not achieve benchmark even if the operating and maintenance cost is zero, which is impossible in practice. Based on the above results, the IRR of the project activity, are in general well below the 12.0%, which is the standard return in the market for independent power producers. These results also support the conclusion that the project activity is unlikely to be financially attractive without CDM registration. 2. Barrier due to prevailing practice The prevailing practise for power generation in Peninsular Malaysia is fossil fuel based thermal power generation dominating the total power generation capacity. It is evident from Table B.2 below that power generation in Malaysia is heavily dependent on fossil fuel. Source TNB 11 (MW) IPP 12 (MW) Total (MW) Percent % Coal 2,070 1,600 3, % Gas 4,195 10,572 14, % Oil % Hydro 1, , % Mini Hydro % Diesel / LFO % Total (MW) 8,416 12,172 20, % Table B.2 Malaysia Installed Capacity as of 31 st December 2005 in MW 13 From Table B.2 above, all of the 1,911MW power generated by Hydro and mini hydro in Peninsular Malaysia is by Tenaga National Berhad. None of the Independent Power Producers have invested in hydro or mini hydro. This is due to the fact that TNB is a government owned entity and the largest electricity utility in Malaysia, and the only company that manages and operates the National Grid. Most of the mini hydro operated by TNB was set up under the Rural electrification program and supported by the Malaysian Government. IPP s are not able to compete in generating mini hydro power due lack of financial support from the government. The following Table B.3 illustrates the total installed capacity (accumulated) and fuel mix in electricity generation in Peninsular Malaysia for years 2000, 2005 and 2010 (forecast). The table 11 TNB Tenaga National Berhad, Malaysian Power Utility Company 12 IPP Independent Power Producers 13 National Energy Balance 2005, Ministry of Energy, Water and Communication. 20

21 clearly shows the percentage of fuel mix contributed by hydroelectric dropped from 9.4% in 2000 to 4.9% in The percentage is expected to drop further to 3.4% in This shows few promoters are willing to invest in hydro power projects. Tariff related issues, technical barriers and issues with financing of hydro power projects have been identified as some of the prime reasons for the decreasing attractiveness of the small hydro project in Malaysia compared to thermal power plants for the private sector. Year Accumulated Installed Capacity (MW) Oil % Coal % Gas % Hydro % Others % Total (GWh) , , , , , ,718 Table B.3 : Accumulated installed capacity and Fuel mix in electricity generation for Peninsular Malaysia ( ) 14 The Economic Planning Unit of Malaysia has acknowledged that the same trend would continue unless suitable measures are taken for promotion of renewable energy projects. The following statement taken from the Ninth Malaysian Plan states The Clean Development Mechanism (CDM) will also be utilised to provide support for the implementation of SREP (Small Renewable Energy Projects 15 ). Though the hydroelectric project has not been an attractive proposition, the project proponent is aware that the barriers could be overcome with the sales of carbon credits once the project gets implemented. The project proponent considered CDM revenue stream during the planning stages. In general, renewable energy projects (including mini-hydro) face long lead times and various obstacles from the pre-development stage up until actual project implementation, especially in securing the relevant licenses/permits, securing financial assistance and contractual agreement for the selling of electricity with the national utility. These uncertainties often extending the time horizon required to achieve financial closure before construction can place. During the lagging period of preinvestment activity, most of the initial assumptions used in assessing a project are prone to change. Thus, project developers have to repeatedly adjust their project evaluation models to determine the projects viability in response to the changes in the assumptions. Most often than not, many developers of renewable energy projects do not survive and their projects abandoned. 14 Ninth Malaysia Plan, , Chapter 19, p , Table 19-4 & Ninth Malaysia Plan, , Chapter 19, p408, paragraph

22 CDM Consideration Process. Initial meeting with CDM consultants (1 st Draft proposal sent to client) 18/06/2007 Contract finalised between I.S. Energy and SV Carbon Sdn. Bhd., CDM 17/04/2008 Consultant Stakeholder meeting 01/07/2008 Impact of CDM Revenues The approval and registration of the 2.8MW Mini Hydro Project as a CDM project activity will assist the project to overcome the associated and related barriers as discussed above in implementation and completion of the project activity; and other company(ies) in Malaysia that decides to embark on to the similar project activity in the future. The benefits arising from successful implementation, completion and registration of the project activity as a CDM project activity by the CDM Executive Board are as follows: The project activity will reduce anthropogenic greenhouse emissions by generating electricity supply via clean energy source; The income derived from the sale of CERs to Annex 1 party will assist to overcome the investment barriers as demonstrated above, and the additional revenue from the sale of CERs will also act as a provision in the event of any unexpected breakdowns; and The investment cost involved for the development of small hydro project is considerably high. In general, this poses difficulties for companies to embark on similar project as 2.8MW. I.S. Energy Mini Hydro Project without the project being registered as a CDM project activity. Therefore, the proposed project activity is additional and not (part of) the baseline scenario as it overcomes the barriers discussed above and can reduce the greenhouse gas emissions. 22

