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Tiêu đề Wind Power Projects In The CDM: Methodologies And Tools For Baselines, Carbon Financing And Sustainability Analysis
Tác giả Lasse Ringius, Poul Erik Grohnheit, Lars Henrik Nielsen, Anton-Louis Olivier, Jyoti Painuly, Arturo Villavicencio
Trường học Risø National Laboratory
Thể loại thesis
Năm xuất bản 2002
Thành phố Roskilde
Định dạng
Số trang 116
Dung lượng 672,29 KB

Cấu trúc

  • 1.1 Background (7)
  • 1.2 Implications of Baseline Methodologies in the Marrakesh Accords (8)
    • 1.2.1 Which Baseline Methodology is Preferable? (9)
  • 1.3 Carbon Financing (9)
    • 1.3.1 Implications of Different CO 2 -Prices (10)
    • 1.3.2 Implications of Different Baselines (10)
  • 1.4 Sustainability and Socio-Economic Benefits (11)
  • 1. INTRODUCTION (13)
  • 2. THE UNFCCC AND THE CDM (15)
    • 2.1 Additionality (15)
    • 2.2 Crediting Periods (18)
    • 2.3 Adaptation Surcharge and Administrative Expenses of the CDM (19)
    • 2.4 Supplementarity (19)
    • 2.5 Exemptions for Small-Scale CDM Projects (20)
    • 2.6 Project Boundary and Emissions Leakage (21)
    • 2.7 The CDM Project Cycle (21)
      • 2.7.1 Project Development/Project Design Phase (22)
      • 2.7.2 Validation and Registration (22)
      • 2.7.3 Monitoring (23)
      • 2.7.4 Verification and Certification (23)
  • 3. BASELINES FOR WIND POWER PROJECTS (25)
    • 3.1 Introduction (25)
    • 3.2 Baselines (25)
    • 3.3 Project-Specific and Standardized Baselines (27)
      • 3.3.1 Project-Specific Baselines (27)
      • 3.3.2 Standardized Baselines (28)
      • 3.3.3 Fixed vs. Revised and Static vs. Dynamic Baselines (29)
    • 3.4 Internationally Approved Baseline Approaches and Concepts (30)
  • 4. STANDARDIZED BASELINES FOR ZAFARANA (31)
    • 4.1 CER Revenues (35)
    • 4.2 Which Baseline to Select? (36)
    • 4.3 Conclusions (37)
  • 5. PROJECT-SPECIFIC BASELINES FOR ZAFARANA (39)
    • 5.1 Introduction (39)
    • 5.2 Static and Dynamic Baselines (39)
    • 5.3 Baseline Studies on the Egyptian Power System (40)
    • 5.4 Static Baseline Study (41)
    • 5.5 Wind Power Integration and CO 2 Reduction Approach (42)
    • 5.6 Basic Assumptions (43)
    • 5.7 Electricity Demand, Hydro- and Wind Power Profiles (44)
    • 5.8 Wind Power and Substitution of Thermal Power (44)
    • 5.9 Baseline Electricity Supply System (45)
    • 5.10 CO 2 Reduction by Wind Power in Egypt (47)
    • 5.11 Dynamic Baseline Study 1999-2010 (49)
      • 5.11.1 Assumptions and Results for 2010 (49)
      • 5.11.2 Results of Dynamic Baseline 1999-2010 (53)
    • 5.12 Comparison of Results from Static and Dynamic Baselines (54)
  • 6. CARBON FINANCING: THE ZAFARANA EXAMPLE (55)
    • 6.1 Introduction (55)
    • 6.2 ADDITIONALITY ISSUES (56)
      • 6.2.1 Financial Additionality (56)
      • 6.2.2 Programme Additionality (56)
      • 6.3.1 Example: Zafarana (58)
    • 6.4 Detailed CDM Financial Assessment (60)
      • 6.4.1 The Financial Model (60)
      • 6.4.2 Financial Modeling Assumptions and Inputs (61)
      • 6.4.3 CER Income Stream Valuation (61)
      • 6.4.4 CER Ownership (62)
      • 6.4.5 CDM Transaction Costs (63)
      • 6.4.6 Crediting Period (64)
    • 6.5 Results of Financial Modeling (64)
      • 6.5.1 Baselines (65)
    • 6.6 Conclusions (66)
      • 6.6.1 Business as Usual Compared to the CDM (66)
      • 6.6.2 Implications of Different CO 2 -Prices (66)
      • 6.6.3 Implications of Different Baselines (67)
      • 6.6.4 Risk Mitigation through CO 2 Revenues (67)
    • 6.7. Summary (67)
  • APPENDIX 1. FINANCIAL SPREADSHEET MODEL (69)
  • APPENDIX 2. REVENUES FROM WIND AND ELECTRICITY MARKETS (73)
    • 7. SUSTAINABILITY ASSESSMENT OF ZAFARANA (81)
      • 7.1 Introduction (81)
      • 7.2 The Approach (81)
      • 7.3 Indicators of Sustainability (82)
      • 7.4 Performance of the Zafarana Project (84)
        • 7.4.1 Viability of the Zafarana project (84)
      • 7.5. Contribution of the Project to the Sustainability of the Energy-Economic System (89)
      • 7.6 Multicriteria Assessment (91)
      • 7.7 Conclusions (95)
  • APPENDIX 3. QUANTIFYING SOCIAL BENEFITS AND COSTS OF CDM (97)
  • ANNEX 1. (104)

Nội dung

Background

The Clean Development Mechanism (CDM) under the Kyoto Protocol encourages industrialized nations to invest in renewable energy technologies, such as wind power, to reduce greenhouse gas (GHG) emissions in developing countries By participating in the CDM, investors can earn credits that count towards their own emission reduction targets, while also engaging in the growing global carbon offsets market for trading emission reductions.

To achieve credible emission reductions, it is essential to demonstrate that CDM projects lower emissions per unit of output (measured in tonnes of CO2 equivalents per MWh) below the baseline scenario without the project The GHG emission reductions from a CDM project are calculated by taking the difference between the baseline emission factor and the project's energy production emissions, which are typically minimal These reductions represent the GHG emissions avoided by implementing renewable energy alternatives that replace conventional power generation from coal, oil, or natural gas plants operating under business-as-usual conditions.

Wind power has the potential to become a significant source of renewable energy in developing countries, driven by capital costs and the competitiveness of alternative electricity generation The revenue from selling greenhouse gas (GHG) emission reductions can enhance an investor's total income from wind projects, making wind power more competitive against traditional energy sources However, the effectiveness of the Clean Development Mechanism (CDM) in promoting wind energy adoption will largely depend on the relationship between wind energy costs, GHG offset prices, and the capital expenses of other electricity generation options.

This report serves as a comprehensive guide for project developers, investors, lenders, and CDM host countries engaged in wind power projects under the CDM framework It focuses on critical aspects such as baseline development, carbon financing, and environmental sustainability, while not delving into standard wind power project assessments Additionally, the report evaluates, compares, and recommends methodologies and approaches for baseline development, carbon financing analysis, social costing, and environmental sustainability analysis.

This article analyzes the methodologies and approaches used in the context of Africa's largest wind farm, the 60 MW facility in Zafarana, Egypt, treating it as a hypothetical Clean Development Mechanism (CDM) wind power project.

Recent analytical experience in baseline development is primarily derived from demonstration and trial projects within the Activities Implemented Jointly (AIJ) Pilot Phase, where maximizing emission reductions and minimizing costs were not the main objectives However, with the implementation of the Clean Development Mechanism (CDM), there will be increased pressure to develop low-cost, practical, and accurate baseline methodologies.

Implications of Baseline Methodologies in the Marrakesh Accords

Which Baseline Methodology is Preferable?

Investors and host countries often prefer baseline methodologies that yield the highest emission rates and maximize offset revenue However, project developers must also consider additional factors when selecting from various eligible baseline methodologies Key considerations include the environmental impact, regulatory compliance, and long-term sustainability of the chosen approach.

• Ability to take into account specific circumstances;

• Ease of monitoring and verification

Combining various critical issues in baseline methodology can be challenging, particularly in addressing both operationalizability and the specific circumstances of individual countries Additionally, transaction costs must be considered, as they can differ significantly across these issues It is also essential to ensure consistency with internationally recognized rules for baseline development under the Clean Development Mechanism (CDM).

The study reveals that the project-specific assessment utilizing ES 3-model simulations is the most expensive baseline methodology, yet it fails to provide a more appealing emission factor or baseline for emission reductions Furthermore, this approach requires extensive data and a longer development timeline, raising concerns about the transparency and replicability of the baseline established through simulations.

At the same time, some of the standardized baseline approaches outlined in the Marrakesh Accords seem unable to produce a reasonably accurate baseline for the electric power sector

The Marrakesh Accords outline baseline methods currently being tested and refined through various studies and projects In addition, alternative baseline methodologies and combinations, such as the combined margin approach, are under development This approach assesses the impact of new projects on emissions by considering both the operation of existing and future power plants (operating margin) and the timing of new power plant construction (built margin) Chapter 5 analyzes Zafarana's influence on the operation of generation plants in Egypt, while the options discussed in chapter 4, including the "economic attractive course of action" and "similar projects undertaken in the previous five years," can serve as proxy build margin approaches.

Carbon Financing

Implications of Different CO 2 -Prices

The discounted net present value of the Certified Emission Reductions (CERs) can account for 5-30% of a project's capital cost, depending on the CO2 price and baseline scenario Even at the lower end of this range, this value is substantial and can significantly impact the project's financial viability and structure.

A five-fold increase in the value of Certified Emission Reductions (CERs) from US$2 to US$10 boosts the project's return on equity by approximately 8% This suggests that the project's financing is relatively stable and not highly sensitive to fluctuations in CO2 prices, indicating that once financing is secured, minor changes in CER values are unlikely to significantly impact the project's financial outcomes.

Implications of Different Baselines

The analysis reveals a significant 20% variance between the best (181,465 tCO2/annum) and worst (147,513 tCO2/annum) baseline scenarios, leading to an increase in the project's return on equity ranging from 0.4% (US$2) to 1.66% (US$10) This indicates that the project's financial performance is relatively stable against baseline changes Consequently, project developers should not solely focus on maximizing emission reductions when selecting baseline scenarios; they must also consider factors such as the ease of establishing and verifying the baseline, along with the associated certification costs, which can differ based on the chosen baseline.

To enhance the income of a wind project, two strategies can be employed: lowering wind energy costs or securing higher electricity tariffs While these methods operate independently, their impact varies significantly Increasing electricity tariffs can greatly improve project economics, whereas minor reductions in production costs may have limited effects In 1986-87, Egypt initiated an economic adjustment program to tackle low energy prices by reforming a costly subsidy policy that discouraged price increases and promoted higher energy consumption Recently, this subsidy policy was abandoned for political and social reasons, making a reversal unlikely in the near future.

5 For instance, petroleum products subsidies reached US$ 3.5 billion in 1985 The Arab Republic of Egypt:

Initial National Communication on Climate Change—Prepared for the United Nations Framework

Convention on Climate Change (Egyptian Environmental Affairs Agency, June 1999), p 31 More

Since the early 1970s, the wind industry in Europe and North America has thrived due to green-electricity schemes that allow wind energy to be sold at prices above market rates, aimed at promoting renewable energy development Key drivers for these initiatives include environmental concerns, such as acid rain and global warming, alongside energy security issues stemming from the 1970s energy crisis Although Egypt could benefit from a potential EU-Mediterranean trade area that includes renewable energy values, the establishment of such a market appears unlikely in the near future, and Egypt has no immediate plans to create a domestic green electricity market.

In Egypt, the cost of generating electricity from natural gas is currently lower than that from wind energy, making gas-fired power plants the favored choice However, if domestic gas prices rise due to Egypt's potential entry into the European gas market, the cost of electricity from gas plants will increase, enhancing the competitiveness of wind power.

1.3.3 Risk Mitigation through CO 2 Revenues

Securing income from selling creditable emission reductions (CERs) from the Zafarana project will enhance its financial stability by providing a separate revenue stream from electricity sales This diversification reduces overall financial risk and lowers the project's cost of capital Additionally, since CERs are valued and sold in OECD currencies like US dollars or Euros, this income is insulated from typical currency risks faced by developing countries, unlike power generated from a CDM wind park, which is usually sold in local currency and exposed to such risks.

Sustainability and Socio-Economic Benefits

The Zafarana project's sustainability outlook is promising, with all viability indicators, except for cost-effectiveness, indicating favorable conditions for success The project aligns with national development priorities, has low risks of economic and technical obsolescence, and poses no significant challenges for grid integration Additionally, there are sufficient human and institutional resources, along with local expertise, to ensure efficient management and operation of the project.

Egyptian authorities believe that wind technology will significantly contribute to broader development objectives beyond mere techno-economic factors While the Zafarana project’s impact on the energy system's sustainability and the overall economy may be limited due to its size, its significance extends beyond technical aspects It represents a crucial step towards creating more environmentally friendly and diversified energy systems, with wind power playing a vital role in this transition.

Developing countries are unlikely to establish green energy markets in the near future, although some transitional economies like Poland have made limited progress in introducing green electricity markets The project in question has successfully met resilience, technological diversification, and environmental protection standards By increasing wind power capacity in the energy supply, the system's vulnerability to unforeseen events and fluctuations in hydrology and oil prices can be reduced Additionally, wind technology has the potential to stimulate industrial development, enhancing the diversity of the national technological landscape Furthermore, given its location, any negative environmental impacts, such as land use, noise, and visual disturbances, are expected to be minimal.

INTRODUCTION

Since the late 1980s, international negotiations have aimed to safeguard the global climate system from the adverse effects of increasing human-induced greenhouse gas emissions A significant milestone in these efforts was the signing of the United Nations Framework Convention on Climate Change (UNFCCC) during the United Nations Conference on Environment and Development in Rio de Janeiro.

In 1992, the United Nations Framework Convention on Climate Change (UNFCCC) was established, leading to the negotiation of the Kyoto Protocol in 1997 Set to take effect in 2003, the Kyoto Protocol introduces the Clean Development Mechanism (CDM), a significant and innovative tool designed to foster climate cooperation between industrialized and developing nations.

This document aims to highlight the opportunities presented by the Clean Development Mechanism (CDM) and its implications for wind power investments in developing countries With the Kyoto Protocol and CDM likely to be implemented soon, there remains a significant lack of awareness among the wind power industry, potential investors from industrialized nations, lenders, and developing country hosts regarding the CDM and its financial benefits for renewable energy investments.

This guidance document is designed for project developers, investors, lenders, and CDM host countries involved in wind power projects with a minimum capacity of 15 MW, specifically addressing issues relevant to the Kyoto Protocol and the Clean Development Mechanism (CDM) Unlike conventional feasibility studies, it explores critical aspects of baseline development methodologies through the lens of a real-world example: the 60 MW wind farm in Zafarana, Egypt, the largest in Africa While the Zafarana wind park is utilized for illustrative purposes, the findings presented do not represent the actual conditions of the facility.

Zafarana was chosen as a case example for a CDM wind project due to several practical reasons Firstly, this selection allows the use of the ES 3-model, a simulation tool developed by the Systems Analysis Department at Risø National Laboratory, which analyzes the system implications of the wind park using detailed data from the Egyptian electricity system Secondly, the Wind Energy Department at Risø National Laboratory conducted the wind measurements in the Zafarana project area Lastly, this case builds on a recent study that also evaluates the Zafarana wind park from a CDM perspective.

The Kyoto Protocol and the Clean Development Mechanism (CDM) will establish a global legal framework for foreign direct investments in greenhouse gas (GHG) offsets within developing nations Chapter 2 will outline the new regulations and guidelines introduced by the Kyoto Protocol and CDM, addressing crucial concepts like baselines and additionality, while also detailing the CDM project cycle.

7 The Danish Agency for Development Assistance is abbreviated as DANIDA

8 NREA/Risứ National Laboratory, “Pre-Feasibility Study for a Pilot CDM Project for a Wind Farm in Egypt” (October 2001: ENG2-CT1999-0001)

Chapter 3 provides an overview of essential concepts and methodologies pertinent to regular-sized wind power projects within the Clean Development Mechanism (CDM) In Chapter 4, we will evaluate and contrast internationally recognized approaches for establishing standardized baselines Chapter 5 will concentrate on creating project-specific baselines utilizing model-based simulation tools.

Chapter 6 focuses on the methodologies and approaches for financial assessment of wind projects under the Clean Development Mechanism (CDM), introducing a model tool that analyzes the effects of baseline choices and electricity price profiles on the financial viability of wind parks Chapter 7 emphasizes environmental sustainability and the socio-economic benefits generated by CDM projects in host countries, providing a qualitative assessment of the Zafarana wind park using a set of sustainability indicators Additionally, an appendix to Chapter 7 presents a framework for quantifying the socio-economic benefits and costs associated with CDM projects, specifically illustrated through the Zafarana case study.

The various baselines presented and explored in this guidance document estimate the amounts of

The Zafarana wind farm significantly reduces CO2 emissions that would otherwise occur without its operation While wind power minimally displaces non-CO2 Kyoto gases and generates very low greenhouse gas emissions, this document focuses solely on the CO2 emission reductions achieved by the Zafarana wind project.

