Patrick McCully
International Rivers Network
1847 Berkeley Way
Berkeley, CA 94703, USA
Tel. 510 848 1155
patrick@irn.org
Submitted to Det Norske Veritas, August 2, 2004

2E Carbon Access:
La Esperanza Hydroelectric Project, Honduras
CDM SSC PDD Version 01 (21 January, 2003)
June 7, 2003 [both dates on original]

Description of project: Three stage 12.73 MW "containment run–of–river" hydropower facility.

Chronology:
Stage 1A (485 kW) completed June 2003
Stage 1B (785 kW) completed May 2004
Stage 2A (11.5 MW) entering construction June 2003

Comments:

1. Additionality

The PDD makes its case for additionality based on barriers of investment, technology and prevailing practice. The cases made for why each of these three barriers exist are unconvincing, lack documentary evidence, and could certainly not be described as "conservative."

1.i Investment barrier

PDD claim:
"Carbon finance from the World Bank and Finnish government was pursued prior to financial closure on Phase 1... Phase 2 is possible due to a loan from CABEI and the inclusion of potential CER revenue.

Contrary evidence:
Carbon finance may indeed have been pursued prior to closure on Phase 1. However this does not prove that carbon finance was necessary for Phase 1 moving forward. Indeed the fact that Phase 1 has already been completed without carbon finance strongly suggests that it was not necessary (although it may have been hoped for as "icing on the cake" for project investors).

A press release from E+Co dated July 28, 2003 on financial closure for Phase 2 mentions funding from E+Co, CABEI and a Honduran private bank, but no mention of any CER revenue. A PowerPoint presentation on E+Co’s financing model dated June 2004 and available on the web site of the Basel Agency for Sustainable Development includes a slide on the financing of La Esperanza. This again makes no mention of the importance of CERs in reaching financial closure. No evidence is given in the PDD to back up the claim for the importance of CER revenue for Phase 2. Without such evidence it is not possible to accept that there is a substantial "investment barrier" to La Esperanza.

1.ii Technological barrier

PDD claim:
"The lack of available knowledge and confidence in the technology involved in small, privately built hydroelectric projects makes this type of development non–existent and difficult to establish."

Contrary evidence:
Seven small hydros have recently been completed or entered construction in Honduras (see below). Furthermore, the two mini–hydros that form Phase 1 of La Esperanza have been completed and the small hydro that forms Phase 2 has entered construction. Investors may have found these projects difficult to establish but they are not impossible and are certainly not "non–existent". 

1.iii            Prevailing practice barrier

PDD Claim:
"Privately financed, built and operated small hydro plants are not common practice in Honduras." 

Contrary evidence:
La Esperanza is just one of 16 small and medium hydroplants included in the Honduran Generation Expansion Plan 2004–08 (see http://www.enee.hn/generacion.htm). Of these plants, (and not including any of the La Esperanza phases) 6 are already online or under construction. [Babilonia and Rio Blanco are already online; Yojoa entered construction in June 2003, Cececapa was to have entered construction in May 2004 and San Carlos and Cortecito supposedly entered construction in July 2004 (see La Esperanza PDD for Babilonia, and PDDs for Rio Blanco; Cececapa; and San Carlos and Cortecito)]. Another small hydro not listed in the 04–08 Expansion Plan came online in 2003 (La Nieve).

The PDD claims that of 16 mainly small hydro projects in Honduras with negotiated PPAs (the projects are not named but this list presumably includes most of the 16 small/medium hydros in the 04–08 Expansion Plan) "an optimistic estimate is that 50% . . . will actually come on line in the next few years." It is certainly true that system expansion plans are usually overoptimistic, and that it is difficult to attract private investment for energy projects in countries such as Honduras. However as explained above eight small hydros are already complete or under construction (counting La Esperanza as a single project). So 50% of the projects with PPAs are already under construction or complete, and there is no reason to believe that more will not enter construction in coming years. 

The PDD reinforces its argument that La Esperanza is not business–as–usual by claiming that "none of the six hydro plants originally projected to come online in 2004 . . . will actually do so." Given that time overruns are to be expected in hydropower projects, a delay in implementation does not prove that a plant will not soon come online. 

Last, it is not relevant to assessing "prevailing practice" whether projects are financed by private or public investors (or a mix). The relevant issue is whether or not the technology is being implemented. 

2. Baseline 

Baseline emissions are calculated on the basis of a build margin which is 95% bunker fuel (see PDD p.17). Yet according to the latest Honduran Expansion Plan, planned new fossil capacity in Honduras until 2008 is 200 MW of combined cycle gas and 210 MW of diesel.

Only 48 GWh/yr of renewables are included in the build margin. Yet according to the International Journal on Hydropower and Dams 2004 Yearbook, a partial list of the small hydros under construction or planned to soon enter construction would generate 376 GWh/yr. The build margin also seems to exclude planned and ongoing biomass projects; a 60 MW wind project for which a PPA is under negotiation; an ongoing IDB–funded feasibility study of the Platanares geothermal field with an estimated potential of up to 110 MW (total geothermal potential in Honduras is estimated at 990 MW – see http://www.bl–a.com/ECB/GreenGreen/103103.htm); and the more than 694 MW of large hydro which is planned (see IJHD 2004 Yearbook, p.210).

The operating margin and build margin both seem to ignore the 10% of Honduran power that is imported from El Salvador (2002 data from IJHD 2004 Yearbook, p.210) and the impact on the emissions factor of the Honduran grid of the completion of the SIEPAC Central American grid in 2007.

3. Project Emissions

The PDD states that "Emissions by sources are zero since hydroelectric power is a zero CO₂–neutral (sic) source of energy" (p.15). This assertion is wrong (see e.g., http://www.irn.org/programs/greenhouse/). Emissions from true run–of–river projects are commonly presumed to be negligible. However this may not be the case for La Esperanza which has a regulation reservoir and is described as a "containment run–of–river" project. The need to model methane emissions from La Esperanza is increased as according to the PDD the water entering the reservoir is contaminated with sewage, increasing the likelihood of the reservoir creating conditions suitable for methane–producing bacteria.

4. Public Funding of the project activity

The PDD states that "This project is not seeking any public funding." According to the E+Co web site, however:

"E+Co has supported CISA [the developer] with assistance on business plan preparation, leading to a $250,000 loan for construction of the first powerhouse and securing the loan financing for full construction. E+Co services have been supported through FENERCA (Financing of Renewable Energy Enterprises in Central America) a USAID sponsored program."

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

For further information, please contact:

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