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Rural Electrification with Solar Energy as a Climate Protection Strategy Prospective SHS Participation
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International Climate Change Agreements Under the United Nations Framework Convention on Climate Change (UNFCCC), which opened for signature at the Rio Earth Summit in 1992, 36 industrial countries (designated as "Annex I") made voluntary commitments to reduce their GHG emissions to 1990 levels by the year 2000. Developing countries, whose per capita emissions have historically been far below those of industrial countries, agreed to inventory though not limit their GHG emissions. In 1995, at the first Conference of the Parties to the climate convention, the Activities Implemented Jointly pilot phase was created to encourage climate change mitigation projects between parties in different countries. As of June 1999, a total of about 130 AIJ projects of various types (energy, forestry, etc.) had been officially registered, five of which involve SHS dissemination. The number and scale of projects has thus far been modest largely because, at present, Annex I countries cannot use AIJ to help meet their domestic emissions reduction commitments. At the third Conference of the Parties, held in Kyoto, Japan, in 1997, parties agreed to what has become known as the Kyoto Protocol, which established binding emissions limits for Annex I countries. Collectively, these amount to reductions of 5.2% below 1990 industrial-country levels over a five-year period beginning in 2008. Developing countries are not subject to binding limits under the protocol, but can host climate change mitigation projects within their borders by participating in the Clean Development Mechanism. The CDM will provide Certified Emission Reduction (CER) credits to qualifying greenhouse gas reduction projects that also provide development benefits to their non-Annex 1 host country. The CERs will be transferable to industrial countries, where they can be applied toward emissions reduction targets. (The CDM is one of three so-called Kyoto mechanisms established by the protocol to help industrial countries meet their emission targets cost-effectively through international GHG trading.) Since too few countries have ratified the Kyoto Protocol for it to enter into force, the CDM does not yet formally exist. At the same time, the protocol says that crediting of CDM projects can begin in the year 2000; thus the Parties are moving quickly to develop structures and criteria for the CDM in order to give companies and countries guidance on how to proceed with projects as early as possible. If the CDM develops as anticipated, it will most likely prove to be a primary funding source for climate change mitigation projects in developing countries as part of what could become a multibillion-dollar GHG mitigation market. One estimate suggests the flow of CERs could be on the order of 2 billion tons of CO2 per year (that is, just under 10% of current global CO2 emissions and about 50% of projected Kyoto-mandated reductions).47 Possibility and Value of CDM Participation Since SHS dissemination activities simultaneously contribute to climate change mitigation and host-country development, they have the potential to be an excellent fit for the CDM. Based on the criteria being considered, most observers think that most SHS projects would be CDM-eligible, though activities directly supported by official development assistance (ODA) and the GEF would likely be excluded on the basis of additionality criterion (see discussion in next section). The extent to which CERs can help to expand SHS markets will largely depend on future CER values, which are uncertain. A recent White House report estimated that CO2 may trade for $4-6 per ton in 2010, while a U.S. Department of Energy report predicted possible CO2 prices of $20-100 per ton by that time.48 CER values not only will depend on CDM activities, they will be influenced by GHG values from the other Kyoto mechanisms. In addition, the transaction costs associated with CDM participation could have an important impact on the net value of CERs. Given a range of CO2 prices from $4 to $100 per ton, a 40 Wp SHS displacing 0.3 tons of CO2 annually could generate CERs worth anywhere from $1 to $30 per year. This differential underscores the tremendous uncertainty about CER market value projections, but also shows that CDM participation could improve marginal SHS project economics. For example, if CO2 trades at $20 per ton, then each qualifying SHS would generate about $6 in CERs per year. Assuming a 10% discount rate and 20-year life, the $50 present value of the $6 payment stream would equal about 10% of the system's initial wholesale equipment cost. Alternatively, a $6 CER value could augment annual fee-for-service revenues by about 3-5% per system, potentially enabling an otherwise marginal business to attract sufficient investments to proceed. Since direct carbon displacement per Wp is often larger in smaller SHSs, CERs would tend to have a greater beneficial impact on the economics of the smaller systems generally used by poorer families. Anticipating CDM Eligibility Requirements While it is not yet possible to predict with certainty how the CDM will be structured, based on Article 12 of the Kyoto Protocol and on work to date, it appears likely that the eligibility criteria will be based in some way on host-country government approval, advancement of