This research was supported by the Danish Energy Authority, and the authors express gratitude to Mac Callaway and Niels-Erik Clausen for their valuable feedback and suggestions to enhance the report.

9 The six gases regulated under the Kyoto Protocol are carbon dioxide (CO 2 ), methane, nitrous oxide, hydrofluorocarbons, perflurocarbons, and sulphur hexafluoride

The production of wind turbine components such as blades, nacelles, and towers, along with material exploration and equipment transport, contributes to energy consumption and indirect emissions, particularly when fossil fuels are the primary energy source For detailed information on the emissions of SO2, NOx, and CO2 associated with wind technology, refer to Thomas Ackermann and Lennart Sửder's review, "Wind Energy Technology and Current Status."

Sustainable Energy Reviews 4 (2000), 351-352 See also Robert Y Redlinger, Per Dannemand Andersen, and Poul Erik Morthorst, Wind Energy in the 21st Century (Palgrave, Hampshire: 2002), pp 158-163.

THE UNFCCC AND THE CDM

Additionality

The Kyoto Protocol allows for greenhouse gas (GHG) emission reductions through investments in Clean Development Mechanism (CDM) projects that produce fewer emissions than traditional alternatives In this context, the alternative project is compared to the base case, which serves as a counterfactual estimate and cannot be measured beforehand The GHG emission reductions are calculated as the difference between the emissions from the base case and those from the CDM project.

The Kyoto Protocol emphasizes that greenhouse gas (GHG) emission reductions must be real, measurable, and sustainable to ensure credibility It specifies that only emissions reductions that exceed what would happen without the certified project activity can generate Certified Emission Reductions (CERs) In this framework, "additional" is synonymous with "real," underscoring the importance of genuine efforts in emission reduction initiatives.

From a Southern African perspective, a Clean Development Mechanism (CDM) project is characterized as a market-driven development initiative aimed at reducing greenhouse gas emissions According to Randall Spalding-Fecher in "The CDM Guidebook," this approach highlights the intersection of economic development and environmental sustainability, emphasizing the role of market forces in promoting GHG reduction efforts.

In the UNFCCC the industrialized countries and the countries with economies in transition are referred to, collectively, as the Annex-I countries: Australia, Austria,

Belarus, Belgium, Bulgaria, Canada, Czech Republic, Denmark, the European Union,

Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan,

Latvia, Lithuania, Luxembourg, Netherlands, New Zealand, Norway, Poland, Portugal,

Romania, Russian Federation, Spain, Sweden, Switzerland, Turkey, Ukraine, United

Kingdom, and the United States The developing countries are referred to as the non-

Emission reductions associated with a CDM project must be real and additional, meaning they should only occur beyond the baseline emissions that would have happened without the project This approach aims to eliminate the possibility of credits being granted to projects that would have taken place regardless, often referred to as “free-rider” projects Furthermore, any emission reductions that are unverifiable, misleading, or only temporary will not be recognized as credible under the CDM framework.

Project developers must tackle the issue of additionality with transparency and a systematic approach Without proactive measures, there is a risk that investors and host countries may inflate CDM baselines to increase profits This could lead to an overestimation of greenhouse gas (GHG) emission reductions attributed to a project, creating incentives for both parties to exaggerate baseline emissions Implementing consistent, conservative, and verifiable methodologies can significantly mitigate and potentially eliminate the risks associated with such baseline manipulation.

Figure 1: Baseline inflation and implications on amount of CO 2 reductions generated

Environmental additionality is the sole concept of additionality explicitly recognized in the Kyoto Protocol and the Marrakesh Agreements However, there are other significant notions of additionality that merit consideration The four primary concepts of additionality include:

A Certified Emission Reduction (CER) is a unit created under Article 12 of the Kyoto Protocol, representing one metric tonne of carbon dioxide equivalent This measurement is based on the global warming potentials (GWPs) recommended by the Inter-Governmental Panel on Climate Change (IPCC).

16 For instance, if a forest fire re-releases the carbon sequestered in forest biomass by a CDM project, the project would generate only short-term, not long-term, reductions

In November 2001, the seventh Conference of the Parties (COP-7) to the UNFCCC convened in Marrakesh, Morocco, where government representatives reached agreements on various detailed aspects concerning the Clean Development Mechanism (CDM).

Parties on Its Seventh Session, Held at Marrakesh from 29 October to 10 November 2001,” (21 January

18 For definitional discussions and proposals for procedures for assessing additionality, see Stephen

Meyers, “Additionality of Emissions Reductions from Clean Development Mechanism Projects: Issues and Options for Project-Level Assessment” (Berkeley: LBNL, 1999); Ram M Shrestha and Govinda R kgCO2/kWh

1 environmental additionality (i.e only those GHG emission reductions that are over and above the baseline are additional);

2 financial additionality (i.e only those projects that would not have been invested in anyway are additional);

3 program additionality (i.e only those project that are financed by new, additional government programs are additional); and

4 technology additionality (i.e only those CDM projects that employ technologies that emit less GHGs than the base-case technology are additional)

Project developers must prioritize environmental additionality when evaluating the legitimacy of a wind farm Chapter 3 outlines various baseline concepts and methodologies used to assess environmental additionality According to the Kyoto Protocol, projects lacking environmental additionality are disqualified from the Clean Development Mechanism (CDM) and cannot generate Certified Emission Reductions (CERs), rendering them non-credible.

The concept of financial additionality is crucial for ensuring that Certified Emission Reductions (CERs) are awarded only to projects that lack commercial viability without the revenue from CER sales If projects that would proceed regardless earn both profits and CER revenues, the environmental integrity of the Clean Development Mechanism (CDM) is at risk Although the Kyoto Protocol does not explicitly mention financial additionality, project developers are encouraged to consider it carefully, as discussed in Chapter 6.

Program additionality, highlighted in the Marrakech Accords, refers to scenarios where governments utilize existing funds rather than new financial resources to support Clean Development Mechanism (CDM) projects For instance, a government might allocate current Official Development Aid (ODA) funds to finance these initiatives instead of seeking additional government resources Another example includes investing the financial contributions pledged by industrialized nations under the UNFCCC framework, such as those directed to the Global Environment Facility (GEF), into CDM projects.

Timilsina, “The Additionality Criterion for Identifying Clean Development Mechanism Projects under the Kyoto Protocol”, Energy Policy 2002 30: 73-79

The financial additionality criterion can be challenging to apply due to the ease of manipulating financial project parameters, allowing projects to potentially meet this criterion without genuine additionality.

Creative bookkeeping often involves the management of proprietary financial information within private companies Additionally, financial considerations may not always play a crucial role in a company's decision-making process regarding new business ventures, as highlighted in the "Criteria and Guidelines for Baselines: Outcomes of an Expert Workshop" held in Amsterdam from January 17-19, 2000.

20 But note that e.g PCF projects are subject to systematic financial additionality testing

According to the Marrakesh Accords, public funding for clean development mechanism projects from Annex I Parties must not divert official development assistance and should be considered separate from the financial obligations of these Parties.

Conference of the Parties on Its Seventh Session, Held at Marrakesh from 29 October to 10 November 2001,” (21 January 2002), FCCC/CP/2001/13/Add.2, p 20

Technology additionality, while not explicitly mentioned in the Kyoto Protocol, plays a crucial role for project developers, particularly when identifying the baseline technology is straightforward A practical interpretation of this concept involves selecting the "marginal" technology—essentially, the technology or project chosen based on the latest comparable investment—as the baseline This approach underscores the significance of technology additionality in evaluating project viability and effectiveness.

“recent additions”, is examined in chapter 4.

Crediting Periods

The emission reductions achieved under the Clean Development Mechanism (CDM) from 2000 to 2008 can be utilized to fulfill commitments during the first five-year budget period of 2008-2012 However, the eligibility criteria for projects generating emission reductions post-2012 remain unclear in international regulations, raising significant concerns For instance, a CDM wind park with a 20-year lifespan that started producing emission reductions in 2003 would have its reductions from 2003 to 2012 recognized In contrast, any reductions from 2013 to 2023 would not be eligible, highlighting a critical gap in the regulatory framework.

It is anticipated that the emission reductions achieved throughout the lifespan of a project will ultimately be recognized under the Kyoto Protocol If this recognition fails to materialize, many reductions from wind projects and other long-term technologies could be rendered valueless, creating a substantial disincentive for investment in these sustainable solutions.

Figure 2 demonstrates how the costs of Certified Emission Reductions (CERs) vary based on project lifetimes, highlighting that projects with shorter lifespans, such as efficient lighting and landfill gas, show different cost sensitivities compared to longer-term projects like hydro and wind Specifically, the cost of reducing one tonne of CO2 emissions from wind power could rise significantly, from $3.6 to $14.4, if the crediting period is shortened from the full 20-year project life to just the initial commitment period.

Figure 2: Indicative costs of carbon credits under different crediting period validity conditions

Wind Landfill Gas w ith CH4

Source: Alternative Energy Development, “The Sensitivity of the Cost of

GHG Credits to Credit Eligibility Period.” (A Study Prepared for the World

Bank Prototype Carbon Fund, September 2000)

Two alternative approaches to eligible crediting periods are identified in the Marrakesh Accords from November 2001:

1 A crediting period of maximum seven years which may be renewed no more than two times

It is necessary that, for each renewal, the CDM’s executive board (see Box 3) is informed that the original baselines is still valid or has been updated; or

2 A maximum of ten years with no option of renewal

For wind power projects, the ideal option is to use a baseline that can be updated, as these projects typically have lifetimes exceeding ten years This approach enables the incorporation of new data when establishing the baseline, although it does not permit changes to the baseline methodology itself The necessity for updating and potentially revising the baseline method is particularly crucial for Clean Development Mechanism (CDM) projects with extended lifespans.

Adaptation Surcharge and Administrative Expenses of the CDM

Under current international regulations, two percent of the Certified Emission Reductions (CERs) generated by the Clean Development Mechanism (CDM) are allocated to the Kyoto Protocol Adaptation Fund, aimed at supporting developing countries that are especially vulnerable to climate change impacts This allocation means that two percent of the CERs from a CDM project will be deducted However, projects located in least developed countries are exempt from this requirement.

A portion of the proceeds from Clean Development Mechanism (CDM) projects will be allocated to cover administrative expenses associated with the CDM The Conference of the Parties to the UNFCCC will determine the specific percentage of proceeds designated for these administrative costs, which is expected to be based on the Certified Emission Reductions (CERs) generated by each project.

Supplementarity

The issue of supplementarity−i.e., to what extent should the Kyoto targets be achieved though domestic measures?−is addressed in the Kyoto Protocol and in other international regulatory

22 “Report of the Conference of the Parties on Its Seventh Session, Held at Marrakesh from 29 October to

10 November 2001,” (21 January 2002), FCCC/CP/2001/13/Add.2, p 23

In 2002, there were officially forty-nine Least Developed Countries (LDCs), including Afghanistan, Angola, Bangladesh, and Zambia, among others While specific regulations in the climate sector remain undeveloped, project developers are encouraged to engage with national authorities early in the process to assess any potential impacts on their intended Clean Development Mechanism (CDM) projects.

Exemptions for Small-Scale CDM Projects

Small energy efficiency and renewable energy projects face higher transaction costs compared to regular CDM projects due to stringent baseline and additionality testing requirements This disparity could render these smaller initiatives less appealing and competitive To address this issue, it is crucial to implement a "fast-track" approval process for small-scale projects within the CDM framework, ensuring they remain viable and attractive options.

The preliminary rules in this area were first formulated in 2001 They define three categories of small-scale CDM projects as follows:

1 Renewable energy project activities with a maximum output capacity equivalent of up to

15 MW (or an appropriate equivalent);

2 Energy efficient improvement project activities which reduce energy consumption, on the supply and/or demand side, by up to the equivalent of 15 GWh/year; and

3 Other project activities that both reduce anthropogenic emissions by sources and that directly emit less than 15 kilotonnes of CO2 equivalent annually

The CDM executive board is reviewing technical aspects related to project types, baseline methodologies, leakage, and monitoring for three specific project categories Decisions regarding the rules for small-scale CDM projects are anticipated in 2002/2003.

Wind parks exceeding 15 MW of installed capacity are expected to adhere to the same regulations as standard CDM projects Consequently, project developers should operate under the assumption that the rules governing regular CDM projects apply to all wind initiatives, with the exception of those qualifying as small-scale projects.

The Marrakesh Accords emphasize that mechanisms for addressing climate change should complement domestic actions, which are essential for each Annex I Party to fulfill its commitments in controlling or reducing greenhouse gas emissions.

Box 3: The Executive Board of the CDM

The executive board of the Clean Development Mechanism (CDM) oversees various critical functions, including the registration of CDM projects, maintaining a public database of project activities, accrediting independent verifiers and certifiers, approving baseline and monitoring methodologies, and issuing Certified Emission Reductions (CERs) Comprising ten members from the Parties to the Kyoto Protocol, the board held its inaugural meeting in November 2001 For more details, visit the UNFCCC CDM website at http://unfccc.int/cdm/.

Project Boundary and Emissions Leakage

Defining the project boundary or monitoring domain is crucial to encompass all significant anthropogenic greenhouse gas (GHG) emissions linked to a Clean Development Mechanism (CDM) project Emissions leakage refers to the increase in emissions outside the project's boundary that can be measured and attributed to the CDM initiative, potentially diminishing the net emissions reductions achieved There is a growing global focus on addressing emissions leakage in the context of CDM projects.

When discussing wind energy projects, it's essential to differentiate between grid-connected and off-grid initiatives Grid-connected projects are part of a larger system, where the electric power grid defines the project's boundaries rather than the physical site itself This distinction is crucial, as potential leakage effects can impact regional or national levels based on grid connections For small off-grid wind projects, establishing standardized default baseline values is beneficial, though such values would likely require approval from the CDM executive board.

The CDM Project Cycle

The CDM project cycle consists of four key phases: project development or design, validation and registration, implementation and monitoring, and verification and certification, which includes the issuance of Certified Emission Reductions (CERs) While these steps are standard for all CDM projects, small-scale projects may experience a simplified and expedited process Various stakeholders participate at different stages throughout the project cycle.

Figure 3: Steps in the CDM project cycle and actors involved.

24 This ignores possible international effects occurring where national grids are interconnected

25 See Table B-1 in “Annex B to Attachment 3: Indicative Simplified Baseline and Monitoring

Methodologies for Selected Small-Scale CDM Project Activity Categories List” http://unfccc.int/cdm/Panels/ssc/annexb.pdf See also recommendations in UNEP/OECD/IEA,

UNEP/OECD/IEA Workshop on Baseline Approaches: Possibilities for Standardised Baselines for JI and the CDM: Chairman’s Recommendations and Workshop Report (UNEP, OECD, IEA, 2001)

Project development/ project design validation registration monitoring

Issuance of CDM Executive Board CERs

The main activities at the various steps in the CDM project cycle are summarized below

2.7.1 Project Development/Project Design Phase

Recent experiences indicate that not all project ideas can be transformed into viable CDM projects that effectively reduce CO2 and other greenhouse gases while attracting financing Conducting project screening early in the development process is essential for project developers, investors, and host countries to identify unpromising candidates This preliminary evaluation helps determine the project's potential for success and its ability to secure funding.

• generate profits, i.e returns are acceptable to investor and/or the cost of the generated GHG emission reductions are low;

• has clear boundaries, i.e the parties and sites involved are well-defined;

• the GHGs in the base case and in the CDM project can be determined fairly easily;

• deliver tangible benefits in the host country that increase the probability of effective project implementation;

• the technology should be feasible and established;

• participants are able to undertake the project; and

• implementation would not be risky due to the political, economic, financial, or regulatory environment in the host country

Project participants shall include, as part of the project design documents, a monitoring and verification protocol (MVP) 26 This would require identifying:

• what is to be monitored, especially GHGs but perhaps also sustainable development indicators;

• formulas for calculating emission reductions

To achieve impartiality and reliability, the MVP could be prepared by a different environmental auditing company than that which would be responsible for the verification of the project.

Validation is the independent assessment and endorsement of a CDM project’s design, including its baseline and MVP, by a designated operational entity prior to implementation The CDM executive board accredits various independent environmental auditing firms and possibly other organizations to carry out the validation, verification, and certification processes for CDM projects.

To be validated successfully, a project must:

The Project Design Document (PDD) is formally outlined in Appendix B of the report from the seventh meeting of the Conference of the Parties to the UNFCCC For more information, visit the official UNFCCC website at http://unfccc.int/cdm/cdmpdd.htm.

Marrakesh from 29 October to 10 November 2001,” (21 January 2002), FCCC/CP/2001/13/Add.2, pp 43-

• meet essential criteria for CDM projects set out in the international regulation—e.g., the participating countries are parties to the UNFCCC and the Kyoto Protocol (i.e., eligibility of the partners);

• reduce GHG emissions—i.e., the soundness of the baseline should be established (i.e eligibility of the project);

• identify the quantity of emission reductions that are expected to be earned by the project;

• meet sustainability goals of host country; eventual indicator test (i.e eligibility of the project);

• be compatible with national development plans;

• propose sound monitoring and reporting methods and a MVP; and

• include an agreement on the sharing arrangement for GHG benefits

An internationally recognized environmental auditing company typically serves as the validator, preparing a comprehensive validation report that addresses key issues This report, along with the project documents, is submitted to the relevant national authorities in both the investor and host countries for registration Following this, the documentation is forwarded to the CDM executive board for the planned project's registration If no review of the proposed CDM project is requested, the registration will be deemed final eight weeks after the CDM executive board receives the registration request.

