1. El Gallo Hydroelectricity Project PDD Analysis

2. 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

3. 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

4. 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 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

5. 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

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

7. 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)

8. 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)

9. 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.

10. 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.

11. 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

12. 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.