sustainable development in host country, and additionality. Projects would also need to quantify and monitor their GHG reduction benefits adequately. Host-Country Approval To be eligible for the CDM, the Kyoto Protocol says that projects must be "approved by each Party involved." Many developing countries do not yet have institutions or processes in place to evaluate CDM projects and will need to build their capacity for project review. Once procedures are in place, if host-country concerns are adequately addressed in the negotiations, approval seems likely.49 Advancing Sustainable Development The Kyoto Protocol states that "[t]he purpose of the clean development mechanism shall be to assist Parties not included in Annex I in achieving sustainable development." It remains unclear how this sustainable development focus will affect project eligibility. Operationally, a sustainable development criterion would be implicit in the host-country approval process, which gives countries veto power over projects they deem unsuitable. Given the socio-economic development and environmental benefits from SHS dissemination and use (such as improved rural quality of life), SHS activities are likely to be highly compatible with the sustainable development goals of many developing countries. This view is bolstered by the substantial government efforts to encourage SHSs in a diverse range of countries, including Argentina, India, and South Africa. SHS activities are most applicable where large segments of the population still have no electricity, which tends to be in poorer countries. Furthermore, SHS activities primarily benefit rural areas, which often have the greatest need for economic development. Consequently, a prominent role for SHSs within the CDM would help to ensure that local benefits from CDM projects accrue to segments of the developing world in greatest need. Additionality Article 12 of the Kyoto Protocol says that GHG benefits from CDM projects must be "additional to any that would occur in the absence of the certified project activity." While it is not yet clear how additionality will be defined, the parties involved have put forward various interpretations. The concept of environmental additionality embedded in Article 12 would require that all CDM projects result in real, measurable, and long-term GHG emissions reductions. An essential prerequisite would require that projects be additional to what would occur under "business as usual," since CERs granted for standard practices in developing countries would enable Annex I emissions to increase without real corresponding emissions reductions. The concept of financial additionality refers to whether a project's financing is in some way supplemental to "business as usual" financial flows. Many observers believe activities supported by the GEF and ODA should not generate CERs. This would help to ensure that the CDM generates new financial inflows for developing countries and avoids redirecting funds that are already targeting environmental and economic development activities. Under this criterion, while SHS installations directly receiving GEF or ODA funds would be excluded from the CDM, ones indirectly benefiting from GEF or ODA activities (via public education, for example, or feasibility assessments) arguably should not be excluded. Some parties to the debate think a financial additionality criterion should limit the profitability of CER-generating activities to assure that they are not standard practices. Others believe this is unnecessary and that limiting profitability would be counterproductive, discouraging prospective climate protection activities that have the greatest potential to mobilize private capital and generate self-sustaining markets for carbon-reducing technologies and practices. In the case of SHSs, numerous assessments indicate that commercial activities are more sustainable than ones that rely principally on charity.50 Two primary approaches to assessing additionality are being considered: project-specific reviews and benchmarks. Project-specific reviews, which prevailed under the AIJ pilot program, involve constructing "with" and "without" project scenarios on a case-by-case basis. The "without" project scenario, describing what is expected in the project's absence, is compared with a "with project" scenario. If a project demonstrates that it adheres to all the additionality criteria and results in emission reductions, it is deemed additional. Although this approach considers the specific circumstances of individual projects, analysts in good faith can reach different conclusions about the additionality of a given project. In the AIJ pilot phase, case-by-case additionality reviews lacked transparency, resulted in high transaction costs, and created substantial uncertainty for project developers.51 The project-specific approach also creates a strong incentive for developers to manipulate their projections and overstate project benefits. The benchmark approach would set a uniform standard at the regional, national, or subnational level by which the "additionality" of a project could be determined without reliance on subjective assessments. Benchmarks can be performance standards (such as kilograms of CO2 emitted per kilowatt-hour) or "normative" technology standards (that is, that certain technologies are additional while others are not). Performance standards would define a level of GHG emissions below which a given project could generate emissions reduction