Registration is the formal acceptance of a validated project by the CDM executive board, serving as a prerequisite for the verification, certification, and issuance of Certified Emission Reductions (CERs) The designated companies and organizations responsible for validation must adhere to procedures outlined in the Kyoto Protocol while reviewing CDM project design documents Additionally, the baseline and monitoring methodologies will be assessed against those approved by the CDM executive board.

Monitoring involves systematically tracking project performance by implementers through the measurement, evaluation, and documentation of key performance indicators It is essential that monitoring adheres to established rules and standards, particularly those associated with the Kyoto Protocol and the Clean Development Mechanism (CDM) This process must follow the specific steps, procedures, and methods outlined in the Monitoring and Verification Plan (MVP) developed for the project, which must be approved by all project participants and included in the project agreement.

Verification is an independent review process that assesses the greenhouse gas (GHG) reductions from a Clean Development Mechanism (CDM) project Governed by the Monitoring and Verification Protocol (MVP) or similar guidelines, this process ensures compliance with national and international standards A thorough evaluation of the project's baseline data and performance indicators, along with site visits, leads to a positive valuation report from the verifier Once the project is operational, the verifier quantifies the emission reductions achieved during each verification period, issuing transparent reports akin to established environmental auditing practices.

It should be possible for an independent third part to reproduce the findings and reach the conclusions contained in the report

Certification serves as a formal assurance from an accredited verifier that a Clean Development Mechanism (CDM) project has successfully achieved greenhouse gas (GHG) reductions This legal process must comply with both national and international laws that are yet to be finalized Typically, certification is based on a verification report submitted to the CDM executive board The certificate confirms that the emission reductions can be utilized to fulfill commitments under the Kyoto Protocol, thereby generating "certified emission reductions" as outlined in Article 12 of the Protocol The accredited verifier and certifier operate on behalf of the parties to the UNFCCC and are accountable to them However, the specifics of verification and certification within the Kyoto Protocol are still under negotiation among member governments of the UNFCCC.

BASELINES FOR WIND POWER PROJECTS

Introduction

Baseline development is a crucial yet challenging aspect of creating a Clean Development Mechanism (CDM) project This chapter examines different methodologies for establishing baselines, including the base case and the CDM alternative, while comparing these two approaches It covers a variety of baseline concepts and methodologies, from project-specific baselines to standardized, multi-project baselines The following chapters will delve deeper into these methodologies and concepts, specifically in relation to the Zafarana wind park.

Emerging baseline methodologies and approaches within the UNFCCC context currently lack well-defined, internationally accepted CDM standards This presents flexibility for developing baselines for wind projects, fostering an environment for experimentation and learning in the early stages of the CDM market However, uncertainty remains until the CDM executive board identifies standardized methodologies, which are crucial for the consistent and cost-effective estimation, validation, monitoring, verification, and certification of CDM projects Additionally, project developers have the opportunity to propose new methodologies for baseline development to the CDM executive board.

Baselines

A CDM project's baseline represents the expected human-induced greenhouse gas (GHG) emissions that would occur without the project It must encompass emissions from all gases, sectors, and sources within the project's defined boundary.

Emissions from the base case and from a CDM project in the energy supply area may generally be conceived of as follows:

GHG emissions = Project output * energy use/output * GHG emissions/energy use

Greenhouse gas (GHG) emissions are influenced by output levels, energy intensity, and carbon intensity Modifying any of these factors—such as decreasing activity levels, improving energy efficiency, or transitioning to cleaner fuels—can significantly impact the total GHG emissions of a project Specifically, wind power projects primarily focus on reducing carbon intensity, thereby contributing to lower overall emissions.

The initial phase of assessing greenhouse gas (GHG) emissions for an energy supply project involves forecasting the future energy supply, generation resource mix, and overall energy demand throughout the project's lifespan For example, establishing a baseline for the Zafarana wind farm requires predicting future energy consumption and the corresponding GHG emissions.

27 See the Project Design Document, Annex 3 http://unfccc.int/cdm/cdmpdd.htm

28 “Report of the Conference of the Parties on Its Seventh Session, Held at Marrakesh from 29 October to

On November 10, 2001, the FCCC/CP/2001/13/Add.2 document highlights the importance of considering historical practices and the current socio-economic conditions of the impacted area Additionally, it emphasizes that broader national, regional, or global economic trends should also be integrated into the baseline scenario of any project.

The implications of various national and international policies are often reflected in baselines, making it essential to consider the potential future consequences of significant measures, such as action and restructuring plans A conservative approach is recommended when evaluating future government policies, focusing on the effects of those already in place or likely to be implemented It is crucial to consider a country's historical track record in policy implementation when forecasting the expected outcomes of government initiatives, as assuming complete and successful implementation of these policies is rarely a credible assumption.

A consistent and well-defined methodology is crucial for establishing a baseline in a CDM project This approach must be rigorously applied, with all necessary data collected and utilized, and the assumptions for baseline calculations clearly stated Such transparency allows independent verifiers and other stakeholders to verify and assess the integrity of the baseline.

In certain circumstances, estimating multiple baselines becomes essential, as outlined in international regulations (see section 3.4) Comparing various baseline concepts and methodologies is crucial for assessing their sensitivity and robustness Additionally, having multiple baselines is advantageous, particularly in situations with substantial uncertainty regarding future developments that could significantly affect the project However, it is important to avoid creating an excessive number of unrealistic baselines, as this could lead to unnecessary increases in project development costs.

When selecting a baseline for emission reductions, project developers should prioritize the most realistic option, choosing the one that yields the highest reductions if multiple plausible baselines are available To prevent overestimation, opting for a conservative baseline can be beneficial Alternatively, calculating a simple average of various baselines may provide a balanced approach For example, a recent study for a wind power project in Jamaica proposed an average of four plausible multi-project baselines, resulting in a conservative estimate that served as a reasonable middle ground In cases where project-specific baselines are necessary, utilizing a weighted average of several baselines can better reflect their relative likelihood.

29 EcoSecurities, Wigton Wind Power Project, Jamaica: Evaluation of Potential Greenhouse Gas Emission

Reduction Value (EcoSecurities, June 2000) But note that a revised version instead adopts a “combined margin” approach See EcoSecurities, Baseline Study Document for the Wigton Wind Farm Project

The combined margin approach evaluates a project's impact on greenhouse gas (GHG) emissions by considering both the operational effects of existing and future power plants (the operating margin) and the timing and type of new power plant constructions (the built margin) (EcoSecurities, August 2002; Kartha, Lazarus, and Bosi, 2002).

Project developers are encouraged to adhere to internationally recognized technical procedures and to use approved energy and emission data whenever possible Specifically, it is advisable to apply the methods, factors, and values outlined in the Intergovernmental Panel on Climate Change (IPCC) Revised 1996 Guidelines for National Greenhouse Gas Inventories.

Greenhouse gas inventories can utilize alternative values and data, such as carbon emission factors (tC/TJ) and calorific values (TJ/10³ tonnes), when the IPCC does not provide relevant metrics The International Energy Agency (IEA) offers emission factors that encompass the life-cycle of energy projects, rather than focusing solely on isolated project emissions Additionally, the UNFCCC secretariat has compiled an overview of emission factors and activity data applicable to energy and non-energy sectors in certain developing countries It is essential for the executive board of the Clean Development Mechanism (CDM) to approve these alternative factors and values.

Project-Specific and Standardized Baselines

Project developers have two distinct approaches for establishing baselines: standardized multi-project baselines and project-specific baselines Standardized baselines allow for multiple similar projects, such as renewable energy initiatives, to utilize the same baseline, which can reduce transaction costs and encourage investment in CDM projects However, these standardized methods may lack the precision of project-specific baselines in calculating greenhouse gas reductions, potentially diminishing their environmental credibility The key challenge lies in finding an optimal balance between maintaining environmental integrity through accuracy and minimizing the costs associated with developing and monitoring baselines.

While there is no universally accepted definition for regulatory purposes, project-specific baseline methodologies are widely recognized and utilized in project development These baselines are tailored to the unique characteristics of individual projects and their socio-economic and policy contexts They are influenced by assumptions regarding economic growth, technological advancements, and population trends, as well as other critical elements like national development strategies, energy sector reforms, and electricity grid plans Ensuring that the baseline methodology is transparent, consistent, and comprehensive in considering all relevant factors is essential for effective project implementation.

To establish project-specific baselines, it is frequently essential to employ energy, economic, or financial models This report utilizes a simulation model to effectively estimate these baselines.

30 On IPCC emission factors, see IPPC, 1997 http://www.ipcc-nggip.iges.or.jp/public/gl/invs1.htm

31 See, e.g., FCCC/TP/1999/3, 24 October 1999, Comparative Analysis of Emission Factors and Activity

The estimation of greenhouse gas emissions in developing countries, particularly in the energy and land-use change and forestry sectors, relies on comprehensive data analysis This analysis is essential for understanding the impact of these sectors on climate change Accurate data collection and reporting are critical for effective policy-making and international cooperation in addressing greenhouse gas emissions The findings emphasize the importance of reliable data to support sustainable development and environmental protection efforts.

32 See, for instance, S Meyers, C Marnay, K Schumacher, and J Sathaye, Estimating Carbon Emissions

Avoided by Electricity Generation and Efficiency Projects: A Standardized Method (MAGPWR) (Berkeley,

CA: Lawrence Berkeley National Laboratory, 2000)

The Zafarana project significantly impacts the Egyptian electric system and CO2 emissions, as explored in various studies, including those by the OECD and IEA, and the Tellus Institute Chapter 5 will develop a dynamic baseline that considers future electricity demand growth, influenced by factors such as economic and population growth, pricing, and technological advancements.

Standardized multi-project baselines typically do not rely on model outputs and are less complex, often using aggregated data rather than detailed project-level information For instance, an example of such a baseline is the average emission rate, measured in tCO2/MWh, for the entire electric power grid This rate can act as a benchmark, allowing for the calculation of GHG emission reductions by comparing the emission rate of a CDM project multiplied by its output in kWh to this benchmark value This standardized approach is further explored in chapter 4.

To accurately assess the generation technologies and fuel mix in a country, using a weighted average of all power plants may seem beneficial; however, this method presents challenges A key issue lies in the integration of both non-fossil and fossil fuel sources in electricity generation For instance, hydropower represented approximately 21% of Egypt's total installed capacity in 1996-1997 Including hydropower in baseline calculations would lower emissions estimates, as it is emission-free, consequently reducing the CO2 displacement attributed to renewable energy projects This topic is further examined in Chapter 4, focusing on the Zafarana wind park.

In CDM project documents, static technology baselines are often proposed, facilitating straightforward calculations of GHG emission reductions for wind farms This process involves estimating the emissions from conventional gas-fired power plants and then comparing these emissions with those generated by the wind farm Specifically, in the Egyptian context, it is essential to compare the wind park's performance against that of a natural gas boiler-turbine plant.

The key question in evaluating energy sector technologies is determining the most credible base case technology Specifically, can a new wind park realistically replace conventional gas-fired power plants? Furthermore, will these gas-fired plants remain the primary technology throughout the entire duration of the CDM project, eliminating the need for baseline updates? This baseline approach is further examined in chapter 4.

Government goals related to specific technologies, sectors, or regions can serve as a baseline for Clean Development Mechanism (CDM) projects, such as a power sector expansion plan This method offers advantages like simplicity and reduced development costs However, it may present challenges, including unrealistic or vague policy goals, inconsistencies, gaps in certain areas, or conflicting objectives Consequently, exploring alternative approaches is crucial, as this manual does not delve into this particular strategy.

34 NREA/Risứ National Laboratory, “Pre-feasibility Study for a Pilot CDM Project for a Wind Farm in Egypt” (Preliminary Draft, ENG2-CT1999-0001N, December 2000), p 45

35 As an actual fact, hydropower can lead to methane emissions from rotting vegetation and carbon inflow from the catchment

3.3.3 Fixed vs Revised and Static vs Dynamic Baselines

Understanding the difference between fixed and revised baselines is crucial in project management A fixed baseline, once established during the project development phase, remains constant throughout the project's duration In contrast, revised baselines may change over time, necessitating clear definitions on when and how these updates will occur from the project's inception.

Dynamic baselines involve ex-ante projections that account for anticipated changes in key project parameters, such as annual improvements in energy efficiency, leading to variations in CO2 emissions throughout a project's lifespan In contrast, static baselines offer a straightforward projection based solely on historical CO2 emission levels.

Some of the key factors that could influence baseline changes over time are:

Dynamic baselines, illustrated in Figure 4, represent the impact of technological advancements and regulatory changes on project evaluations Dynamic Baseline I, highlighted in bold, exemplifies the phase-out of outdated technologies at specific intervals These baselines are crucial in scenarios of rapid innovation or when environmental standards evolve Conversely, Dynamic Baseline II highlights situations where a shift towards more fossil fuel-based generation technologies may occur, such as in developing countries that, after maximizing their hydroelectric resources, consider constructing coal-fired power plants to satisfy rising energy demands.

Figure 4: Static and dynamic baselines for CDM projects

36 See, for instance, “Electricity Generation Case Study” in OECD/IEA, Emission Baselines: Estimating the

Unknown (Paris: OECD/IEA, 2000), pp 99-163 tCO2MWh

Internationally Approved Baseline Approaches and Concepts

Recent international regulations established under the UNFCCC indicate that project developers have the flexibility to select either project-specific or standardized concepts and approaches for their project development This was outlined in the text agreed upon at COP-7 in Marrakesh, Morocco, in November 2001.

1 With respect to project-specific baselines it is pointed out that they should take “into account relevant national and/or sectoral policies and circumstances, such as sectoral reform initiatives, local fuel availability, power sector expansion plans, and the economic situation in the project sector”; 37 whereas

2 With respect to standardized baselines, project developers can select from among three different approaches:

(a) “Existing actual or historical emissions, as applicable”; or

(b) “Emissions from a technology that represents an economically attractive course of action, taking into account barriers to investment”; or

The average emissions from comparable project activities conducted in the past five years, under similar social, economic, environmental, and technological conditions, reflect the performance of the top 20 percent within their category.

Note that (a) and (c) are based on historic data They are therefore measurable to the extent the necessary date exist and are available

International regulations in this field are continually evolving, with the CDM executive board anticipated to clarify baseline methodologies and project development approaches in the near future It is crucial for project developers and stakeholders to stay informed about the latest international baseline methodologies and approaches.

37 “Report of the Conference of the Parties on Its Seventh Session, Held at Marrakesh from 29 October to

10 November 2001,” (21 January 2002), FCCC/CP/2001/13/Add.2.FCCC/CP/2001/13/Add.2, p 37

38 “Report of the Conference of the Parties on Its Seventh Session, Held at Marrakesh from 29 October to

10 November 2001,” (21 January 2002), FCCC/CP/2001/13/Add.2, p 37.

STANDARDIZED BASELINES FOR ZAFARANA

CER Revenues

The revenue potential from the sale of Certified Emission Reductions (CERs) generated by the Zafarana wind farm is uncertain due to fluctuating CO2 emission reduction levels and unpredictable market prices for the CERs.

CER price estimates fluctuate between a low of $0.8 and a high of $50 per ton of CO2 The U.S withdrawal from the Kyoto Protocol in March 2001 significantly hindered the Clean Development Mechanism (CDM), as it was anticipated that the U.S would represent over 40% of the total Kyoto market for emission reductions This withdrawal has considerably weakened the CDM market, impacting global carbon trading initiatives.

During the 2000 period, the target price for carbon credits was approximately $20 per ton of carbon (tC), equivalent to $5.4 per ton of CO2, with actual trades occurring between $3 and $4 per ton of CO2 However, the market has weakened, leading to a forecasted price range for CO2 offsets between $0 and $4 per ton of CO2, according to the PCF.

The implications of the different baselines and of a medium-low price of $2 and a high price of

The revenue realization for a $10 per ton of CO2 crediting period varies significantly, ranging from $3 million to $18.4 million over 10 years, and doubling for a 20-year period A notable factor influencing this revenue is the five-fold increase in the Certified Emission Reduction (CER) price, alongside differing baseline approaches, which can account for approximately a 25% variance in revenue, with figures ranging from $2.95 million to $3.69 million Additionally, applying a 10% discount rate results in a revenue range of $1.8 million to $11.2 million for the 10-year crediting period.

$2 per ton) The highest difference of 25 percent occurs between two approaches that consider

43 During panel discussions at the "Special Financing Session" of the 7 th European Roundtable on Cleaner Production, held in Lund, Sweden, on 2-4 May 2001, a representative of the Business Council for

The sustainable development sector anticipates carbon pricing to range from $3 to $5 per ton A CO2 price of $50 reflects a scenario where only 15% of emissions trading potential can be utilized due to challenges associated with the Clean Development Mechanism (CDM), including supplementarity constraints, additionality concerns, and high transaction costs.

Annex B countries can secure cartel pricing, indicating a potential upper limit of benefits from the Clean Development Mechanism (CDM) for non-Annex B nations Various modeling studies assessing the effects of the Kyoto Protocol on Annex B countries are incorporated in the analysis.