23 B.6. Emission reductions: B.6.1. Explanation of methodological choices: >> The proposed project activity meets the requirements of the simplified baseline methodology category AMS I.D. as discussed earlier in Section B.2. Therefore, in accordance with paragraph 9 of the methodology, the baseline of the project is the kwh produced by the renewable generating unit multiplied by an emission coefficient (measured in kg CO 2 e/kwh) of the national grid calculated in a transparent and conservative manner as: (a) A combined margin (CM), consisting of the combination of operating margin (OM) and build margin (BM) according to the procedures prescribed in the Tool to calculate the emission factor for an electricity system ; OR (b) The weighted average emissions (in kg CO 2 e/kwh) of the current generation mix. The data of the year in which project generation occurs must be used. Option (a) is chosen for this project as the proposed project activity affects both current and future generation mix of the grid. The OM emission factor (EF OM ) and BM emission factor (EF BM ) are calculated and then the CM emission factor (EF y ) will be calculated as the average of EF OM and EF BM. The calculation process will be in accordance with the steps of ACM0002 (Version 6) and the calculation approach on emission factor issued by Pusat Tenaga Malaysia 16. The detailed calculation processes are as follows: Step 1: Calculation of the Operating Margin Emission Factor (EF OM,y ) According to methodology ACM0002, there are four methods of calculating EF OM,y (a) Simple OM, or (b) Simple adjusted OM, or (c) Dispatch data analysis OM, or (d) Average OM. Method (c) is not possible as the data is not readily available from the relevant authorities. Method (d) is also not applicable due to the fact that low-cost/must-run sources constitute less than 50% of the total grid generation. Both methods (a) and (b) are used for the calculation; however, the results obtained were the same. Thus option (a) Simple OM is chosen. Calculation of the Simple Operating Margin The simple OM is calculated as follows: EF OM, simple, y = i, j F i, j, y j COEF GEN j, y i, j 16 Study on Grid-connected Electricity Baselines in Malaysia Year 2005 conducted by Pusat Tenaga Malaysia, January 2008 available at ( 23

24 Where, F i,j,y is the amount of fuel (mass or volume) i consumed by relevant power sources j in year(s) y, j refers to the power sources delivering electricity to the grid not including low-operating cost and must run plants, including imports to the grid, COEF i,j is the CO2 emission coefficient of fuel (tco2/volume) taking into account the carbon content of the fuels used by the relevant power sources j and the percent oxidation of the fuel in year(s) y, and GEN j,y is the electricity (MWh) delivered to the grid by source j. The CO 2 emission coefficient COEF i is obtained from: COEF i = NCV i EF CO2 OXID i NCV i is the net calorific value of the unit of fuel i, OXID i is the oxidation factor of the fuel, EF CO2 is the CO 2 emission per unit of energy of the fuel i. The Simple OM emission factor has been calculated based on the full generation weighted average for the most recent 3 years ( ). The calculations of OM were based on specific individual plant specific data as provided by the Energy Commission. Based on data availability and reliability, the conservative method was adopted to estimate the fuel consumption of electricity generating plants. These 3 years of historical data and the Simple OM are illustrated in Table 7 below: Table 7: Simple Operating Margin for Peninsular Malaysia for 2005 Years Generation (GWh) CO 2 Emission (tonnes) Baselines (t CO 2 /MWh) ,338 52,489, ,566 48,808, ,511 37,833, Average Operating Margin for 3 years (EF OM,y ) Source: Energy Commission, 2005 Step 2: Calculation of the Build Margin Emission Factor (EF BM,y ) According to ACM0002, project participants can choose between two given options for calculating the Build Margin for the project. These include: Option 1, takes an ex ante approach, based on the most recent information available on plants already built, and the sample plants are the five most recently built, or capacity additions 24