credits. Technology standards would determine eligibility, though a separate "baseline" (see below) may still be needed to determine the level of emissions additionality. Performance standard benchmarks would generally be based on a country's or region's historical or projected carbon intensity for a given sector or activity. Alternatively, they could be based on a "standard to beat." As a zero emission renewable energy source, SHSs would probably qualify for crediting under most conceivable approaches to carbon intensity benchmarking. Normative technology benchmarks rely on nonquantitative indicators of project additionality. For example, given the well-understood barriers to the dissemination of small-scale renewable energy technologies using solar, hydro, or wind energy-and the potential of such applications to help reduce the cost of these emerging technologies-a normative benchmark could attribute additionality to all such technologies. A normative benchmark may take into account qualitative features that the other benchmarking schemes would miss. It might, for example, exclude electricity generation technologies that could have GHG benefits but cause other environmental concerns, such as large hydro and nuclear facilities. Given clear social benefits and zero emissions energy for project areas, SHSs could receive a blanket endorsement under the CDM in a normative benchmarking arrangement. The disadvantage of granting CDM eligibility to all activities in a given category such as SHSs is that it enables credit for some "free rider" projects that would happen even without CDM participation. In the case of SHSs, the potential environmental downside of granting CERs to some installations that would happen anyway is very small and will probably be offset by the market development benefits of the truly additional SHS installations induced by the CDM. Some parties have suggested using a technology matrix approach that would allow crediting for a project only until its technology reaches a certain level of penetration in a given country. This would be one way to assure that activities are no longer CDM-eligible once they become commercially mainstream. Baseline Setting Once a project is deemed CDM-eligible, the applicable CERs will be calculated by subtracting the project's anticipated emissions from "baseline" emissions expected in the project's absence. If a performance benchmark is used to determine additionality, it would also probably define the baseline. In other cases, a baseline must either be constructed or selected. For SHS projects, setting a baseline to estimate the quantity of CO2 offset by each SHS could be fairly straightforward, with the principal option being whether to base calculations on historic energy use or the more speculative concept of grid avoidance. Standardized approaches to baseline setting could help to keep CDM transaction costs low while achieving reasonable accuracy. Streamlined approaches to monitoring the GHG benefits of SHS activities could do likewise, for example by random sampling or the selected use of remote data acquisition technology, though more experience is needed before specific standard monitoring approaches can be recommended. Nearly all SHS projects in the AIJ and GEF programs use a historic energy baseline, in most cases consisting of kerosene lighting and sometimes lead-acid battery charging.52 Based on this experience, targeted analyses could be used to set standard historical energy baselines by country or possibly by region, expressed in kilograms of CO2 per household per year. These baselines could be set as averages for a broad range of system sizes (for example, 10 to 75 Wp = 240kg/yr) or by narrower ranges of system sizes (12 to 20 Wp = 180 kg/yr; 21 to 35 Wp = 240 kg/yr; 36 to 50 Wp = 300 kg/yr; and so on). Alternatively, historic energy use baselines could be established project-by-project, trading greater possible accuracy for greater cost. In such cases, there could still be advantages to standardizing the methodology for calculations. A forward-looking baseline for SHS could consider avoided grid or mini-grid electrification. While historic energy use patterns in rural areas of many countries may continue for some time, a few developing countries such as South Africa have significant rural electrification programs. If grid or mini-grid electrification serves as the baseline, the impact of SHSs could be calculated in two ways. One approach would base emissions avoidance calculations on the amount of electricity generated by each SHS. Given the small amount of electricity typically generated by each SHS and the inefficiency of kerosene lighting, this approach would often indicate that the GHG benefits from grid avoidance are less than those from direct fuel substitution. The other approach would base calculations on the level of electricity consumption expected if homes were actually connected to a grid (as done in Table 4), which could be based on national or regional averages. This method is appropriate to the extent that SHSs actually are expected to avoid the grid. In any case, the rate of CO2 avoidance per kWh for CER calculations must be selected and would also have an important impact on the amount of CERs attributable to each SHS. |
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Rural Electrification with Solar Energy |
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Message from REPP Staff Executive Summary |
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