The Energy Journal's 1999 special issue, "The Costs of the Kyoto Protocol: A Multi-Model Evaluation," highlights that most studies focused on Annex B emissions trading scenarios, revealing a peak cost of $209 per ton of carbon according to the Oxford model Only two studies incorporated the Clean Development Mechanism (CDM), reporting carbon prices of $79 per ton (MS-MRT model) and $116 per ton (MERGE model) These figures were derived from the macroeconomic costs associated with domestic reductions For further insights, refer to J.P Painuly's analysis in "The Kyoto Protocol, Emissions Trading and the CDM: An Analysis from Developing Countries Perspective," published in Energy Journal 22(3) in 2001 Additionally, calculations can be extended to a 20-year crediting period and various discount rates.

Table 2: Revenue implications of different baseline approaches and CO 2 -prices for Zafarana

CO 2 savings from the CDM project (1,000 tons)

Revenue at different CO 2 -prices

20 year crediting period $2/ton $10/ton $2/ton $10/ton

Historical/all plants except renewable (hydro)

Last five years of additions/all fuels

Last five years of additions/all fuels excluding renewable (top 20%)

Last five years of additions/

LFO/NG plants only (top 20%)

Last five years of additions/

HFO/NG plants only (top 20%)

Economically attractive option/ NG plant

Which Baseline to Select?

Project developers must choose from various baselines and provide a justification for their selection Typically, developers will opt for the simplest alternative that offers the highest returns and is easy to defend.

Table 2 reveals that the baseline category of "historical/all plants except hydro" generates the highest revenue, while the "economically attractive option/NG plant" follows closely Additionally, various iterations of "recent additions" rank lower than the "commercially attractive option," yet remain above other alternatives.

The "historical/all plants" category yields the lowest revenue due to the inclusion of renewable energy plants The ranking of alternatives can fluctuate based on the plant mix and their age A baseline using the "recent additions" method could be appealing if renewables were previously dominant, while more recent additions were thermal resources However, some options may become less viable once clearer baseline approaches are established by the CDM executive board.

In the early phase of a CDM project, it is advisable for the project developer to compile a comprehensive inventory of potential baselines that adhere to established guidelines and criteria A preliminary assessment can help gauge the relative appeal of each baseline The selection of the proposed baseline should consider the availability of expertise and data, anticipated returns, and associated costs Additionally, opting for a longer crediting period, such as 20 years, can be particularly advantageous.

Discount factors play a crucial role in financial analysis, with a 20-year lifetime yielding values of 0.62 at a 5% discount rate and 0.43 at 10% For a shorter, 10-year lifetime, the discount factors are 0.77 and 0.61, respectively Ultimately, the choice of discount rate depends on various factors, including the project's lifespan, perceived risk, the complexity of updating baseline data, and the revenue-sharing agreement with the host.

Conclusions

The Marrakesh Accords established at COP-7 clarified aspects of the Clean Development Mechanism (CDM) and outlined key principles for developing baselines The CDM executive board is tasked with creating detailed guidelines moving forward Current baseline approaches include historical emissions, emissions from recent plants, and economically viable options For the Zafarana project, seven potential baselines can be derived from these methods When selecting a baseline approach, project developers must consider factors such as complexity, conservatism to protect the environment, data availability, expected returns, transaction costs, and the expertise needed for baseline determination.

PROJECT-SPECIFIC BASELINES FOR ZAFARANA

Introduction

This chapter presents a method for estimating annual CO2 emission reductions from CDM supply-side projects in the electric power sector, with a focus on renewable electricity generation It emphasizes the integration of wind power projects into larger power systems and quantifies the CO2 reduction effects based on the fuel type and conversion efficiencies of individual plants.

To quantify the CO2 reduction, the following key questions should be addressed:

• Which power plants (existing and future) in the overall system configuration reduce production due to the renewables project?

• Which fuels and amounts of fuels are substituted at the affected power plants during the period analyzed relative to a reference case or a baseline?

Estimating and analyzing larger power systems can be data-intensive and computationally demanding This chapter introduces a method designed to minimize data requirements by focusing on essential information for each plant within the power system and the specific renewable project The approach utilizes readily available statistical data and system development plans, ensuring efficiency in the estimation process.

Static and Dynamic Baselines

This method is utilized in two baseline studies centered on the same wind power CDM project The studies vary in their level of detail and accuracy regarding CO2 reduction estimates, as well as the data requirements and computational resources needed.

The first study relies on recent statistical data only:

• Static baseline study: This baseline assumes the present power system configuration, and its mode of operation, as a fixed reference system

The second and more detailed study takes into account power system developments during the period analyzed:

• Dynamic baseline study: This baseline includes assumptions about baseline system developments during the period analyzed

The ES 3 -model developed at Risứ National Laboratory simulated the power system (at aggregated level of detail in one-hour time steps) in both baselines 46

45 Note that official expansion plans may not be available in developing countries where the energy sector is privatized

46 Demonstration and Development of Technology and Planning in the Wind Energy Sector in Egypt Phase

II 1997; Nielsen, L.H.; Morthorst, P.E (eds.), Fluktuerende vedvarende energi i el- og varmeforsyningen – det mellemlange sigt (System integration of wind power on liberalised electricity market conditions Medium term aspects (In Danish)) ISBN 87-550-2396-7 ISSN 0106-2840 Risứ-R-1055(DA) (April 1998) 154p; Nielsen, L.H (ed.), Vedvarende energi i stor skala til el- og varmeproduktion Indpasning i

Static baseline studies provide an unreliable foundation for assessing future CO2 emission reductions and anticipated Certified Emission Reduction (CER) income from CDM projects In contrast, dynamic baseline studies seek to minimize this uncertainty but necessitate additional data and computational resources Consequently, the analysis incorporates projections for electricity demand growth and the planning of supply systems, including the commissioning and decommissioning of power plants.

The comparison and discussion of the two baselines reveal significant shortcomings in attributing specific CO2 emission reductions to individual renewable projects This analysis highlights the importance of considering the cumulative system effects generated by Clean Development Mechanism (CDM) projects, which are often overlooked.

Baseline Studies on the Egyptian Power System

Research on the Egyptian power system has examined the impacts of static versus dynamic approaches to baseline development The study estimates the reductions in CO2 emissions resulting from the integration of wind power generation into the Egyptian energy landscape.

• A static baseline defined as the Egyptian power system ultimo year 1999

A dynamic baseline was established for the years 1999 to 2010, with comprehensive analyses focusing specifically on the years 1999 and 2010 For the intermediate years, the baseline is represented by a straight line connecting the emission factors recorded in 2001 and 2010.

The key assumptions regarding the Egyptian power system in 1999 and 2010 are outlined in Table 3 The report discusses the future of large-scale renewable energy in an uncertain landscape, highlighting the potential for sustainable power and heat production within Denmark's energy framework The publication is available under ISBN 87-550-2029-1 and ISBN 87-550-2087-9, with an ISSN of 0106-2840, and is identified as Risø-R-784(DA)(1994), comprising 114 pages.

47 The data are from Demonstration and Development of Technology and Planning in the Wind Energy Sector in Egypt Phase II 1997

Table 3: Main assumptions in the case studies of the Egyptian power system

Total electricity generation: 73310 GWh 125611 GWh

New thermal production capacity since 1999/00: 9-10.000 MW

Electricity demand profile: 1992 profile 1992 profile

Hydro power: 14659 GWh/year 14659 GWh/year

Wind gen profile Data from 1992 Data from 1992

Electricity gen to grid: 257 GWh/year 257 GWh/year

Electricity gen to grid: 2566 GWh/year 2566 GWh/year

Electricity gen to grid: - 8552 GWh/year

It can be seen from Table 3 that a substantial increase in electricity demand in Egypt is expected by 2010 Consequently, a considerable build-up of new power production capacity of about 9-10

GW is planned for the period analyzed 48 This analysis assumes that the capacity of hydropower does not change

The one-hour wind power generation profile is crucial for assessing CO2 reduction effects in the energy system Understanding the relationship between electricity demand and wind power generation is vital for determining which plants contribute to electricity substitution and to what extent This data, combined with the specific characteristics of each plant, allows for accurate calculations of CO2 emission reductions.

Sections 5.4 and 5.5 provide essential information on the Egyptian power system's power plants, highlighting the system configurations from 1999 and 2010 Detailed methodologies are outlined in section 5.4.

Static Baseline Study

This section aims to assess the CO2 emission reductions achieved by incorporating wind power into Egypt's electricity supply system, using the 1999 electricity demand profile and supply system as a static baseline The analysis reveals that the integration of wind power leads to reduced CO2 emissions across multiple power plants, as changes in capacity factors for several plants, compared to the baseline, result from the added wind energy.

To illustrate the effects of scale, two cases are examined:

48 See GEF, “Proposed Program Concept and Request for a PDF Block B Grant” (April 12, 2001), p 4 http://www.gefweb.org/Projects/Pipeline/Pipeline_7/Egypt_Private_Sector.pdf

• One case covers the integration of a 60 MW wind farm at Zafarana, Egypt The generation from this wind farm covers about 0.35 % of the electricity demand in 1999

The second scenario considers a significantly larger project, specifically a 600 MW wind power plant within the Egyptian energy system It is assumed that the turbine specifications and wind regime data mirror those of the Zafarana project This 600 MW wind power facility is projected to fulfill approximately 3.5% of the total electricity demand in the base year.

In 1999, Egypt's peak power demand reached approximately 11.7 GW This article examines two cases to demonstrate how the specific CO2 reduction per kWh of wind electricity generated is influenced by the installed wind power capacity in the system The analysis employs a difference approach, comparing the alternative system with the wind power project to the baseline scenario.

Wind Power Integration and CO 2 Reduction Approach

Wind power generation must be integrated and utilized within the power system as it becomes accessible, largely depending on the available wind resources However, wind energy has limited capacity for regulation, and reducing wind power output can lead to decreased production and lost sales opportunities.

As wind power capacity rises, the existing supply system must reduce production to accommodate this increase Hydropower, known for its excellent regulation capabilities, particularly over short time scales, provides essential support for managing these fluctuations While annual hydropower production remains stable, its marginal production cost is nearly zero, and its CO2 emissions are low Consequently, as wind power generation grows, it effectively replaces thermal power production in the Egyptian energy system.

The substitution of fuels and reduction of CO2 emissions in thermal plants are influenced by the scheduling of power generation, ranging from base load to peak load A crucial aspect of this analysis is identifying which thermal plants or categories will alter their production levels due to increased wind power generation, along with estimating the corresponding decrease in fossil fuel consumption.

The method divides the analysis into two parts, dealing with the demand side and the supply side aspects, respectively:

• Part 1: Determines modified load conditions for power plants (with regulation capability, e.g., plants based on fossil fuels)

The analysis examines the residual electricity demand after accounting for wind power production, focusing on variations in this demand profile In scenarios incorporating wind power projects, the adjusted demand is met through hydropower and thermal plants The study compares the modified demand profile, influenced by 60 MW and later 600 MW of installed wind capacity, to the original baseline demand profile A key finding is the distribution of wind power's contribution across the spectrum from base load to peak load, analyzed in one-hour intervals over the year 1999.

• Part 2: Determines modified supply from power plants based on fossil fuels

The second part of the analysis focuses on the merit order of thermal plants and hydropower within the Egyptian power supply system This analysis utilizes production statistics from 1999 to estimate the dispatch order under baseline conditions It is assumed that thermal plants will operate in the same merit order when considering the alternative scenario that includes wind power.

The first part of the analysis is addressed in sections 5.7 and 5.8 The second part is addressed in section 5.9

The expected electricity substitution split among thermal plants can be established based on the estimated dispatch order in the baseline By analyzing the production changes at each plant and utilizing data on average energy conversion efficiencies and fuel types, the CO2 reduction attributed to wind power can be calculated Detailed findings from this static baseline study are discussed in section 5.10.

Basic Assumptions

A number of assumptions have been made in order to reduce the computational work in the analyses Another reason has been the data available for the analysis

For the electricity demand and supply in the static baseline the following main assumptions have been made:

In this analysis, the Egyptian system configuration from 1999 serves as the baseline, utilizing statistics on capacity, annual electricity production, annual fuel consumption, and fuel types for individual plants The data, sourced from the New and Renewable Energy Authority (NREA) and the Egyptian Electricity Authority (EEA), is detailed in Annex 1.

The electricity demand profile for Egypt, analyzed at an hourly resolution over the course of a year, is derived from comprehensive statistics from 1992 This profile has been adjusted to reflect the electricity demand levels observed in 1999, establishing it as the baseline for that year.

Hydropower production is expected to remain constant from the baseline scenario to the alternative situation, matching the production levels of 1999 Additionally, the hydropower production profile is fixed at a one-hour resolution, relying on historical statistical data.

The following additional assumptions have been made concerning the alternative situation:

• The wind power production profile is based on wind speed measurements at the Zafarana site carried out in 1993 Further details are given in section 5.7

• The power system is assumed to have no constraints or “bottlenecks” in the grid for the energy flow from production to consumption

• Scheduling of thermal production plants is based on 1999 statistics Further details are described below

• Thermal plants fueled by heavy fuel oil and hydropower are assumed to operate in the base load area

A thorough analysis should consider the specific fuel conversion efficiencies of individual plants, as their operational changes may differ from the reference scenario This analysis presumes that the fuel conversion efficiencies and fuel mix at each plant remain consistent and align with the annual average performance data derived from statistical information.

Electricity Demand, Hydro- and Wind Power Profiles

Figure 5 and Figure 6 show sequences of the assumed electricity demand, hydropower production, and wind power production profiles

In this analysis, scaled profiles from 1999 are utilized to detail electricity demand, hydropower production, and projected wind power generation from installed capacities of 60 MW and 600 MW.

The wind power production profile utilizes wind speed data from Zafarana collected in 1993, alongside power curve assumptions for specific wind turbines This profile accounts for availability, wake losses, and transmission losses as perceived from the grid However, it does not consider the geographical distribution of wind power capacity or aspects related to power leveling.

The hydropower production profile for 1999 is expected to be consistent across both alternative and baseline scenarios, based on estimates derived from 1992 data This uniformity is attributed to the constraints on hydropower output resulting from the Nile's water flow management, which significantly impacts agricultural and irrigation requirements in Egypt.

In 1992, the relationship between power demand and synchronous hydropower production illustrates the significant role of hydropower in regulating power supply and meeting peak demand within the Egyptian energy system.

Wind Power and Substitution of Thermal Power

The timing of electricity demand is crucial in assessing the impact of wind power generation When wind power is produced during peak load hours, it can replace output from peak load plants Conversely, wind energy generated during off-peak times can offset production from plants designed for medium load operations.

Figure 5 Electricity demand profile for Egypt, and an estimated wind power production profile assuming 10% coverage from wind power and

Zafarana wind conditions Demand data from May

Electricity demand and wind power

Figure 6 Hydropower production profile in Egypt and the synchronous electricity demand profile Data from May 1992 (covering the hours

Electricity demand and hydro power

Peak load plants are intended for operation in relatively few hours of the year to cover the

Power plants are designed to handle "spikes" or peak loads efficiently, often featuring low initial investment costs but higher operational expenses In contrast, base load plants focus on minimizing operational costs through high energy efficiency, as they are intended to run at maximum capacity throughout the year, with maintenance periods being the only exceptions.

Efficient scheduling of power plants is crucial for reducing production costs, with base load plants receiving top priority for generation due to their lower operational expenses, while peak load plants, which incur higher costs, are utilized last.

The introduction of wind power into the Egyptian power system modifies specific thermal power supply levels, as illustrated in Figure 7 This figure highlights the electricity demand levels at which substitution occurs, indicating that thermal plants scheduled to operate at these levels will need to decrease their production in response to the output from wind power generation.

Figure 7: Distribution of wind power over thermal power demand levels 1999/2000

Power demand from thermal plants (GW)

Elec tr ic it y s ubs ti tu ti on dis tribut io n

Figure 7 illustrates that electricity substitution is more likely to occur at lower capacity levels with 600 MW of installed wind power compared to the 60 MW scenario This aligns with expectations regarding the impact of higher capacity on electricity substitution.

In the MW case, electricity substitution leads to decreased production at thermal plants that are scheduled to operate nearer to the base load area compared to the 60 MW case Consequently, a greater number of thermal plants are affected by wind power, resulting in a reduction of their output.

Baseline Electricity Supply System

The dispatch order in the baseline is based on 1999 statistics of the Egyptian power supply, as detailed in Annex 1 This merit order, which governs the increase and decrease of production at power plants based on electricity demand fluctuations, is expected to remain applicable in alternative scenarios While the overall system is projected to follow similar production plans as in the baseline, wind power may lead to a reduction in output from medium to peak load plants The methodology used to estimate the dispatch order is depicted in Figure 8.

Figure 8 illustrates the estimated overall scheduling of power plants in Egypt, showcasing the capacity factors of individual plants The plants are arranged in descending order of capacity factor, plotted against their accumulated power production capacity along the x-axis, with data reflecting the status as of 1999/2000.

