GHG Accounting Guidance Note Grid Connected Wind, Solar, Run-of- River Hydro, Small Hydro 1 and Geothermal Generation Investment Projects

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1 GHG Accounting Guidance Note Grid Connected Wind, Solar, Run-of- River Hydro, Small Hydro 1 and Geothermal Generation Investment Projects 1 Less than 10 MW IFC CLIMATE BUSINESS GROUP SEPTEMBER 2011

2 Introduction The following is an overview guidance for IFC investment staff to conduct greenhouse gas (GHG) emission reduction calculations for renewable energy projects in grid connected wind, solar, hydro, and geothermal generation. For other renewable energy (RE) projects (biomass, large hydro, geothermal, etc), please see additional guidance notes from CBGSM. Such calculations are required in order to consider the project as mitigation or climate related and will feed into the climate-related tracking system required by management. 1 1 Previously called RE/EE tracking. KEY CONSIDERATIONS 1) This methodology is subject to refinement and expansion based on testing and implementation feedback, please visit our website for the latest version of guidance. See contact information at the bottom for more information and related questions. 2) This methodology is to be superseded by any externally accepted GHG calculation qualified for generating certified and/or verified carbon credits by an internationally recognized third party, such as the UNFCCC s Clean Development Mechanism (CDM) Executive Board. If approved as generating carbon credits, please upload the Project Design Document (PDD, in the case of CDM), or equivalent, as per the instructions in the Reporting section of the guidance note. Please note that a third party methodology must be followed in its entirety and any partial application of the methodology and assumptions is not acceptable. 3) Scopes: Net GHG calculations require inclusion of some degree of GHG lifecycle analysis (LCA), and all significant changes in GHG emissions affected by the project, regardless of ownership, are considered, per the guidelines herein. This is defined as partial lifecycle analysis in this methodology. 4) Boundary: IFC investments can often include multiple projects and facilities, both RE-related and non-re, and the gross emissions calculation will typically capture all project components. However, for the purposes of GHG reduction calculations, project boundaries are limited to the impacts

3 tco2e/mwh associated with the RE portion of investments only. 1 This means that all changes in GHG emissions resulting from the RE portion of the project, regardless of ownership, need to be captured, over and beyond the RE facility covered by the project. 5) Conservativeness is to be followed in all calculations to address uncertainty. Given ex ante calculations often require some level of assumption, staff should assume the project options and emission factors resulting in the lowest GHG reduction in order to not overstate project GHG emissions reduced. When addressing any uncertainty, staff should also detail how conservativeness is being followed in their submitted calculation. 2 The GHG emission reduction methodology is illustrated in the graphic below: Baseline (Country) Project Emissions (PE) Additionality / GHGs emissions reduced 1 Anything non-re related is considered business-as-usual, does not result in any change in GHG emissions, and excluded from the GHG reduction calculation. These emissions are captured separately by IFC gross portfolio reporting. 2 As an example, consider an IFC project scenario displacing coal as a fuel where uncertainty exists if the new fuel will eventually be natural gas or liquefied petroleum gas (LPG), based on future market pricing. The GHG reduction calculation, in this case, would assume that LPG will be the fuel substituting coal in order to follow conservativeness, as this results in the lowest GHG reduction (natural gas is less GHGintensive than LPG when combusted) and is least likely to overstate GHG emission reductions.

