Comments on the Project Design Document on the Huanza Hydroelectric Power Project

submitted for validation for Senter Internationaal’s CERUPT carbon credit programme

We have reviewed the project documentation on the Huanza Hydroelectric Power Project and would like to raise several questions regarding the baseline assumed, additionality of the project, and the effects of climate change on the hydrologic conditions of the region.

Baseline

The Baseline Study Document (BSD) uses the assumption that all the power displaced by Huanza would be fossil–fuel generated marginal power. This assumption is unrealistic.

The BSD assumes that no other hydropower projects will be developed in Peru in the near future (pp.22–23). However according to the Hydropower and Dams World Atlas 2002 (p.228) 1500MW of new hydro capacity is planned for Peru (current installed capacity is 2860MW) with concessions awarded for new hydro projects with a total capacity exceeding 1000MW.

Immediately after Huanza is first completed it may be assumed that it will displace marginal existing power. However, as electricity demand increases Huanza will have the effect of deferring construction of new power plants. During most of the lifetime of the project it should be assumed that Huanza displaces a new power plant that would have been built in its stead, rather than marginal power. Therefore, for the majority of the life of the project, the baseline should reflect the mix of expected power production from new power plants, which would include hydro.

The coal generation that would supposedly be displaced by Huanza is from the privately developed Ilo–2 plant that entered operation in October 2000. It is normal practice for Independent Power Projects in developing countries that power sales are guaranteed through Power Purchase Agreements. The BSD does not mention the power purchasing arrangement for Ilo–2. If there is a PPA for Ilo–2 which guarantees that its power will be purchased then Huanza will not displace coal–fired power. The certifier should thus clarify the nature of Ilo–2’s power sales arrangement.

Additionality

Additionality is a serious concern if the CDM is to gain public acceptance. Developers appear to be proposing projects for carbon credits on a purely speculative basis, hoping that the credits will improve their profits on projects to which they are already committed. The same appearance is given by the Huanza project.

Harza was first awarded a concession for Huanza in 1998 (then in a consortium with Synergics Energy Development and CyA– PROHISA) The Baseline Study states (p.29):

The development of the Huanza project under the CDM is of paramount importance for the successful implementation of the Huanza project. The value of the carbon credits has been included in the investment and business plan for the Huanza project and will improve the IRR to approximately 21%, which is the minimum threshold required by most foreign private investors interested in the Peruvian power sector.

This short statement does not provide sufficient information to adequately assess the additionality of the project. No further details are given of the Huanza investment and business plan. No information is given on the investment assumptions that have guided Harza’s interest in the Huanza project over the past four years nor of what conditions have changed to make carbon credits so important to the project. Also not explained are Huanza’s IRR if carbon credits are not granted, Harza’s minimum threshold for investing in Huanza, and the threshold for developers prepared to settle for less than 21%.

It is not clear that "of paramount importance for the successful implementation of the Huanza project" actually means that the project would not be built without CDM credits.

The stated IRR threshold of 21% is very high. Private power projects in developing countries usually have IRRs of around 14–16%. IRN has reviewed many private power projects in developing countries and has not yet come across one with an IRR as high as 21%. Such a high IRR raises concerns that the main result of giving carbon credits to Huanza would be to subsidize the profits of Harza, rather than to achieve any reduction in greenhouse gas emissions.

An accurate assessment of the project’s additionality should include discussion of the financial viability of Huanza compared to other recently built grid–connected power projects in Peru, including hydroelectric projects, and compared to the plants included in the Ministry of Energy and Mines’ expansion plans.

In the absence of further information and a clear commitment from Harza that Huanza would not proceed without carbon credits the obvious conclusion is that Harza may be attempting to use the CDM to boost their profits on a project to which they are already committed. If this is the case the project will have no climate benefits and will undermine the legitimacy and rationale of the CDM.

Failure to Allow for Impacts of Climate Change in Estimated Project Output

It is well established that climate change will cause major changes in hydrologic conditions and that these changes will affect hydropower performance and dam safety (see e.g. N. Arnell and M. Hume (2000) "Implications of Climate Change for Large Dams and Their Management", World Commission on Dams, Cape Town). The BSD claims (p.48) that the flow data for the Pallca River from the past 35 years represent adequately "the expected average hydrological conditions during the project life." (Project life is given as 50 years (p.53). No mention is made in the BSD of the impact that climate change will have upon the hydrology of the Pallca River.

Given the reality of climate change and its hydrological impacts it is not credible to pretend that future streamflows will be the same as they were in the past. Predictions of the power output of Huanza must take into account the increased hydrological uncertainty caused by climate change.

According to the BSD, Huanza is located just downstream of the outlet of the Transandean Tunnel which discharges the flows of the Marca system of lakes on the eastern side of the Andes into the Pallca River. The BSD adds that the Marca system is the main source of potable water to Lima. The UNEP/WMO document "Common Questions About Climate Change" notes that Lima’s water supply "depends on the summer melt from a glacier that is now in rapid retreat." This implies that the water source for Huanza may eventually be seriously diminished.

Reservoir Emissions

The BSD correctly assumes that greenhouse gas emissions from the operation of the Huanza project are unlikely to be substantial given its small reservoir and the high montane zone in which it is located. The certifier should however note that the figures for typical reservoir emissions given in Table 10 in the BSD are unrealistically low. The highest emission in Table 10 is 156 g/CO2eq./kWh. By comparison Duchemin et al give average emissions from tropical hydro plants as 200–3000 g/CO2eq./kWh (Eric Duchemin et al. (2002) "Hydroelectric Reservoirs as an anthropogenic source of greenhouse gases," World Resource Review (in press)).

We look forward to seeing your response to these comments.

Sincerely,

Barbara Haya

• Visit IRN’s Rivers, Dams and Climate Change Campaign

For further information, please contact:

Patrick McCully
E–mail: patrick@irn.org
Phone: +1 510–848–1155

Barbara Haya
Research Associate
Climate Program
International Rivers Network
bhaya@socrates.berkeley.edu