25 comprising at least 20% of system generation. Ex-ante refers to the period before the proposed project activity is starting; Option 2, in the 1st crediting period, the Build Margin is calculated ex post for the year in which the actual project generation and associated emission reductions occur, and for subsequent periods, the build margin is calculated ex ante. Option 1 is selected to calculate the EF BM,y for this project using the following formula: EF BM, y = i, m F i, m, y m COEF GEN m, y i, m The Build Margin Emission Factor (EF BM,y ) is calculated as the generation-weighted average emission factor of the 5 most recently built plants in Peninsular Malaysia as tabulated in Table 8. This sample group of power plant capacity must comprise more than 20% of the total system generation, as stipulated in the methodology. In the year 2005, the total system generation is 93,526,000 MWh, inclusive of hydro generating plants. The total output generated by these 5 plants is 33,291,230 MWh, resulting in 36% of the total system generation in Peninsular Malaysia, thus justifying the use of this method. Table 8: Build Margin for Peninsular Malaysia for 2005 Name of Power Plants/ Fuel Types 1. Tuanku Jaafar Power Station/Gas 2. Janamanjung Power Station/Coal 3. SKS Prai Power Station/Gas 4. Perlis Power Station/Gas 5. Panglima Power Station/Gas Year Operation Capacity, MW Total Generation, MWh CO 2 Emission (t CO 2 ) June ,840,870 1,167,523 Sept ,638,010 10,385,486 June ,202, ,846 April ,638,010 6,714,452 March ,972,300 2,024,377 Total 33,291,230 21,177,684 Source: Energy Commission, 2005 The Build Margin for Peninsular Malaysia is calculated as the CO 2 Emissions divided by the total generation i.e. EF BM,y = 21,177,684 / 33,291,230 = tonnes of CO 2 /MWh 25

26 Step 3: Calculation of the Baseline Emission Factor (EF y ) According to ACM0002, the baseline emission factor EF y was calculated as the weighted average of the Operating Margin emission factor (EF OM,y ) and the Build Margin emission factor (EF BM,y ) based on the following formula: The emissions factors of the OM and BM are weighted equally, each 50%, by default i.e. w OM = 0.5 and w BM = 0.5. The final result of the Combined Margin (EF y ) is as follows: EF y = 0.5 (0.592) (0.645) = t CO 2 /MWh Step 4: Calculation of Baseline Emissions (BE y ) The Baseline Emissions (BE y ) are calculated by multiplying the Baseline Emission Factor (EF y ) by annual power generation i.e.: BE y = (EG y EG baseline ) EF y Where: BEy the baseline emissions in year y; EGy the electricity supplied by the project activity to the grid; EGbaseline the baseline electricity supplied to the grid in the case of modified or retrofit facilities; and EFy the emission factor in year y As the project involves the construction of a new hydropower station, EG baseline is zero and the formula can be simplified as: BE y = EG y EF y Step 5: Calculation of Emission Reductions (ER y ) Emission Reductions (ER y ) are calculated using the following formula: ER y = BE y PE y L y Where: ER y emission reductions in year y, BE y baseline emissions in year y, PE y project emissions in year y, L y leakage in year y The project does not involve project emissions because the project utilizes a zero emissions technology and there is no leakage, as the project does not transfer generating equipment from other facilities; i.e. PE y = 0 and L y = 0. Thus, ER y = BE y B.6.2. Data and parameters that are available at validation: 26

27 Data / Parameter: Generation Mix Data unit: GWh Description: Annual electricity generation in TNB by power sources ( ) Source of data used: Electricity Supply Industry in Malaysia, Performance and Statistical Information 2006 ( Value applied: 23,482 - Please refer Appendix 3 Justification of the To be used to demonstrate the applied condition of Simple OM that the average choice of data or rate of electricity generated by low-cost/must-run power sources over the past 5 description of years is less than 50 % of annual total electricity generation of the grid. measurement methods and procedures actually applied : Any comment: Data / Parameter: CEF GRID Data unit: tco 2 e/kwh Description: Baseline emission factor for the Peninsular Malaysia Grid Source of data used: Study on grid connected electricity baseline in Malaysia year 2005, compiled by Malaysian Energy Centre (PTM). Value applied: Justification of the This study uses the CDM Executive Board approved tool to calculate the choice of data or emission factor for an electricity system, description of measurement methods and procedures actually applied : Any comment: B.6.3 Ex-ante calculation of emission reductions: In a given year, the emission reductions realised by the project activity (ER y ) is equal to baseline GHG emissions (BE y ) minus project direct emissions and leakages during the same year: ER y = BE y - PE y - L y The calculations involved in deriving the value for the Baseline Emissions (BE y ) are as detailed out in Section B.6.1. Based on methodology AMS I.D. the project does not involve project emissions because the project utilizes a zero emissions technology and there is no leakage, as the project does not transfer generating equipment from other facilities; i.e. PE y = 0 and L y = 0. Thus, the emission reductions due to the proposed project are equal to the baseline emissions, i.e. ER y = BE y = EG y EF y The project activity is expected to supply 20,849 MWh of electricity to the grid. Hence, the emission reductions are: 27