Accumulated power production capacity (MW)

In Figure 8 the capacity factors of the individual plants are plotted in descending order against the corresponding accumulated installed capacity The total installed production capacity is almost 15

Hydropower plants and thermal plants using heavy fuel oil are categorized as base load facilities, as illustrated in Figure 8 The remaining production capacity consists of thermal plants, organized by their capacity factors from 1999 Plants with low capacity factors are associated with peak load operations, while those with high capacity factors are linked to base load operations This arrangement reflects the general scheduling of plants across the spectrum from base load to peak load operation.

In the baseline scenario, plants recognized as operating in the peak load area are expected to retain their positions in the scheduling of plants within the alternative situation Consequently, the merit order for generation in the baseline is anticipated to remain consistent in the scenario that includes wind power.

In 1999, the accumulated power generation in Egypt was plotted against the accumulated installed capacity, as illustrated in Figure 9 This sequencing of plants reflects the assumed merit order for dispatch, ensuring that the total electricity demand for the year was met effectively.

Figure 9: Accumulated electricity production from the individual plants against accumulated installed capacity 1999/2000

Accumulated power production capacity (MW)

CO 2 Reduction by Wind Power in Egypt

Table 4 and Table 5 show the results of the analysis based on the above assumptions about the power system dispatch These tables show the 60 MW and 600 MW cases of installed wind power capacity

Table 4: Integration of 60 MW wind power: Potential substitution of thermal power production and CO 2 reduction in the 1999 system Case 1

Electricity supply 1999: 60MW Reference Fossil Type of CO2-

Windpower: Efficiency fuel fuel emission

Reference Case 1 Difference % TJ/year k.ton/year

Renewables 52772 TJ/year 53695 TJ/year 923 TJ/year 85

Thermal power supply split on capacity intervals:

0-1 31534 TJ/year 31534 TJ/year 0 TJ/year 42 0 - 0

1-2 31534 TJ/year 31534 TJ/year 0 TJ/year 41 0 - 0

2-3 31534 TJ/year 31534 TJ/year 0 TJ/year 39 0 - 0

3-4 31534 TJ/year 31534 TJ/year 0 TJ/year 39 0 NG 0

4-5 31316 TJ/year 31294 TJ/year -22 TJ/year 38 -60 NG -3

5-6 27926 TJ/year 27703 TJ/year -223 TJ/year 39 -569 NG -32

6-7 17105 TJ/year 16746 TJ/year -359 TJ/year 33 -1073 NG -61

7-8 6855 TJ/year 6637 TJ/year -218 TJ/year 35 -626 NG -36

8-9 1768 TJ/year 1672 TJ/year -95 TJ/year 24 -396 NG -23

9-10 25 TJ/year 20 TJ/year -6 TJ/year 21 -27 NG -2

10-11 0 TJ/year 0 TJ/year 0 TJ/year 0 0 0

TOTAL 263902 TJ/year 263902 TJ/year 0 TJ/year -2750 -156

Table 5: Integration of 600 MW wind power: Potential substitution of thermal power production and CO 2 reduction in the 1999 system Case 2

Electricity supply 1999: 600MW Reference Fossil Type of CO2-

Windpower: Efficiency fuel fuel emission

Reference Case 2 Difference % TJ/year k.ton/year

Renewables 52772 TJ/year 62008 TJ/year 9236 TJ/year 85

Thermal power supply split on capacity intervals:

0-1 31534 TJ/year 31534 TJ/year 0 TJ/year 42 0 - 0

1-2 31534 TJ/year 31534 TJ/year 0 TJ/year 41 0 - 0

2-3 31534 TJ/year 31534 TJ/year 0 TJ/year 39 0 - 0

3-4 31534 TJ/year 31527 TJ/year -7 TJ/year 39 -18 NG -1

4-5 31316 TJ/year 30816 TJ/year -500 TJ/year 38 -1332 NG -76

5-6 27926 TJ/year 25283 TJ/year -2643 TJ/year 39 -6745 NG -384

6-7 17105 TJ/year 13657 TJ/year -3448 TJ/year 33 -10296 NG -586

7-8 6855 TJ/year 4997 TJ/year -1858 TJ/year 35 -5343 NG -304

8-9 1768 TJ/year 1010 TJ/year -757 TJ/year 24 -3138 NG -179

9-10 25 TJ/year 4 TJ/year -21 TJ/year 21 -102 NG -6

10-11 0 TJ/year 0 TJ/year 0 TJ/year 0 0 0

TOTAL 263902 TJ/year 263903 TJ/year 0 TJ/year -26975 -1535

Table 6: CO 2 reduction in the Egyptian power system as a result of integration of 60 MW and 600

CO2-substitution via wind power Electricity Fossil CO2- Specific CO2-substitution generation fuel Efficiency emission CO2- CO2-

Egyptian system 99/00 substituted substituted average reduction reduction reduction

TJ/year TJ/year % k.ton/year ton/kW,year kg/kWh

As seen from Table 6 the specific CO2 reduction (in kg CO2 per kWh wind based electricity supplied to the grid) varies only marginally between the 60 MW case and the 10-fold larger 600

A decrease in the specific CO2 reduction could be expected when increasing the wind power capacity because the increased capacity would substitute electricity production generated by plants approaching the base load characteristics of higher efficiency This is because the type of fuel used is unchanged As seen from Table 4 and Table 5, natural gas is the only fuel type involved in the two cases 49

49 Emission factor: 57kg CO 2 /GJ.

Dynamic Baseline Study 1999-2010

The dynamic baseline study takes into account system developments during the period specified for the analysis Assumptions about the development of electricity demand, details on planned new production capacity, decommissioning of plants, etc enter the analysis

The present dynamic baseline study covers the period 1999-2010 However, to reduce the computational work the following approach is used:

• Baseline analyses are carried out for 1999 and 2010 only

• The baseline for the intermediate period is constructed as a straight line between the emission factors in these two years

For the 2010 the baseline study is described in section 5.11.1, and the results of the dynamic baseline study are given in section 5.11.2.

The main assumptions regarding the Egyptian power system in 2010 are shown in Table 3 A number of additional assumptions concerning the configuration and operation of the system have been made:

• The electricity consumption patterns expressed in the shape of the demand profile are assumed to remain unchanged The increased electricity consumption in 2010 relative to

1999 thus scales up the demand profile without altering the relative shape of the profile

• Planned commissioning and decommissioning of plants have been taken into account at aggregated level

• The relative dispatch order for thermal plants existing in the system in 1999 is maintained

• New thermal plants are assumed to contribute their maximum to the power supply, and are consequently situated in the base load area of the system in 2010

• It is assumed that the hydropower capacity in the system in 2010 is unchanged relative to the 1999 situation

• The potential integration of pumped hydropower for load levelling in the system is not taken into account in the analysis of the system in 2010

• Thermal plants operating in the capacity interval 8-11GW are assumed to use heavy fuel oil (HFO) Natural gas (NG) is used above this interval

The CO2 reduction consequence of a wind power project depends on the capacity of wind power that is already present in the system To illustrate the order of magnitude of this in the Egyptian system in 2010, three cases are analyzed:

• A 60 MW wind farm at Zafarana, Egypt This generation capacity covers about 0.2 % of the demand in 2010

• 600 MW wind power in total developed in the system up to 2010 Turbine characteristics and wind regime are assumed to be similar to the Zafarana project conditions This generation capacity covers about 2.0 % of the demand in 2010

• 2,000 MW wind power in total developed in the system up to 2010 Turbine characteristics and wind regime assumed to be similar to the Zafarana project conditions This generation capacity covers about 6.8 % of the demand in 2010

Figure 10 shows at which levels of thermal power output wind power substitutes thermal production in the three cases.

Figure 10: Distribution of wind power over thermal power demand levels 2010

Power demand from thermal plants (GW)

E le c tr ic ity s u b s titu tio n d is tr ib u tio n Case 3:

It can be seen from Figure 10 that in 2010 wind power substitutes thermal production at production levels in the interval from about 10 GW to 18 GW The interval has increased considerable compared to the situation in 1999 where the corresponding interval is about 5-10 GW (see Figure 7) This is due to the expected expansion in electricity demand during the period 1999-2010 An effect of this is that a greater number of thermal plants have modified conditions of operation due to wind power generation compared to the 1999 situation

The pronounced new and second peak in the distribution shown in Figure 10 is due to increased thermal production in peak hours As seen from Figure 6, in 1999 the hydropower capacity in the system contributed a large fraction of the peak capacity However, the increased electricity demand in 2010 and the assumption of unchanged consumption patterns means that thermal plants increasingly enter the peak load area of operation Thus, more thermal production capacity operates only a few hours a day to serve the peak This is reflected as the “second top” in Figure

Wind power is increasingly replacing thermal production at high capacity levels, leading to a shift in energy generation New plants entering the system are anticipated to receive priority for production over older facilities, allowing them to capitalize on their enhanced performance.

In the demand range of 8-11 GW for thermal power, it is assumed that heavy fuel oil (HFO) will replace older thermal plants that originally operated at base load With the introduction of new thermal plants before 2010, these older plants are now shifted to medium load operations These plants have the capability to utilize HFO or light fuel oil (LFO), while some may also have natural gas as an option However, for the 2010 baseline analysis, it is assumed that these plants exclusively burn HFO.

Plants with a thermal production capacity below 8 GW in the base load area remain unaffected by wind power capacity across all three scenarios Consequently, during normal system operations, wind power does not replace the production or fuel requirements of these plants.

Tables 7-9 show the CO2 reduction implications of a total capacity of 60 MW, 600 MW, and 2,000 MW wind power In Table 10, the main results of the three case studies are compared.

Table 7: Integration of 60 MW Wind Power: Substitution of Thermal Power Production and

Electricity supply 2010 60MW Reference Fossil Type of CO2-

Windpower: Efficiency fuel fuel emission

Reference Case 3 Difference % TJ/year k.ton/year

Renewables 52772 TJ/year 53695 TJ/year 923 TJ/year

Thermal power supply split on capacity intervals:

0- -8 252269 TJ/year 252269 TJ/year 0 TJ/year - 0 - 0

8-9 31526 TJ/year 31525 TJ/year -1 TJ/year 42 -2 HFO 0

9-10 31278 TJ/year 31262 TJ/year -16 TJ/year 41 -39 HFO -3

10-11 29054 TJ/year 28931 TJ/year -122 TJ/year 39 -317 HFO -25

11-12 22839 TJ/year 22623 TJ/year -216 TJ/year 39 -553 NG -31

12-13 14652 TJ/year 14412 TJ/year -240 TJ/year 38 -638 NG -36

13-14 8143 TJ/year 8010 TJ/year -133 TJ/year 39 -339 NG -19

14-15 5444 TJ/year 5375 TJ/year -68 TJ/year 33 -204 NG -12

15-16 3235 TJ/year 3160 TJ/year -74 TJ/year 35 -214 NG -12

16-17 940 TJ/year 891 TJ/year -49 TJ/year 24 -205 NG -12

17-18 21 TJ/year 18 TJ/year -3 TJ/year 21 -16 NG -1

TOTAL 452173 TJ/year 452172 TJ/year 0 TJ/year -2527 -151

50 Emission factor: 78 kg CO 2 /GJ

Table 8: Integration of 600 MW wind power: Substitution of thermal power production and CO 2 reduction in 2010 Case 4

Electricity supply 2010 600MW Reference Fossil Type of CO2-

Windpower: Efficiency fuel fuel emission

Reference Case 4 Difference % TJ/year k.ton/year

Renewables 52772 TJ/year 62008 TJ/year 9236 TJ/year

Thermal power supply split on capacity intervals:

0- -8 252269 TJ/year 252269 TJ/year 0 TJ/year - 0 - 0

8-9 31526 TJ/year 31515 TJ/year -11 TJ/year 42 -27 HFO -2

9-10 31278 TJ/year 30971 TJ/year -307 TJ/year 41 -752 HFO -59

10-11 29054 TJ/year 27630 TJ/year -1423 TJ/year 39 -3680 HFO -287

11-12 22839 TJ/year 20596 TJ/year -2243 TJ/year 39 -5736 NG -326

12-13 14652 TJ/year 12300 TJ/year -2352 TJ/year 38 -6264 NG -356

13-14 8143 TJ/year 7052 TJ/year -1092 TJ/year 39 -2786 NG -159

14-15 5444 TJ/year 4744 TJ/year -700 TJ/year 33 -2090 NG -119

15-16 3235 TJ/year 2545 TJ/year -690 TJ/year 35 -1984 NG -113

16-17 940 TJ/year 540 TJ/year -400 TJ/year 24 -1658 NG -94

17-18 21 TJ/year 5 TJ/year -16 TJ/year 21 -79 NG -5

TOTAL 452173 TJ/year 452173 TJ/year 0 TJ/year -25057 -1520

Table 9 Integration of 2,000 MW wind power: Substitution of thermal power production and CO 2 reduction in 2010 Case 5

Electricity supply 2010 2000MW Reference Fossil Type of CO2-

Windpower: Efficiency fuel fuel emission

Reference Case 5 Difference % TJ/year k.ton/year

Renewables 52772 TJ/year 83559 TJ/year 30787 TJ/year

Thermal power supply split on capacity intervals:

0- -8 252269 TJ/year 252260 TJ/year -9 TJ/year 42 -21 HFO -2

8-9 31526 TJ/year 31064 TJ/year -462 TJ/year 42 -1098 HFO -86

9-10 31278 TJ/year 28548 TJ/year -2730 TJ/year 41 -6675 HFO -521

10-11 29054 TJ/year 22944 TJ/year -6110 TJ/year 39 -15800 HFO -1232

11-12 22839 TJ/year 15028 TJ/year -7811 TJ/year 39 -19975 NG -1137

12-13 14652 TJ/year 8648 TJ/year -6004 TJ/year 38 -15990 NG -910

13-14 8143 TJ/year 5277 TJ/year -2866 TJ/year 39 -7315 NG -416

14-15 5444 TJ/year 3189 TJ/year -2254 TJ/year 33 -6731 NG -383

15-16 3235 TJ/year 1435 TJ/year -1800 TJ/year 35 -5175 NG -294

16-17 940 TJ/year 220 TJ/year -720 TJ/year 24 -2983 NG -170

17-18 21 TJ/year 2 TJ/year -19 TJ/year 21 -91 NG -5

TOTAL 452173 TJ/year 452175 TJ/year 2 TJ/year -81855 -5155

Table 10 illustrates that as the total wind power capacity in the system rises, the CO2 reduction per kWh of wind electricity generated also increases This trend contrasts with the situation observed in 1999.

CO2 reduction diminishes as the power capacity increases from 60 MW to 600 MW due to the influence of heavy fuel oil (HFO) in the 2010 scenario As wind capacity rises, HFO substitution increases, leading to a reduced proportion of natural gas (NG) in the total displaced fuel Although energy efficiency improves for plants operating closer to base load, the transition towards HFO ultimately results in a higher CO2 reduction.

Table 10: Main results of the estimated CO 2 reduction in 2010 in the Egyptian power system as a result of integration of 60 MW, 600 MW, and 2,000 MW wind power

CO2-substitution via wind power Electricity Fossil CO2- Specific CO2-substitution generation fuel Efficiency emission CO2- CO2-

Egyptian system 2010 substituted substituted average reduction reduction reduction

TJ/year TJ/year % k.ton/year ton/kW,year kg/kWh

Compared to the situation in 1999, in 2010 the CO2 reduction due to the 60 MW wind power project has changed marginally only The simulation result for 1999 shows a CO2 reduction of 0.610 kg

CO2/kWh, while the simulation for 2010 shows a CO2 reduction of 0.590 kg CO2/kWh, if no further wind power capacity enters the system during the period If, however, it is assumed that wind power capacity during the period up to 2010 increases to 600 MW, then the CO2 reduction is slightly higher

Two opposite effects produce this result One is that the increased electricity demand has the effect that wind power tends to substitute electricity at plants with relatively higher energy efficiency in the low load periods On the other hand, this also means that not only NG fired plants are affected In the low load periods HFO fired plants are increasingly affected, and this increases the CO2 reduction compared to plants burning NG, if energy efficiencies are the same Taken together, these effects reduce the CO2 reduction in 2010 in the 60 MW case relative to the situation in 1999

In 2010, the CO2 reduction increases slightly from the 60 MW case to the 600 MW case because more HFO fired plants are affected by the wind power generation And from the 60 MW case to the 2,000 MW case, the CO2 reduction increases from 0.590 kg CO2/kWhwind to 0.603 kg CO2/kWhwind

Table 11: Main results of the dynamic baseline study Estimated average CO 2 reduction in the Egyptian power system in period 1999-2010 as consequence of integration of 60 MW wind power

CO2-substitution via wind power 1999-2010 Period 1999-2010

Total Specific Total Specific Average specific

Egyptian system 1999-2010 capacity CO2- capacity CO2- CO2-

Wind reduction Wind reduction reduction

Development in wind capacity assumed MW kg/kWh MW kg/kWh kg/kWh

Constant 60MW throughout the period 1999-2010 : 60 0.610 60 0.590 0.600

Increase from 60MW > 600MW during period 1999-2010 : 600 0.592 0.601

Increase from 60MW ->2000MW during period 1999-2010 : 2000 0.603 0.606

As Table 11 shows, the average CO2 reduction for the 1999-2010 period due to a 60 MW wind project initiated in 1999 depends on the total deployment of wind power during that period If the

Comparison of Results from Static and Dynamic Baselines

Using a static baseline approach significantly reduces data requirements compared to a detailed dynamic baseline approach As illustrated in Table 11, the differences in outcomes for the 60 MW Zafarana wind project are minimal Nonetheless, it is crucial to consider anticipated system developments, including ongoing CDM projects.

