El Gallo Hydroelectricity Project PDD Analysis

Project Description Objectives of the project Generate renewable electricity using hydroelectric sources Stimulate commercialisation of renewable energy Broaden private sector experience in development and operation of hydroelectric schemes Meet increasing energy demand for economic growth Project description and proposed activities 30 MW power plant at existing irrigation dam Sale of electricity to industrial users and municipalities Technologies to be employed 30 MW, 47 m head, 77 m3/s flow, 86% efficiency Francis type hydraulic turbines 12 km transmission line

Project Description Project Developer Impulsora Nacional de Electricidad (INELEC) Project Sponsors Prototype Carbon Fund (PCF); Scudder Latin American Power Fund Greenhouse gases targeted CO2 Location of the projects Mexico, State of Guerrero, Cutzamala River Expected Schedule Project start date Project lifetime 2005 25 years

Social and Environmental Benefits Estimate of Greenhouse Gases abated (tons of CO2 equivalent) Annual: 70 kT CO2e Over crediting period: 1480 kT CO2e over 21 years Calculation based on: 120 GWh annual electric output of project 0.584 t CO2e/MWh grid emission rate (replaced by project) (120x1000) MWh x 0.584 t CO2e/MWh = 70 kT CO2e Replacement of mix of coal (58%), fuel oil and gas power generation Baseline scenario Dam built in 1978 for irrigation and electricity production; electricity component never implemented for lack of funds Potential electricity consumers include municipalities with low creditworthiness Difficulties in securing financing

Social and Environmental Benefits Specific global & local environmental benefits greenhouse gas emission reductions no new dam construction, insignificant negative environmental impacts (the construction of the reservoir had already depleted fish stocks) clearing of vegetation for line construction Socio-economic aspects payment for right of way for construction of transmission lines to landowners impact on irrigation of downstream farmers limited by maximum water usage agreement by the dam the dam will ensure a minimum water flow

Finance Total project cost estimates US$ 45 million Sources of financing No public funding

Baseline Methodology Prohibitive barriers to securing financing: high interest rates of Mexican financial markets perceived technology risk (El Gallo is a small hydro by a private developer) transaction and development costs of small project Registration as a CDM project with World Bank backing would overcome those barriers (credibility and creditworthiness) Sale of CO2 is more secured than that of electricity to customers with low creditworthiness (US$ 270,000 per year out of US $7.7 million per year)

Baseline Emission Rates Displacement of electricity that would otherwise be provided by the expansion of the grid Emissions from a technology that represents an economically attractive course of action, taking into account investment barriers Baseline emissions are the average of the approximate operating margin and the build margin (as in the methodology defined for small-scale projects)

Baseline Emission Rates Baseline emissions are the average of the approximate operating margin and the build margin (as in the methodology defined for small-scale projects) operating margin is the weighted average emissions of all generating sources serving the system, excluding hydro, geothermal, wind, low-cost biomass, nuclear and solar build margin is the weighted average emissions of recent capacity additions to the system, defined as the lower of most recent 20% of plants built or the 5 most recent plants.

Project Boundary and Leakage Geographic and system boundary of electric grid: power projects that feed into the Mexican grid can be established almost anywhere in the country. Potential leakages mainly related to plant construction, fuel handling and land inundation are not considered by the baseline methodology.

Expert Reviewers Comments The methodology is valid as the project is a relatively minor addition to the grid. The PDD should consider undertaking an analysis showing that the project is not a least cost option and therefore not part of the baseline scenario. Some barriers identified in the PDD are debatable: perceived technology risk: risk is low as the technology is widely known in Latin America. Meth Panel Recommendation: approval with minor changes

Public Comments The PDD uses the small-scale baseline methodology, yet its capacity exceeds 15MW. Most developing countries face similar difficulties in securing financing for their hydropower projects. Approving the PDD would make any kind of hydropower project, including large ones in China and India, eligible for CDM.