28 ER y = 20,849 MWh 0.62 t CO 2 /MWh = 12,926 t CO 2 e B.6.4 Summary of the ex-ante estimation of emission reductions: Year Estimation of project emissions (tco 2 e) Estimation of baseline emissions (tco 2 e) Estimation of leakage (tco 2 e) Estimation of overall emissions reductions (tco 2 e) , , , , , , , , , , , , , ,926 Total (tonnes of CO 2 e) 0 90, ,482 Table B.2 : Emission Reduction where Year 1 starts from 1 st May 2009 until 31 st arch B.7 Application of a monitoring methodology and description of the monitoring plan: B.7.1 Data and parameters monitored: (Copy this table for each data and parameter) Data / Parameter: Data unit: Description: Source of data to be used: Value of data Description of measurement methods and procedures to be applied: EG y MWh Electricity supplied by the project activity to TNB Grid Direct reading from the kwh meter 20,849 (based on 80% load factor of the 2.8MW net generation capacity of the mini hydro plant) The measurement will be a power meter continuously measuring the transport of electricity. The project owner will appoint the energy plant manager to record the kwh supply of electricity to the grid system monthly. The readings will follow the same periods as the billing period in the Renewable Energy Power Purchase Agreement (REPPA) under which electricity is supplied to the grid, meaning that the readings will be for each calendar month. According to the REPPA the project proponent will keep records on electricity supply to the grid system, properly stored and maintained at its offices at the site, 28

29 for a minimum of seven years and for such additional time period as may be required by law or by Government authority having jurisdiction over the project owner and project activity. QA/QC procedures to be applied: Any comment: The project owner and the electricity company i.e. TNB will jointly read the main metering equipment at the Interconnection Point within five Business Days after the end of each calendar month. The data for power sales are part of a commercial agreement with the power company and will thus be cross checked by the parties to the REPPA. B.7.2 Description of the monitoring plan: In accordance with the small-scale methodology AMS I.D. the monitoring shall consist of metering the electricity generated by the renewable technology. This monitoring plan will set out a number of monitoring tasks in order to ensure that all aspects of projected greenhouse gas (GHG) emission reductions for the proposed project are controlled and reported. This requires an on-going monitoring of the project activity to ensure performance according to its design and that claimed Certified Emission Reductions (CERs) are actually achieved. The monitoring plan of the proposed project is a guidance document that provides the set of procedures for preparing key project indicators, tracking and monitoring the impacts of the proposed project. The monitoring plan will be used throughout the defined crediting period for the project to determine and provide documentation of GHG emission impacts from the proposed project. This monitoring plan fulfils the requirement set out by the Kyoto Protocol that emission reductions projects under the CDM have real, measurable and long-term benefits and that the reductions in emissions are additional to any that would occur in the absence of the certified project activity. Key definitions The monitoring plan will use the following definitions of monitoring and verification. Monitoring: The systematic surveillance of the project s performance by measuring and recording of performance-related indicators relevant in the context of GHG emission reductions. Verification: The periodic ex-post auditing of monitoring results, the assessment of achieved emission reductions and of the project s continued conformance with all relevant project criteria by a selected DOE. The monitoring plan provides the requirements and instructions for: 1. Establishing and maintaining the appropriate monitoring systems for electricity generated by the project; 2. Quality control of the measurements; 3. Procedures for the periodic calculation of GHG emission reductions; 4. Assigning monitoring responsibilities to personnel; 5. Data storage and filing system; 6. Preparing for the requirements of an independent, third party auditor or verifier. The engineer is in charge of the implementation of this Monitoring Plan and summarizing the results. The 29

30 Plant Manager (Operations/Project) of the AMDB Perting Mini Hydro Project will check the results to ensure the quality and accuracy of the data monitored.the monthly summary will be prepared by the Manager and calculate the emission reductions of the project activity and develop reports with the support from their CDM consultant. Figure 1: Management structure to monitor emission reductions Support by CDM Consultant (YTL SV Carbon) Calibration of meters & metering The metering equipment will be properly calibrated and checked annually for accuracy according to electrical meter specification guide by the project proponent and the calibration report shall be provided to TNB for verification. Monitoring The proposed project activity adopts the ex-ante calculation of emission factor of the grid; thus only the electricity supplied by the project activity to the grid (EG y ) needs to be monitored during the crediting period. According to REPPA entered into between the project proponent and TNB, the project proponent keep records on electricity supply to the grid system, properly stored and maintained at its offices at the site, for a minimum of seven years and for such additional time period as may be required by law or by Government authority having jurisdiction over the project proponent and project activity. The project proponent and the electricity company i.e. TNB will jointly read the main metering equipment at the interconnection point within five business days after the end of each calendar month. Quality assurance and quality control The quality assurance and quality control procedures for recording, maintaining and archiving data shall 30