In the 60 MW scenario, CO2 reduction is approximately 0.610 kg CO2/kWhwind in the static baseline study and around 0.600 kg CO2/kWhwind in the dynamic baseline study, assuming no additional wind capacity is added This reduction is primarily attributed to rising electricity demand, which diminishes the capacity factor and operating hours of peak load plants, resulting in lower contributions to CO2 reduction due to their relatively low energy efficiency However, this effect is less pronounced in the 600 MW scenario, as heavy fuel oil (HFO) is increasingly substituted later in the period analyzed in the dynamic baseline.

The dynamic baseline study indicates an anticipated reduction of approximately 0.600 kg CO2 per kWh of wind energy when no additional wind capacity is integrated into the system However, if there is an increase of 2,000 MW in wind capacity during this timeframe, the CO2 reduction associated with the 60 MW project is significantly enhanced.

The introduction of additional wind capacity during this period enhances CO2 reduction across all projects initiated, benefiting earlier projects like the first CDM initiative in Egypt This improvement is attributed to rising electricity demand and a gradual shift from natural gas (NG) to heavy fuel oil (HFO) as the primary fuel source.

The characteristics of power systems that rely on a mix of fossil fuels, particularly when coal is predominantly used by base load plants, can significantly affect CO2 emissions While case studies on static baselines did not demonstrate this effect, similar outcomes would likely arise in static baseline studies with increased wind capacity and the substitution of heavy fuel oil (HFO) and natural gas (NG).

This chapter highlights the challenges of allocating CO2 emission reduction amounts to individual renewable energy projects It emphasizes that different renewable energy sources, such as wind power and photovoltaics, produce varying electricity profiles and consequently have distinct impacts on CO2 reduction within power systems.

Generally, the effect of a particular renewables project depends on the totality of all renewables projects integrated into the electric system.

CARBON FINANCING: THE ZAFARANA EXAMPLE

Introduction

This chapter addresses a crucial aspect of CDM projects: converting emission reductions into cash flow to enhance financial viability through their sale A specialized spreadsheet-based model is utilized for financial analysis, focusing on a 60 MW wind farm financed under standard non-recourse (project finance) principles, evaluating the impact of emission reduction sales on costs and benefits.

The financial analysis aims to evaluate the impact of "carbon financing" on the financing of wind energy projects in Egypt, rather than assessing their overall financial viability It highlights how income from selling CO2 reductions influences project financing By examining the costs and revenue streams associated with the Clean Development Mechanism (CDM) throughout the project's life cycle, the analysis illustrates the significant financial differences that arise from CDM participation.

This chapter will explore the unique aspects of project financing specific to the Clean Development Mechanism (CDM) It will outline the additional considerations that developers and financiers, familiar with conventional power projects like wind parks, must address to transition a standard project into a CDM project.

There are several perspectives from which to approach the issue of carbon valuation:

! Equity investors and debt providers;

! Buyers of emission reductions; and

! The United Nations Framework Convention on Climate Change and the Kyoto Protocol, including its CDM

This analysis focuses on the perspectives of developers and investors, the key stakeholders who influence the development and completion of CDM projects Unlike other parties, who primarily establish the rules and framework for CDM initiatives, developers must ensure their projects meet all eligibility criteria and adhere to international regulations for calculating emission reductions.

The net cost-benefit effect of selling emission reductions is influenced by numerous variables, making it challenging to establish universal guidelines for determining the viability of pursuing the "CDM route." This analysis aims to explore the various CDM rules and their implications for decision-making.

The financial analysis models and assumptions are based on comparable projects, aiming to provide a representative overview of a wind park project in a developing country However, the inputs and results are illustrative and do not reflect the actual financial costs and returns of wind farms in Egypt, specifically regarding the Zafarana 60 MW wind farm By focusing on this specific case study, the analysis clarifies the implications of the Clean Development Mechanism (CDM) for project financing, offering valuable insights for project developers and investors on the necessary steps and decision-making criteria throughout the process.

Two different valuations of the Zafarana wind park are presented below The first is a so-called

“quick scan” valuation The second is a quite detailed financial assessment.

ADDITIONALITY ISSUES

Financial additionality in the Clean Development Mechanism (CDM) refers to the idea that revenue from Certified Emission Reductions (CERs) can transform a previously non-viable project into a financially feasible one This means that the project would not have proceeded without the financial support from CO2 financing, distinguishing it from the business-as-usual scenario Thus, projects demonstrating financial additionality are those that are made possible solely through the inclusion of carbon financing.

The concept of financial additionality is often ineffective for several reasons For instance, in projects like the Zafarana wind park, the revenue from selling CO2 reductions is minimal compared to the project's overall income from power sales, meaning that CO2 credits do not significantly impact project viability Generally, if a project cannot succeed without CO2 credits, it is unlikely to thrive with them However, if CO2 prices reach a higher range, such as US$10 per ton, carbon financing can transform a marginal project into a profitable one.

While CO2 financing has a notable impact, the concept of financial additionality is not particularly applicable to projects like Zafarana The role of CDM financing is significant in enhancing the project's financial returns, which can elevate its priority for investors and increase the likelihood of successful implementation.

Program additionality is a concept closely related to financial additionality, aimed at preventing governments from using existing funds to finance Clean Development Mechanism (CDM) projects For instance, if a government utilizes existing Official Development Aid (ODA) funds instead of securing new public funding for CDM projects, it raises concerns about the redirection of development aid To address this issue, host countries are encouraged to implement criteria for program additionality, ensuring that the usual flow of development aid remains intact and is not diverted to CDM investments Consequently, project developers must demonstrate to the host country that the financing for CDM projects is indeed additional to the current development aid.

Wind park developers often inquire whether converting their project into a Clean Development Mechanism (CDM) initiative is beneficial Before conducting an in-depth baseline assessment and CDM analysis, it's advisable to perform a preliminary evaluation to understand the potential advantages that CDM can offer to the project.

A crucial decision regarding the adoption of the Clean Development Mechanism (CDM) should be made early in the process, minimizing costs in terms of time and finances for the developer While the CDM emphasizes financial additionality, meaning only projects that wouldn't have been funded otherwise qualify, it is essential that a project's fundamental financial metrics are favorable It is important to note that the CDM cannot transform a poor project into a successful one; however, it may enhance the viability of a marginal project Therefore, CDM financing should only be considered in the later stages of the pre-feasibility study If the pre-feasibility outcomes are promising, a structured approach can be adopted to evaluate the project's potential for CDM benefits.

The following questions should be answered:

To understand the average kg CO2/kWh emissions from your local power utility, refer to the utility’s annual environmental report or contact their environmental department If CO2 emission figures are not directly available, gather data on the generation mix of all power sources within the grid system, focusing on the percentage of electricity contributed by each fuel type over the past year.

The CDM route is not possible

Government department responsible for the environment, the national climate focal point, or similar.

The CDM route is not possible

Has the host country (e.g Egypt) ratified the UNFCCC?

The host country must provide principal approval for the project to be registered as a Clean Development Mechanism (CDM) initiative To assess the project's potential emissions, one can analyze the energy mix of an average kilowatt-hour (kWh), which might consist of 50% coal, 30% natural gas, and 20% hydro generation By multiplying these percentage shares with the internationally recognized standard emission factors for each fuel type, the total emissions in kilograms can be accurately calculated.

Multiply the CO2/kWh figure with the projected annual power production of the wind park to get the annual emission savings

To estimate annual emissions savings, apply a conservative value of $3 to $7 per ton of CO2 For more precise and current pricing, consult potential buyers such as the Prototype Carbon Fund (PCF) from the World Bank or the Dutch government's CERUPT program.

! Insert the annual CO2 revenue into the project’s financial model

! Add the following costs related to turning a project into a CDM:

! Use paid consultants to manage entire CDM process – approximately US$ 100,000 in Year 0 of the project; or, “do it yourself” – US$ 50,000 and three man months of professional time 53

The analysis provides insights into the project's institutional viability, determining its eligibility as a Clean Development Mechanism (CDM) project, while also offering an estimated range for expected financial returns This preliminary assessment closely aligns with outcomes from a more thorough evaluation of baseline emissions, CO2 values, and associated costs.

Based on a favorable analysis outcome, a decision must be made on whether to engage specialized CDM consultants or to handle the CDM component internally within the standard project development framework Regardless of the choice, a comprehensive analysis of key variables is essential to obtain precise baseline figures, CO2 emissions values, costs, and timelines for host country approvals.

This section outlines the findings of a pre-feasibility study assessing the Clean Development Mechanism (CDM) and its implications for the 60 MW wind farm project in Zafarana The analysis relies on essential information typically accessible during the initial stages of project development.

! Egypt ratified the UNFCCC on December 5, 1994, and it signed the Kyoto

Protocol on March 3, 1999; the Kyoto Protocol is not yet ratified by Egypt 54

52 The emission values can be obtained from a variety of sources including http://retscreen.gc.ca.)

53 These costs are based on quotes received from industry sources presently involved in emission reductions projects

! Principle approval can be obtained from:

Mr Ibrahim Abdel Gelil Executive Chairman of the Egyptian Environmental Affairs Agency Egyptian Environmental Affairs Agency

30 Misr Helwan Road, El Maadi El-Mohandeseen/Dokki

11728 Cairo tel (20-2)352-6481 iagelil@idsc.gov.eg

Total national electricity generation (1999E): 64.7 billion kWh Around 79% of Egypt's electric generating capacity is thermal (primarily gas turbines), with the remaining 21% hydroelectric 55

Assume that the wind power would replace the marginal power plants (i.e gas), not the base load hydropower Each kWh of wind power therefore displaces 1kWh of gas power

Emission factor (new generation gas turbines): 0.461 t CO2/MWh 56

Wind park power production (60 MW at 4,433 full load hours/year)

CO2 price @ $4/t = $ 490,504/annum Value over project life span = $ 9,810, 080

Using external consultants for the CDM documentary requirements increases development costs in year 0 by $100,000

Gross income from electricity sales @ $0.0289/kWh

Combined gross income (power + CO2)

54 Source: http://www.highway.idsc.gov.eg/ccinfo/ obtained via http://www.unfccc.int/text/resource/country/egypt.html

55 Source: http://www.eia.doe.gov/emeu/cabs/egypt.html

56 Source http://retscreen.gc.ca

Increase in annual gross income = 6%

Feeding the CDM income into the project’s financial model gives the following results:

Impact on Return on Equity = + 4.67%

A preliminary assessment suggests that converting this project into a Clean Development Mechanism (CDM) initiative could enhance investor returns by nearly 5% However, this analysis primarily highlights potential additional benefits from CDM participation and does not assess the project's overall financial viability The revenue from CO2 credits represents approximately 6% of the income from power sales For the project to succeed, it must be viable or at least marginally viable before considering CDM revenue, as income from CDM alone is insufficient to ensure the project's success.

Detailed CDM Financial Assessment

The financial viability of the Zafarana wind park is assessed using standard project finance methods, making it easier for sponsors and debt providers to evaluate and compare with similar investments However, this approach may undervalue certain benefits of wind power projects, as it does not account for the project's financial risk relative to the broader Egyptian power sector or other assets in shareholders' portfolios While alternative methods like the Capital Asset Pricing Model can provide these relative risk values, the focus here is on comparing the scenarios "with" and "without CDM," allowing us to rely on the standard non-recourse project finance model.

A financial model was created to evaluate the financial performance of a proposed 60 MW wind farm in Zafarana, projected for construction in 2002 This model utilized an annual cash flow projection method to assess various financial performance indicators.

! Project Internal Rate of Return (IRR);

! Financial Levelised Cost of Production (FLCP);

! Average and minimum Debt Service Cover Ratio (DSCR); and

! Average and minimum Interest Cover Ratios (ICR)

Numerous analysts, including Amy Ellsworth in her paper 'CDM Carbon Pricing in the Renewable Energy Sector: A Market Perspective', emphasize that for CDM projects to succeed, they need a robust financial foundation This is crucial, as carbon credits alone are inadequate to ensure the commercial viability of financially unsound projects.

6, November 14, 2000 http://www.greenpeace.org/~climate/climatecountdown/cdmrenew.pdf

The Economic Internal Rate of Return (EIRR) is determined by analyzing the gross cash flow, which is the income after deducting operating expenses, while excluding financing costs This calculation is essential for evaluating the total capital cost of the project.

The Economic Net Present Value (ENPV) is determined by assessing the gross cash flow, which is the income after operating expenses but before financing costs, alongside the total capital cost of the project, using a discount rate of 5% When the ENPV yields a negative value, it indicates that the Effective Internal Rate of Return (EIRR) falls below the applied discount rate.

Return on Equity (RoE) after taxes measures the expected return for equity investors, specifically reflecting 35% of the total project capital cost This metric is derived from the net cash flow, which accounts for income after all costs, taxes, and interest payments.

These indicators were calculated for a reference business-as-usual case (i.e., “without CDM”) and for six CDM cases defined by different emission baselines and CO2-prices

6.4.2 Financial Modeling Assumptions and Inputs

The financial model utilized data sourced from industry and research organizations, especially from the EU-funded CDMED project While efforts were made to ensure the accuracy of this data, the inputs are ultimately based on motivated assumptions and should be regarded accordingly.

The basic inputs and assumptions used in the model include:

• A basic financial structure with 35% equity and 65% concessionary loan (20 years at 3% interest rate with a 5 year grace period);

• The capital costs of the 60 MW wind park are US$ 64 million;

• Power production is 266,000,000kWh/annum; and

• Power is sold at a fixed tariff price of US$ 0.0289/kWh

Under the Clean Development Mechanism (CDM), emission reductions traded in the carbon market are known as Certified Emission Reductions (CERs), with each CER representing one ton of CO2 equivalent These reductions can also account for other greenhouse gases, such as methane and nitrous oxide, by converting their impact into an equivalent amount of CO2 based on global warming potential The trading units for CERs are expressed in US dollars per ton of CO2 (US$/t CO2).

There are a number of different options available to determine the monetary value of the emission reductions generated by a project

58 The non-CO 2 gases regulated under the Kyoto Protocol can be converted to CO 2 equivalents by using the Global Warming Potentials, on a 100-year lifetime basis, developed by the IPPC

59 The conversion factor for C to CO 2 is 3.67

The absence of a formal framework for the Clean Development Mechanism (CDM) has led to an emerging market for Certified Emission Reductions (CERs), driven by early participants like the World Bank's Prototype Carbon Fund and various governmental programs These entities are establishing themselves as price setters in the global CO2 market, allowing project developers to convert CO2 reductions into immediate revenue However, entering this pre-CDM market carries the risk of missing out on potentially higher prices once the CDM is fully operational, presenting a classic dilemma: sell now for a guaranteed but lower price or wait for uncertain future gains.

Currently, the average market price of CO2 is in the range of US$ 3-7/t CO2 For the purposes of this project, two market prices—US$2 and US$10—are used

CO2 buyers can utilize the incremental value approach for projects where income from power and energy sales is insufficient for viability, necessitating additional revenue streams like emission reduction sales This approach involves calculating the incremental value price of CO2 by establishing a predetermined internal rate of return or return on equity, determining the required price per ton of CO2 to meet these returns Consequently, the CO2 price varies by project and is typically much higher than the market price These values are often referred to as the project's mitigation cost, with effective projects demonstrating low costs per ton of CO2, while less effective ones exhibit high costs.

Expected Future CDM Market Price

Various models have been created to forecast potential price ranges for Certified Emission Reductions (CERs) after the full implementation of the Clean Development Mechanism (CDM) These predictions are influenced by several uncertain factors, including U.S participation in the global carbon offset market and the integration of carbon sinks The price of CERs will largely depend on the quantity and quality of emission reductions available, as well as market dynamics involving buyers and sellers A well-functioning, internationally recognized CDM program would mitigate the risks associated with CERs, providing buyers with greater assurance of resale potential, which in turn would enhance the value of CERs.

It is unlikely that the future price of CERs will either increase or drop significantly below the present levels of US$2-$10.

The ownership of Certified Emission Reductions (CERs) in a project is a crucial consideration, as various stakeholders—including project developers, investors, and banks—may seek to secure their rights to these credits Legal ownership is typically influenced by the project's financing structure, with developers aiming to claim CERs to offset development costs, while equity providers assert their claims as primary financiers Often, a Special Purpose Company (SPC) is established to manage the project and can sell CERs to its financiers or external parties Ultimately, the focus should not solely be on who owns the CERs, but rather on how the revenue generated from their sale is utilized.

In scenarios where a project's financial viability is marginal, the revenue generated from selling Certified Emission Reductions (CERs) becomes crucial for meeting the required return rates set by financiers These CER revenues are considered income for the project, allowing the owner to leverage this funding to strengthen their claim on the project's returns Additionally, the legal owner of the CERs might need to assign their revenue claims to the project's bank as collateral.

If a project is financially viable without relying on CER revenues, the owner of the CERs has the flexibility to either sell or retain them based on their specific needs This scenario highlights the independence of the project from CER revenue dependency.