4 Method 1. IFC PROJECT EMISSIONS (PE 1 ) Calculate project emissions from any sources of GHG emissions that will change as a result of the implementation of the project. 1 A. UPSTREAM EMISSIONS: Upstream GHG emission increases can be any of the following and should be treated as described below: Upstream manufacturing of the equipment and machinery installed or used onsite by the project are generally excluded from the calculation. The underlying assumption is that the scale of IFC RE projects will not materially change these upstream manufacturing emissions. 2 A different reasoning applies if the project is intended to achieve material market transformation, please refer to the Advisory Services (AS, forthcoming) methodology for such cases. GHG emissions related to the construction of the RE generation site are excluded from upstream emissions. 3 B. OPERATIONAL EMISSIONS: Calculate the post-ifc operational emissions for the RE project. This is already an IFC GHG accounting requirement as operational emissions are mandated in idesk prior to project approval. Operational emissions are always calculated in the IFC CEET in the IFC Gross Project Emissions worksheet. Ensure to consider the following: Mobile fuel combustion in maintenance and staff vehicles Stationary fuel combustion in back-up power or other Electricity purchases from grid Other emission sources C. LEAKAGE: Leakage is a change in GHG emissions beyond the project boundary. It can result from displacing a source of GHG emissions off-site or causing an increase in GHG emissions at a third party operation. 1 This purpose of this methodology is to identify GHG emission sources that will change between the baseline and project scenarios due to the project activity. Emission sources that remain constant between these scenarios are therefore excluded from the calculation. 2 The implementation (or non-implementation as in the baseline scenario) of the IFC project is assumed to not affect upstream production levels and the resulting emissions of this equipment and machinery. 3 Construction emissions can be large in some cases (e.g. large hydro). However, if these construction emissions were annualized over the project life, they would constitute less than 1% of the GHG reduction calculation and, therefore, are excluded from the calculation.

5 Use the CEET to compute any form of leakage or change in GHG emissions that occur beyond the project boundary as a result of the project. For wind, solar, run-of-river hydro, small hydro, and geothermal, leakage is likely to be zero in most cases due to their lower impact and limited effect on nearby operations and markets. D. DOWNSTREAM EMISSIONS: For these projects, downstream GHG emissions are generally excluded, per the following: GHG emissions related to transmission and distribution beyond the project boundary are comparable between the baseline and project scenario and, therefore, are excluded GHG emissions resulting from third party consumption of electricity generated by the RE project are excluded. 4 The underlying assumption is that the RE project will not materially affect third party behavior as electricity would alternatively be supplied by a equally or more GHG-intensive source in the absence of the IFC RE project E. DISPOSAL: For these project types, the decommissioning and disposal of the RE facility itself is generally neglected if any of the following conditions apply: disposal GHG emissions are negligible; 5 comparable between the baseline scenario and the project scenario; 6 and/or not significant given IFC project timelines. 7 Where none of these cases apply, average GHG emissions associated with the machinery, equipment, and product being disposed should be calculated and included as GHG emissions. The Project Emissions equation is: Project Emissions (PE 1 ) 8 = Upstream Emissions+ Construction Emissions + Operational Emissions + Leakage Emissions + Downstream Emissions + Disposal Emissions 2. BASELINE EMISSIONS The baseline activity displaced by the project is the electricity that could have been delivered by the grid and which is now being delivered by the project. 9 The grid emission factor to be used is the 4 For example, electricity may be consumed in a GHG-intensive industry such as a cement or chemicals plant. 5 If the disposed material has a low degradable organic carbon content and/or the disposal process itself does not generate significant GHG emissions (e.g. not combusted or requiring chemical processing). 6 If the disposal of materials in the IFC project generates the same or lower GHG emissions than equipment and materials in the baseline scenario, then disposal GHG emissions can be neglected. As an example, disposal of a wind farm would generate the same or less GHG emissions than the disposal of a grid-connected power plant. 7 If any disposal GHG emissions were annualized over the project life, they would constitute less than 1% of the GHG reduction calculation and, therefore, are neglected. 8 Units are in tonnes of CO2e per year or tco2e/yr. 9 The baseline is the average country grid factor (GHG emissions per kwh generated) as it is assumed that any RE generation offsets the need for electricity being supplied by additional generation capacity in the grid as a whole. While other methodologies may establish a baseline based on only the fossil fuel portion of the national

