Bundling small-scale energy efficiency projects

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1 Bundling small-scale energy efficiency projects Issue Paper Introduction Energy efficiency projects are characterised by a large variety of size in terms of reduction of energy inputs and emissions Whereas supply-side energy efficiency projects, such as refurbishments of power plants or improvements of heating plants, tend to be larger both in investment and in reduction effects, energy efficiency projects on the demand side mainly generate only limited effects in terms of quantity of emission reductions due to their size. UNIDO experience of energy efficiency project in industry 1 shows that improving systems efficiency does not necessarily involve investment in expensive new technologies with long paybacks. However, the techniques and procedures for identifying and quantifying potential energy savings are complex, requiring information on a wide range of technical subjects as well as knowledge and skills acquired through extensive experience and high levels of specialization. Projects addressing small-scale energy efficiency improvements could deliver considerable contribution to sustainable development and productivity growth in industry. However, despite these potential benefits, these projects could be discouraged because of the relatively high transaction costs. Because of technical complexities in project identification and high transaction costs, energy efficiency projects currently represent only a negligible share in the national CDM project portfolios that are currently undergoing development and screening 2. Some examples to illustrate this: A project that improves the pumping system s effectiveness by applying proper pumps and adding a Variable Frequency Drives (VFD) to the system reduces annual electricity consumption by 1,060 MWh. Carbon savings of this project will be in the order of 1,000 t of CO 2 per year assuming saved electricity is coal based 3. In a cardboard plant, the existing compressor station (installed capacity 430 kw) is replaced by new compressors with increased efficiency (installed capacity 265 kw). Yearly electricity consumption is reduced by 570 MWh. This gives a CO 2 emission reduction of about 500 tons per year. 4 1 China Motor System Energy Conservation Project FI/CPR/00/122 2 UNIDO 2003, CDM Project Portfolio for Brazil GLO/99/HO6, Vienna China Motor System Energy Conservation Project FI/CPR/00/122 4 Energy efficiency project of a private company in a JI country.

2 The JI and CDM project cycle When projects shall be put forward as Joint Implementation (JI) or Clean Development Mechanism (CDM) 5 projects, a certain procedure is necessary to generate emission reductions, which can then be transferred to carbon purchasers. Following the agreements reached in Marrakesh, the project cycle is in many phases very determined and requires the elaboration of specific documents. The documents and procedures involved in project preparation are very extensive in order to ensure additionality of emission reductions. The extra costs that are inevitably encured in this process discourage small scale projects, which as a result, stand a small chance of implementation under the CDM or JI. The project cycle, both for JI and CDM projects, is illustrated in Graph 1. The main steps in the development of a JI or CDM project, which in most cases also require the involvement of external partners at certain costs, are: Project Design Document (PDD): This is the main document in the creation of carbon revenues. It describes the project, analyses the baseline scenario, provides arguments for the additionality of the project and gives an estimate on the emission reductions generated. The PDD includes the Baseline Study and the Monitoring Plan, central documents in the entire project cycle. Validation: Once the PDD including the Baseline Study and the Monitoring Plan are prepared, these document are validated by an external third party. This validation checks, whether the assumptions in the documents are accurate and the expected emission reduction is likely to happen. Monitoring, verification, certification: Once the project is implemented and operating, the performance of the project and the real emission reductions generated will be monitored. The generation of emission reductions will be verified and in the case of CDM also certified. 5 There will be a special methodology for small-scale projects under CDM. These rules for small-scale CDM projects have been drafted, but no decision has been reached up to now. Small-scale CDM projects will not be considered in this Issue Paper.

3 JI Project Cycle Check eligibility and potential CDM Project Cycle Check eligibility and potential Project Design Document (PDD) Project Design Document (PDD) Approval at national level (host country, investor country) Approval at national level (host country, investor country) Validation Validation Registration with CDM Executive Board Project implementation Project implementation Monitoring and verification Monitoring, verification and certification Transfer of ERUs CERs issued and transferred Graph 1: Project cycle for JI and CDM projects

4 Transaction costs As mentioned above, a number of the steps in the JI and CDM project cycle require external experts and lead to certain costs. Validation of the Project Design Documents and verification (in CDM projects also certification) of the emission reductions achieved has to be performed by independent entities. For the other steps in the project cycle, such as developing the Baseline Study or the Monitoring Plan, external support is not required, but will be a valued contribution to achieve the standards necessary to pass validation. Also the project type, the host country, and technologies involved will have an influence, whether more or less support is necessary. All in all, certain transaction costs (baseline analysis, preparation of monitoring plan, contract negotiation, achievement of host country s acceptance, validation, registration etc.) will arise. An analysis for the Austrian JI/CDM Programme showed that these costs will be in a range of about 30,000 to 100,000 per project, depending mainly on project type and framework conditions in the host country It is typical that these costs are almost independent on the size of the project. So smaller projects have the disadvantage that a bigger share of the revenues from the sale of emission reductions is eaten up by transaction costs. Bundling as a strategy for reducing transaction costs As laid down in the introduction, typical demand side energy efficiency projects are generally small in terms of emission reductions. One strategy to overcome this disadvantage is to bundle a number of energy efficiency projects. In order to be able to bundle, a number of requirements has to be fulfilled: Projects should be of the same type: The advantage of bundling is that the documents to be prepared (Project Design Document, Baseline Study, ) can be used for more than one project. This requires that projects are of the same type. Whereas it is easy to bundle a number of motor efficiency projects in different companies, it will be difficult to combine a motor efficiency project with a steam efficiency project. The main reason is that for a specific project type a certain approach is chosen in the Baseline Study and the Monitoring Plan. So it is possible to aggregate smaller sub-projects in different sectors (e.g. motor, industrial steam plants, thermal manufacturing processes), to projects resulting in a generation of carbon assets of sufficient amount to improve cost-efficiency of the generation of emission reductions. Projects should be in the same geographic area: Projects can only be bundled, if they are in the same country. Within a country it is preferred to have the projects within a geographic area, as framework conditions will be similar. Projects should be in a similar development stage: The JI or CDM project cycle has to be integrated into the conventional project cycle for the development of an investment project. If projects are in different stages (e.g. project idea, feasibility study, detailed planning), it will be difficult to synchronize the JI/CDM project cycle. Projects have to be aggregated by an institution: Bundling of project works, when one institution/company is aggregating the different sub-projects. The task of this institution is to act as a single contact point for the carbon purchaser, which is

5 coordinating the preparation of the documents, the implementation of the projects and the monitoring of the emission reductions. This institution will also have the main responsibility against the carbon purchaser for the performance and the accurate implementation of the different projects. Open issues for discussion Is it possible to generate a number of sub-projects within the same project type, the same area and a similar development stage to bundle them to a sizeable JI or CDM project? Can institutions take over the responsibilities for the preparation, implementation and operation of a number of sub-projects in a project bundle? Which strategies do exist to reduce costs for the development of the requested JI and CDM documents further? Can monitoring for a number of sub-projects be organised in a way, which keeps costs at a minimum? Can ESCOs or other intermediaries undertake the task of bundling energy efficiency projects and aggregating them into a larger size CDM/JI projects? What should be done to enable ESCOs to undertake this task?