“financially additional” The ownership of the CERs can then be used either as an offset against own emissions or sold to another party.

Extracting carbon value from a project incurs additional costs beyond the typical development expenses of a non-CDM wind park These CDM transaction costs are not influenced by the project's size, meaning that smaller projects face higher transaction costs as a percentage of their overall expenses compared to larger projects To address this challenge for smaller initiatives, a set of concessionary rules is anticipated to be established under the CDM framework.

CDM transaction costs are incurred at several steps in the CDM project cycle (section 2.7), and include amongst others:

! Securing host country approval of the project as a CDM project;

! Determining the emission baseline and the projected emission reductions;

! Selecting a suitable international environmental auditing company accredited by the CDM executive board to monitor and verify the project;

! Development of an acceptable monitoring and verification plan;

! Validation of the baseline and the project as such by an international auditing company accredited by the CDM executive board;

! Registering the project with the CDM;

! Meeting the monitoring and verification requirements of each crediting periods;

! Verification by an international environmental auditing company;

! Placement of the emission reductions (CERs) for potential buyers;

! Negotiation with potential buyers; and

! Drawing up the appropriate legal framework for the issuing and selling of the emission reductions

Results of Financial Modeling

When conducting CDM analysis, it's crucial to remember that the model and assumptions presented are solely for illustrative purposes and do not accurately represent actual costs and returns.

The estimated costs outlined in this article are derived from feedback provided by companies currently offering these services For a comprehensive overview of transaction costs, refer to the document titled "Responses by the SSC Panel Related to Its Terms of Reference," available at http://unfccc.int/cdm/Panels/ssc/resptor.pdf.

The responsibility for issuing credits lies with the CDM registry administrator, who operates under the authority of the CDM Executive Board, as outlined in the Report of the Conference of the Parties from its seventh session.

From 29 October to 10 November 2001, significant discussions took place in Marrakesh regarding the development of wind farms in Egypt According to financial modeling, a 60 MW wind farm at Zafarana could enhance its financial viability by selling emission reduction credits associated with the project.

This article examines how CO2 revenues influence project financing by focusing on two key variables: the annual emission reductions achieved and the revenue generated per ton of CO2.

CO2 that could be realized

The following tables present a comparison of financial indicators under business-as-usual conditions, excluding CO2 revenues, with three distinct CDM cases, each representing a different baseline emission reduction scenario These three cases, selected from the seven scenarios outlined in chapter 4, illustrate a range of CO2 emission reductions—low, middle, and high—providing valuable insights for financial analysis The annual emission reduction figures for these cases are detailed below.

Case A: Historical/all plants = 147,513 tons of CO2/annum

Case B: Economically attractive NG plant = 181,465 tons CO2/annum

Case C: Last five year additions-all fuels (top 20%) = 159,322 tons CO2/annum

The values presented in Table 12 and Table 13 illustrate the relative changes in financial performance based on different baseline and pricing scenarios It is important to note that these figures do not represent the actual returns that can be anticipated from wind energy projects.

The modeling utilizes two distinct CO2 prices: US$2/ton and US$10/ton, representing a range of potential values in the CO2 offset market for renewable energy projects in developing countries The $2 price serves as a conservative yet realistic estimate based on current market conditions, while the $10 price reflects an optimistic outlook from project partners regarding future market growth.

Table 12: Financial results with US$2/t CO 2 CER price.

Economic internal rate of return* 5.63% 6.32% 6.48% 6.37%

Return on equity after taxes 19.10% 20.96% 21.36% 21.10%

* Excludes financing costs, i.e., interest on loans

Table 13: Financial results with US$10/t CO 2 CER price

Economic internal rate of return* 5.36% 9.01% 9.75% 9.27%

Return on equity after taxes 19.1% 27.34% 29.0% 27.93%

* Excludes financing costs, i.e., interest on loans.

Conclusions

6.6.1 Business as Usual Compared to the CDM

Pursuing the CDM route is financially advantageous for the project, as it enhances the return on equity by 2.26% at a CER price of $2 and up to 9.9% at $10 This supports earlier predictions from the “quick scan” assessment, confirming that transforming a conventional wind energy project of this scale into a CDM project will significantly benefit investors.

The CDM’s impact on a project’s finances depends both on the baseline and on the CER price Developers should attempt to maximize both variables

CER revenues are crucial for enhancing the attractiveness of marginally viable projects, making them more appealing to investors While they alone cannot transform a non-viable project into a financially sound one, they can significantly improve the project's return potential This increase in attractiveness can elevate the project's ranking among investment opportunities, thereby boosting the chances of securing necessary funding and facilitating the construction of the wind park.

It's essential to consider the specific context of this project, as varying costs, electricity tariffs, and baseline conditions, along with differing capacity factors, can significantly influence the outcomes and results compared to other projects.

6.6.2 Implications of Different CO 2 -Prices

The discounted net present value of Certified Emission Reductions (CERs) can account for 5-30% of a project's capital cost, depending on the CO2 price and baseline scenario Even at the lower end of this range, this substantial amount significantly impacts the project's financial viability and overall structure.

A five-fold increase in the value of Certified Emission Reductions (CERs), rising from US$2 to US$10, enhances the project's return on equity by approximately 8% This suggests that the project's financial performance is relatively stable in response to fluctuations in CO2 prices, indicating that once CO2 financing is secured, minor variations in CER values are unlikely to have a substantial impact on the project's overall financial outcomes.

In conclusion, the Clean Development Mechanism (CDM) significantly enhances the probability of project implementation, making it advisable for such initiatives to be developed as CDM projects.

The effect of the roughly 20% difference between the “best” (181,465 tCO2/annum) and the

The project's worst-case scenario, with a baseline of 147,513 tCO2 per annum, results in a return on equity increase ranging from 0.4% (US$2) to 1.66% (US$10) This indicates that the project's financial performance is relatively insensitive to variations in the baseline Therefore, when assessing different baseline scenarios, project developers should prioritize not only emission reductions but also consider factors like the ease of establishing and verifying the baseline and the associated certification costs, as these will differ based on the selected baseline.

6.6.4 Risk Mitigation through CO 2 Revenues

Securing income from selling creditable emission reductions (CERs) significantly enhances the financial structure of the project CERs not only provide an additional revenue stream beyond electricity sales, but also mitigate overall financial risk by diversifying income sources, which can lower the project's cost of capital Furthermore, since CERs are traded in stable OECD currencies like US Dollars or Euros, they are insulated from the typical currency risks faced by developing countries, unlike electricity generated from a CDM wind park that is usually sold in local currency.

Summary

This chapter explores the crucial aspect of converting emission reductions into cash flow for projects and examines how the sale of these reductions influences financial viability A financial analysis was conducted using two specialized spreadsheet models designed for this purpose, allowing for an assessment of various baseline scenarios.

The financial analysis of the MW wind farm, conducted under standard non-recourse project finance principles, examines various "carbon financing" scenarios and their impact on project financing While it does not evaluate the overall financial viability of wind energy in Egypt, it highlights the significant influence of Certified Emission Reduction (CER) income on the project's financial structure and outcomes.

Before starting the CDM process, it's essential to conduct a "quick scan" assessment to evaluate the potential impact of CER revenues on a project's finances This approach can provide a reasonable estimate of outcomes compared to a detailed CDM analysis While CO2 revenues won't transform a financially struggling project into a successful one, they can enhance the financial viability of marginal projects Depending on the CER price and baseline scenario, the discounted net present value of CERs may account for 5% to 30% of the project's capital cost.

The financial analysis evaluated the effects of CO2 revenues at two pricing levels: US$2 and US$10 per ton of CO2 For each price point, the study assessed the implications of three distinct emission reduction baselines—best, worst, and average—based on the volume of CO2 mitigated.

Following the CDM route proves financially advantageous for the project across various pricing and baseline scenarios The project's return on equity significantly increases, ranging from 2.26% with CO2 priced at $2/tCO2 to 9.9% at $10/tCO2 This aligns with earlier predictions from the "quick scan" assessment, confirming that transforming a conventional wind energy project of this magnitude into a CDM project offers substantial benefits for investors.

The disparity of approximately 23% between the "best" and "worst" baselines can enhance the project's return on equity by 0.4% (US$2) to 1.66% (US$10) Financial outcomes show minimal sensitivity to fluctuations in CER prices; a five-fold increase from US$2 to US$10 boosts return on equity by over 8% Therefore, when selecting a baseline, it is crucial to not only aim for maximizing attributable emission reductions but also to consider factors such as simplicity and transparency in the establishment of the baseline, along with effective monitoring and verification procedures.

The analysis indicates that while the impact of CO2 revenues on the overall return on investment is modest at a low CO2 price of $2, it can enhance the return on equity for investors by approximately 2.26% This increase is significant in a conservative scenario and could be pivotal in determining whether a project proceeds or is halted.

In short it can be concluded that the CDM creates a suitable and advisable financing option to use in case of projects such as the wind park in Zafarana.

FINANCIAL SPREADSHEET MODEL

The sections below describe the MS EXCEL based financial analysis model used in the report

The following assumptions are listed on the “Assumptions” sheet in the model

Rated capacity of the wind turbines installed at the wind farm

No of WTG Number of wind turbine generator units

Number of hours per year that the turbines will generate power at their rated capacity

Capacity factor The percentage of full load hours per year

Power (kWh) produced by the wind park per year based on capacity factor

Reduction in nominal power production due to diverse losses in the actual wind farm

Actual expected power production taking into account the wind farm reduction factor

Economic Lifetime Number of years of expected operation

Average inflation rate over project lifetime (used for comparison purposes and not as an input to modeling)

Rate at which the future value streams are reduced compared to value at start-up year Electricity escalation

Rate at which the electricity tariff increases over time (0% in this case)

Price at which electricity produced at the wind farm is sold ($/kWh)

To enhance the commercial viability of wind farms, additional value or subsidies are essential These incentives may encompass the true avoided costs of generation, capacity payments, voltage relief, and the postponement of investments in transmission upgrades.

This value also covers for inaccuracies in all the other values used in the modeling

The sum of the electricity tariff and other electricity value

Number of years over which the capital devaluation of the wind farm is used as a tax deductible expense

Flat Rate Depreciation Annual rate of depreciation

Tax rate to which the wind farm’s profits will be subject

Cost of the Wind farms to the point of being installed on site

Cost of ancillary civil works such a roads, foundations etc

Installation Cost of installing the turbines

Cost of connecting the wind farm to the electricity network

Cost of planning and managing the project up to financial closure Total Capital costs

Capital Subsidy (% of total costs) Subsidy provided if relevant

Total Capital Investment Total capital cost after subsidies

O&M costs per year Operation and Maintenance costs

Other operating costs incl insurance

Human resources Labour cost per annum

Cost of monitoring, verifying and certifying emission reductions per certification period Refurbishment year

Cost of refurbishing specific components of the wind farm during its lifetime

% of capital cost that will be provided by the investors

Value Value of the capital investment

Commercial Interest rate Rate at which debt is rated

Period Period over which debt will be repaid

% of capital cost covered by debt (100% - equity)

Annual reductions in greenhouse gas emissions in equivalent tons of CO 2

Income per annum from sales of certified emission reductions

Cost of registering the project as an CDM project, cost of emission baseline development

The financial analysis sheets (Fin BAU, FIN CO2 a, Fin CO2 b, FIN CO2 C) employ a cash flow-based approach with annual data to assess various financial performance indicators, including Internal Rate of Return (IRR), Return on Equity, Debt Service Cover Ratio, Minimum Debt Service Cover Ratio, Interest Cover Ratio, and Minimum Interest Cover Ratio, utilizing standard financial functions.

Two sets of financial analysis spreadsheets are provided which make the financial analysis under various baseline scenarios for two different CO2 prices (US$2 and US$10)

The article analyzes various scenarios across individual sheets, with the Fin BAU (Business as Usual) sheet focusing on the project's finances without considering CO2 costs or revenues Other "Fin" sheets assess the effects of different CO2 baselines on the project's financial outcomes.

The inputs to the financial analyses sheets are listed on the Assumptions sheet Any changes on the assumption sheet will automatically change the inputs on the financial analysis sheets

The reports sheets contain the results of each of the cash flow analysis sheets for easy comparison.

REVENUES FROM WIND AND ELECTRICITY MARKETS

SUSTAINABILITY ASSESSMENT OF ZAFARANA

Article 12 of the Kyoto Protocol defines the CDM as a mechanism to enhance the sustainable development of the host country To ensure that CDM projects are compatible with sustainable development objectives, policymakers in developing countries need information about the alternative choices involved and how CDM projects affect clear and recognizable social, economic and environmental issues Hence, it is useful to develop a set of indicators that could provide the basis for evaluating project’s performance in achieving sustainability goals and targets

This chapter focuses on the sustainability assessment of the Zafarana project, structured into several key sections Section 7.1 defines the dimensions of sustainability to be evaluated In section 7.2, specific indicators are identified to operationalize the sustainability concept, providing precise information on the satisfaction of these dimensions Section 7.3 examines the project's impact across various sustainability dimensions, using the established indicators to determine if sustainability criteria are met An overall sustainability assessment is conducted in section 7.4 through a qualitative multicriteria evaluation, measuring the degree of sustainability and testing the analysis's sensitivity Finally, section 7.5 presents a summary of the findings and conclusions drawn from the assessment.

In recent years, there has been a growing focus on developing sustainable development indicators to evaluate sustainability in economic analysis and policy Various analytical frameworks have been proposed to define and communicate these indicators, each influenced by different disciplines that lead to unique conceptual frameworks and normative bases Key differences among these frameworks include their methods for identifying measurable dimensions and grouping relevant issues, as well as the concepts justifying their selection processes Economists prioritize maximizing net welfare while preserving economic and ecological assets, whereas social perspectives emphasize inequality and poverty reduction, and environmental viewpoints concentrate on natural resource management and ecosystem resilience.

The identification of indicators for sustainable development requires a clearer consensus on their definitions and measurements Typically, these indicators encompass various elements such as pollution control, nature conservation, resource depletion, social welfare, education, employment, and waste management, creating a broad spectrum that often blurs the lines between sustainable and traditional development goals As a result, the unique factors that differentiate sustainable development are often overshadowed by longstanding issues that remain unresolved despite the sustainable development label Moreover, many indicators focus primarily on quantifiable aspects of sustainability, neglecting crucial elements that are either difficult to measure or lack available quantitative data.

Recent advancements in sustainable development have focused on creating a comprehensive operational framework that encompasses its various dimensions (Bossel, 1999; Meadows, 1998) A key component of this effort is the System Orientor Theory (Bossel, 1998, 1999), which aims to break through existing disciplinary and conceptual barriers in system analysis This approach seeks to clarify the criteria for sustainable development and establish measurable indicators to track progress toward sustainability.

The System Orientors approach addresses sustainability as a basic property of complex systems

Sustainability is a fundamental concept that refers to a system's ability to endure, thrive, and evolve within its natural environment For a system to achieve growth and development, it must consider several essential properties or "orientors" that define its viability Key dimensions of sustainability include various factors that contribute to the overall health and longevity of the system (Bossel, 1999).

(i) Existence: The system must be compatible with and able to exist in its normal environmental state

(ii) Effectiveness: The system should on balance be effective in its effort to secure scarce resources

(iii) Freedom of action: The system must have the ability to cope in various ways with the challenges posed by its environmental variety

(iv) Adaptability: The system must be able to generate appropriate responses to challenges posed by its environmental change

(v) Coexistence: The system must be able to modify its behaviour to account for behaviour and interests of other systems (actors) in its environment

To effectively implement the sustainability framework for the Zafarana project, it is essential to identify clear indicators that accurately reflect its performance across various sustainability dimensions The selection of these indicators is inherently subjective, shaped by individual values and influenced by the understanding and perception of the relevant issues.

The Zafarana project represents a significant technological innovation within the Egyptian energy system, creating new opportunities for achieving developmental goals By introducing novel technology, it fosters new interactions among economic agents, enhancing their ability to adapt and evolve This innovation leads to a co-evolution of interconnected economic components, resulting in a more diverse and efficient energy system Specifically, the implementation of wind farm technology in the Zafarana project will diversify the energy supply, reducing dependence on exhaustible resources and increasing resilience to external shocks.

At the same time, a significant deployment of wind turbines could foster the development of a web of mutually reinforcing economic activities

The introduction of new energy technologies, such as wind farm technology, acts as a destabilizing factor within the energy system, necessitating significant changes in organizational and technological frameworks To fully leverage these advancements, existing planning practices and operational procedures must be modified to accommodate the fluctuating power output from wind turbines, which is influenced by variable wind speeds This adaptation requires updated dispatching routines, enhanced analytical tools for efficient power evacuation, and innovative solutions to grid integration challenges Additionally, a robust service-supplier network is essential for maintaining operational efficiency, indicating that both technical and managerial structures will need to evolve to create a supportive environment for the successful implementation of these technologies.

The viability of the Zafarana project requires a comprehensive set of indicators that address two interconnected perspectives: first, its contribution to sustainable energy systems and overall economic development, and second, the project's sustainability within its specific technological and economic context Various indicators have been proposed to evaluate these aspects, as summarized in Table 14.