6 International Energy Agency (IEA) national grid average CO2 emissions per kwh from electricity and heat generation. 10 To find these IEA grid factors, always refer to the latest version of the IFC Carbon Emissions Estimator Tool (CEET) for the National All Fuels Average grid factor (tco2e/kwh), as illustrated in the example below: 3. GHG REDUCTION: Calculate the GHG emission reduction by subtracting the IFC Project Emissions (PE 1 ) from the Baseline Scenario Emissions: GHG Reduction = Baseline Emissions - Project Emissions (PE 1 ) As noted earlier, this can be done using the CEET for the first year at full production for a project, as a representative year. Annual production variation and longer periods of construction should be captured by year, as noted in the next section. 4. TIMELINE: The timeline for the project GHG emission reduction calculation starts at the Commitment Stage of the IFC Project Cycle and is limited to the term of IFC financing and not beyond. For equity and other financial products with indefinite timelines, a standardized timeline of 10 years should be grid (where additional capacity is likely most available) or a baseline based on recently constructed power plants in the region, the uncertainty between these options leads us to select the average national grid emissions as a matter of conservativeness as it is the least likely to overestimate GHG emission reductions by RE projects. 10 Source: CO2 Emissions from Fuel Combustion Highlights (2010 Edition), OECD/IEA, Paris, 2010, page Download at:

7 assumed to be conservative. 11 impacts during the timeline. 12 Account for all GHG emission reductions and other associated 5. ILLUSTRATIVE EXAMPLE: In the example below, the difference between the baseline and the project emissions (the GHG reduction) is illustrated: Assumptions: 1. Project is a 50MW wind power project and assumed to generate 100,000 MWh per year. 2. GHG project emissions are a estimated at 3,000 tco2e/yr due to a backup diesel generator and mobile vehicles. 3. Baseline emissions to produce 350 GWh in Argentina equals 123,121 tco2e (per the CEET) 4. Loan term is equal to 7 years with a one year grace period. 5. Upstream, downstream, leakage, and disposal GHG emissions are assumed to be zero. GHG Abatement Timeline yr-1 yr-2 yr-3 yr-4 yr-5 yr-6 yr-7 yr-8 yr-9 yr-10 (tco2e) (tco2e) (tco2e) (tco2e) (tco2e) (tco2e) (tco2e) (tco2e) (tco2e) (tco2e) Project Emissions 0 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 Construction Operational Emissions 0 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 Baseline 0 123, , , , , , , , ,121 GHGs Reduced 0 (120,121) (120,121) (120,121) (120,121) (120,121) (120,121) (120,121) (120,121) (120,121) Per the above example, compute the total GHG emission reduction as well as the annual average GHG emission reduction over the IFC project. The total GHG emission reduction over the 7 year timeline is 720,726 tco2e and, therefore, the total annual average GHG reduction for this IFC project is 102,961 tco2e/yr (720,726 tco2e divided by 7years). 6. REPORTING: Please use the GHG Emission Reduction Calculation Template 13 to record GHG reduction calculations and upload it to the project's idesk GHG Emissions tab, under the "attach" section. 11 Beyond IFC financing, implementation assistance, and supervision, we have no assurance that any GHG reductions are actually taking place. This is consistent with IFC s gross emissions accounting methodology and is also consistent with internationally accepted methodologies, such as CDM, where one-time net calculations do not extend beyond 10 years. 12 Grace periods and other operational delays before the project is implemented show up as the baseline being equal to the project scenario (GHG reduction equal to zero) as anything before implementation is business-asusual. 13

8 This is to support any project GHG reduction claims and is required for any project that is to be considered "climate-related" for the purposes of climate-related tracking. The CEET is to be used to compare the Project Emissions (in the IFC Gross Project Emissions worksheet) to the Baseline Emissions (in the Alternate Project Emissions worksheet), illustrating variations between the two scenarios. While the CEET will not capture annual variations, a representative year will suffice for peer review.

9 IFC Climate Business Group 2121 Pennsylvania Avenue, NW Washington, DC Lucas Broussard Sabin Basnyat