The viability of the project is assessed through several key indicators: a) Suitability and urgency, which measures how well the project aligns with national objectives and energy sector priorities; b) Cost effectiveness, evaluating the cost per kWh of electricity generated; c) Risk of obsolescence, considering both economic obsolescence from rapid advancements in wind technology and technical obsolescence due to inadequate support; d) Flexibility, referring to the adaptability of wind technology to the power supply system's operational characteristics; and e) Technological capability, which examines the availability of necessary human, organizational resources, institutions, and service-supplier networks to sustain the technology throughout its lifespan.

Table 14: Indicators of the sustainability of the Zafarana project.

Viability of the Project within the Egyptian technological context

Contribution of the project to the sustainability of the economic and energy systems

Existence Suitability and urgency Suitability and urgency

Effectiveness Cost effectiveness (energy) Efficacy on GHG reductions

Freedom of action Risk of obsolescence Resilience

Coexistence Technological capability Environmental impacts

The Zafarana project plays a crucial role in enhancing the sustainability of the power system through several key indicators Firstly, it addresses suitability and urgency, emphasizing the immediate need for renewable energy solutions Secondly, the project demonstrates effectiveness in greenhouse gas (GHG) reductions, showcasing its potential and cost-effectiveness in minimizing emissions Additionally, it contributes to the resilience of the energy system by broadening its resource base and preparing it for external shocks The project also promotes technological diversification, enriching the national techno-economic landscape Lastly, it considers environmental impacts, assessing the project's overall effect on the ecosystem.

The next two sections present a summary evaluation of the expected project performance in relation to the indicators.

7.4 Performance of the Zafarana Project

7.4.1 Viability of the Zafarana project

The suitability and urgency of new technologies, such as wind farms, are guided by national sectoral priorities, particularly those set by the Egypt Energy Authority The strategic goals include optimizing indigenous energy resources and maximizing the use of non-combustible resources, which necessitate the deployment of large-scale wind power generation, especially given the significant wind resource potential in the Gulf of Suez zone Consequently, renewable energy has become a key component of Egypt's long-term energy planning, with a target for renewable sources to supply 5% of primary energy consumption by 2005, requiring the installation of 600 MW of wind power capacity Looking ahead, the National Renewable Energy Authority (NREA) aims to expand wind power generation capacity to 2,000 MW.

The deployment of wind farms not only addresses strict energy-related concerns but also aligns with broader development priorities The SNAP study on GHG Mitigation and Adaptation Technology Assessment highlights that wind power scored the highest among various analyzed technologies This ranking was based on a range of social and economic criteria, including job creation, management conditions, and revenue distribution, showcasing wind power's potential for effective GHG mitigation.

Table 15: Evaluation of social and cultural impacts of GHG mitigation technologies

Combined heat and power production 77

Substitution of oil by natural gas in industries 48

The Zafarana project aligns with Egypt's development strategies by enhancing the robustness of the energy system while also offering significant technological advantages This initiative holds substantial potential for achieving broader economic and social objectives, making it a vital component of the country's energy landscape.

QUANTIFYING SOCIAL BENEFITS AND COSTS OF CDM

PROJECTS: METHODOLOGY AND A CASE STUDY FROM ZAFARANA

The Zafarana wind park offers significant benefits, including employment creation, public health improvements, gas exports, and deferred investments in the public energy sector These ancillary advantages are crucial for potential host countries, as they can greatly impact a developing nation's decision to participate in a Clean Development Mechanism (CDM) project.

This section presents a framework for quantitatively assessing the social benefits and costs generated by CDM projects in host countries Due to the absence of accurate data, it does not provide a detailed analysis or precise estimates of employment effects or other benefits from the Zafarana wind park Instead, the focus is on outlining a methodology for evaluating the socio-economic impacts of CDM projects.

This section examines the preliminary impact of the Zafarana wind park on net employment in Egypt, aiming to provide an initial analysis of the employment benefits associated with a 60 MW wind park in the host country.

When evaluating the employment potential of a CDM project in a host country, it is essential to adopt a net approach that focuses solely on the additional jobs created For instance, a wind park that merely reallocates existing labor within the Egyptian economy does not contribute to new job creation; it simply shifts employment from one sector to another Therefore, only the employment of individuals who were unemployed prior to the project's initiation should be considered It is important to note that Egypt's actual unemployment rate is estimated to be around 18%, which is double the official figure.

The wind farm in Zafarana is expected to create significant employment opportunities across five key areas: civil works, mill erection, transportation, tower production, and operations and maintenance Detailed in Table 18, the project outlines the duration of employment, worker numbers, and wage levels for both skilled and unskilled labor Additionally, the project will have a positive socio-economic impact on the local community, leading to increased income for local businesses such as shops, hotels, taxi services, and car rentals While these ancillary activities are likely to be substantial, their exact economic contributions are challenging to quantify and are not included in this analysis.

64 See Energy Information Administration, Egypt (December 2001): http://www.eia.doe.gov/cabs/egypt.html

65 This information has been provided by Ibrahem Oezarslan, Nordex

Table 18: Employment generation by the wind park in Zafarana

The wind park is expected to create a total of 748.2 man-years of employment, with initial civil works, mill erection, transportation, and tower production contributing only 48.2 man-years, which represents about 6.5% of the total The majority of employment—700 man-years—will come from the ongoing operation and maintenance of the wind park, driven by a significant workforce and the long-term nature of these activities over the park's 20-year lifespan.

Table 19 highlights the notable wage disparities between skilled and unskilled labor across various job categories Workers engaged in mill erection earn the highest salaries, while those in operation and maintenance roles receive the lowest compensation.

Table 19: Income generated by the wind farm in Zafarana

Civil works Erection of Mills

The total wages generated over the lifespan of the wind park amount to approximately US$ 881,760, based on average salaries and a conversion rate of 0.22 for E £/US $ With an unemployment rate of 18%, the net employment value created by the wind park is estimated to be around US$ 160,000.

The "first-cut approach" provides a rapid estimate of the socio-economic benefits, particularly employment, generated by a CDM project in the host country Project developers gather essential information and data for social cost analysis during the project feasibility study, which can also be shared with the host country to enhance transparency and collaboration.

66 This information has been provided by Ibrahem Oezarslan, Nordex

A comprehensive framework can be applied to estimate the economic costs and benefits associated with employment generated by CDM projects, encompassing significant indirect social impacts that are often overlooked in market prices and standard cost statements Typically, the necessary data for this assessment may not be readily accessible to project developers or host countries However, if initial evaluations yield positive results, conducting a more thorough analysis of the social benefits linked to employment from CDM projects becomes valuable.

First, in addition to the income to workers generated by the project, this approach takes into account the employment benefits that unemployed workers would lose when employed.

Unemployed workers possess valuable "free" time that can be utilized for alternative activities that generate economic value, such as personal production or home maintenance This economic value of "non-working time" can be quantified as a percentage or ratio compared to the value of working time, which is represented by the wages earned during employment.

Unemployment can lead to detrimental social conditions, significantly increasing mortality risk compared to those who are employed Therefore, it is crucial to recognize the health advantages of employment, particularly its association with a lower risk of death Research indicates that the mortality rate among the unemployed is approximately 4.5 deaths per 1,000 workers, suggesting that hiring one individual can decrease this mortality risk by 4.5 per 1,000.

The assumptions behind the more comprehensive approach lead to a definition, and a calculation, of social welfare gains as follows:

The net income gain for individuals from the new job, considering potential employment benefits and informal work, should be calculated without including net tax wages, as workers in the Zafarana project are exempt from taxation.

The value of non-working time during unemployment is significant, representing 15 percent of gross wages, which is forfeited upon gaining employment.

The health-related implications of unemployment are significant, as being employed helps avoid these adverse effects Research indicates that the excess death rate among unemployed men is notably high, at 4.5 deaths per 1,000 individuals.

To estimate the social benefits, one multiplies the welfare costs (1) minus (2) plus (3) by the period of employment created by the CDM project

Table 22: List of all power plants in Egypt 1999/2000

Power Station No of units Installed capacity (MW)

Shoubra (st) 4x315 1260 HFO/NG 1984-85-88 7410 7100 225.8 1195 71 38.8 Cairo West (st) 4x87.5 350 HFO/NG 1966-79 1722 1618 252.2 348 56 34.8

Cairo West (ext) 2x330 660 HFO/NG 1995 3277 3178 217.9 660 57 40.3

Cairo South (c.c 1) 3x110+4x60 570 NG/HFO/LFO 57-65-1989 3173 3101 224.5 528 68 39.1

Wadi Hof (gas) 3x33.3 100 LFO/NG 1985 107 106 383.4 92 13 22.9

El Tebbin (gas) 2x23 46 LFO/NG 1979 53 53 358.6 40 15 24.5

Demietta (c.c.) 9x125 1125 LFO/NG 1989-93 7379 7275 183.6 1185 71 47.8 Talkha (c.c.) 8x24.2+2x45 283.6 LFO/NG 1979-80-89 1353 1329 243 283 54 36.1

Kafr El Dawar (st) 4x110 440 HFO/NG 1980-84-86 1788 1665 263.1 310 65 33.3

Mahmoudia (c.c.) 8x24.5+2x56 308 LFO/NG 1983-95 1568 1548 207.9 312 57 42.2 Damanhour (300) (st) 1x300 300 HFO/NG 1991 1614 1564 217 300 61 40.4

New Damanhour (st) 3x65 195 HFO/NG 1968-69 693 651 258.1 192 41 34

Old Damanhour (st) 2x15 30 HFO 1960 NA 1 NA NA NA NA NA

El Siuf (gas) 6x33.3 200 LFO/NG 81-82-83-84 251 249 378.8 100 29 23.2

Power Station No of units Installed Fuel type Commissioning Gross Net generation Fuel Peak Load Efficiency capacity (MW) date generation

(GWh) consump- tion rate (g/KWh) load (MW) factor (%)

Abu Kir (st) 4x150+1x300 900 HFO/NG 1983-84-91 4299 3992 227.2 897 55 38.6

Abu Sultan (st) 4x150 600 HFO/NG 1983-84-86 2932 2705 250 589 57 35.1

El Shabab (gas) 3x33.3 100 LFO/NG 1982 119 119 346.8 88 16 25.3

Port Said (gas) 1x21+1x23+1x20 64 LFO/NG 1984-1977 35 34 374.6 42 10 23.4

The report titled “Pre-feasibility Study for a Pilot CDM Project for a Wind Farm in Egypt” was published by the New and Renewable Energy Agency and RIS National Laboratory in 2001 It includes data provided by the New and Renewable Energy Authority (NREA) and the Egyptian Electricity Holding Company (EEHC), highlighting the potential for wind energy development in Egypt.

Table 23: Top 20 per cent plants (least consumption of fuel/GWh) in Egypt using oil and gas fuels a

Fuel consump- tion rate (g/KWh)

Cairo West (ext.) 1995 HFO/NG 3,277 217.9 0.3 214,217 499,841 539,839

Average Emissions (C tons /GWh b ) 148.97 a Historical-Top 20 per cent using HFO, NG, LFO or a mix of these fuels (i.e., all plants excluding hydro)

Power Station Fuel type Gross generation (GWh)

HFO used (tons) NG used

Shoubra (st) HFO/NG 7410 225.8 0.3 501953 1171225 1389937 Cairo West (st) HFO/NG 1722 252.2 0.3 130287 304002 360771 Cairo West (ext) HFO/NG 3277 217.9 0.3 214217 499841 593180 Cairo South (c.c 1) NG/HFO/LFO 3173 224.5 0.3 213702 498637 591752 Cairo South (c.c 2) LFO/NG 1154 184.3 0 0 212682 175875

Wadi Hof (gas) LFO/NG 107 383.4 0 0 41024 33924

El Tebbin (gas) LFO/NG 53 358.6 0 0 19006 15717

Talkha (210) (st) HFO/NG 2247 240.9 0.3 162391 378912 449669 Kafr El Dawar (st) HFO/NG 1788 263.1 0.3 141127 329296 390788

Mahmoudia (c.c.) LFO/NG 1568 207.9 0 0 325987 269572 Damanhour (300) (st) HFO/NG 1614 217 0.3 105071 245167 290949 New Damanhour (st) HFO/NG 693 258.1 0,3 53659 125204 148585

El Siuf (gas) LFO/NG 251 378.8 0 0 95079 78625

Abu Kir (st) HFO/NG 4299 227.2 0.3 293020 683713 811389

Akata (st) HFO/NG 5528 214.6 0.3 355893 830416 985487 Abu Sultan (st) HFO/NG 2932 250 0.3 219900 513100 608916

Power Station Fuel type Gross generation (GWh)

HFO used (tons) NG used

El Shabab (gas) LFO/NG 119 346.8 0 0 41269 34127

Port Said (gas) LFO/NG 35 374.6 0 0 13111 10842

Net Cal Value (TJ/000 ton) C (t C/TJ) Fraction oxidized

NG a 54.32 15.3 0.995 826.9405 a For NG, values are not given in IPCC Natural gas has a value of about 39MJ/cum and a density of 0.718 kg/cum

This gives 39*/718 = 54.32 TJ/th tons as calorific value

Data from Egypt indicates a single figure for fuel consumption (g/KWh) in HFO/NG power plants, with minimal variation in carbon coefficients—approximately 840 C ton/th ton for oil and 827 C ton/th ton for natural gas Consequently, assumptions regarding the ratio of HFO to NG in these plants may only slightly impact carbon emissions Based on the consumption data, it is assumed that HFO/NG plants operate on a 30:70 ratio of HFO to NG, a point confirmed by Egyptian experts.

Table 26: Historical/all plants excluding renewable (hydro)

Power Station Fuel type Gross generation

Cairo West (st) HFO/NG 1722 252.2 0.3 130287 304002 360771

Cairo West (ext) HFO/NG 3277 217.9 0.3 214217 499841 593180

Cairo South (c.c 1) NG/HFO/LFO 3173 224.5 0.3 213702 498637 591752

Wadi Hof (gas) LFO/NG 107 383.4 0 0 41024 33924

El Tebbin (gas) LFO/NG 53 358.6 0 0 19006 15717

Kafr El Dawar (st) HFO/NG 1788 263.1 0.3 141127 329296 390788

New Damanhour (st) HFO/NG 693 258.1 0.3 53659 125204 148585

El Siuf (gas) LFO/NG 251 378.8 0 0 95079 78625

Abu Kir (st) HFO/NG 4299 227.2 0.3 293020 683713 811389

Power Station Fuel type Gross generation

Abu Sultan (st) HFO/NG 2932 250 0.3 219900 513100 608916

El Shabab (gas) LFO/NG 119 346.8 0 0 41269 34127

Port Said (gas) LFO/NG 35 374.6 0 0 13111 10842

Table 27: Last fives years of additions/top 20 percent/all fuels

Power station No Units Comm

Fuel type Fuel cons rate (G/KWh)

Cairo west (ext.) 2*330 1995 3277 1 3277 HFO/NG 217.9 0.3 214217 499841 593180

The average emissions are recorded at 161.85 C tons per GWh Due to incomplete data, certain assumptions were necessary; for instance, it was presumed that a 210 MW unit in Talkha was commissioned in 1995, along with an earlier unit Additionally, two units of 56 MW were also considered in this assessment.

In the case of Mahmoudia, MW units were assumed to be commissioned in 1995, while Damanhour had a single 56 MW unit commissioned For Walidia, a 300 MW unit was commissioned after 1995 Additionally, the generation was adjusted based on the capacity commissioned in 1995 and subsequent years.

In 1996-97, the ratio of Heavy Fuel Oil (HFO) to Natural Gas (NG) usage was 28.7:71.3, which was approximated to a 30:70 ratio for HFO/NG plants in 1999-2000 While the consumption data for that year provided average fuel usage in grams per kilowatt-hour (g/KWh), it did not distinguish between NG and fuel oil Consequently, it was assumed that the same amount of NG and fuel oil was used per unit of power generated Any deviation from this 30:70 ratio could significantly affect carbon emissions, given the differing calorific values of NG (54 TJ/ton) and fuel oil (40.19 TJ/ton).

2 LFO use was negligible in 1996-97 It was assumed that it was negligible in 1999-2000 also

Table 28: Last five years of additions/top 20 percent in fuel category oil and gas fuels (HFO, LFO, NG and a mix of these fuels) a

Power station No Units Comm

Gross generation (GWh) 1995 and later

Fuel type Fuel cons rate (g/KWh)

Cairo west (ext.) 2*330 1995 3277 1 3277 HFO/NG 217.9 0.3 214217 499841 593180

8*24.5+2*56 1993-95 1,68 0.36 570 LFO/NG 207.9 0 0 118541 98026 Damanhour(c.c.) 4*24.2+1*56 1985-95 849 0.37 311 LFO/NG 193.2 0 0 60115 49711

Average emissions (C tons /GWh) 172.6 i.e excluding renewables

Table 29: Last five years of additions/top 20 percent in fuel category/specific fuel LFO/NG

Power station No Units Comm

Gross generation (GWh) 1995 and later

8*24.5+2*56 1993-95 1568 0.36 570 LFO/NG 207.9 0 0 118541 98026 Damanhour(c.c.) 4*24.2+1*56 1985-95 849 0.37 311 LFO/NG 193.2 0 0 60115 49711

Table 30: Last five years of additions/top 20 percent in fuel category/specific fuel HFO/NG

Power station No Units Comm

Gross generation (GWh) 1995 and later

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