Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. -UY

CARBON FINANCE ASSESSMENT MEMORANDUM

ON A

Proposed Purchase of emission reductions by the spanish carbon fund

IN THE AMOUNT OF

EUR 480,000

for the

Uruguay

UTE 10 MW Grid Connected wind power farm at caracoles hill

November 5, 2009

Sustainable Development Department

Country Management Unit for Argentina, Chile, Paraguay and Uruguay

Latin America and the Caribbean Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

CURRENCY EQUIVALENTS

(Exchange Rate Effective August 1, 2009)

Currency Unit / = / Uruguay Pesos (UYU)
UYU 1 / = / USD 0.04264
USD 1 / = / UYU 23.4500

FISCAL YEAR

July 1 / – / June 30

ABBREVIATIONS AND ACRONYMS

AM / Approved Methodology
ADME / Administrator of the Electricity Market (Administrador del Mercado Eléctrico)
BP / Bank Policy (of the World Bank Group)
CAS / Country Assistance Strategy
CDM / Clean Development Mechanism
CER / Certified Emissions Reduction
CF, CFU / Carbon Finance, Carbon Finance Unit (at the World Bank)
CO2, CO2e / CarbonDioxide, CarbonDioxideequivalent
DNA / Designated National Authority
DNETN / National Directorate for Energy and Nuclear Technology
DOE / Designated Operational Entity
EB / Executive Board of the UNFCCC (see below)
EIRR / Economic Internal Rate of Return
EMP / Environmental Management Plan
ENVCF / See CFU
ER / Emissions Reduction
ERPA / Emissions Reduction Purchase Agreement
GDP / Gross Domestic Product
GHG / Greenhouse Gas
GWh / Gigawatt-hour
HV / High Voltage
IBRD / International Bank for Reconstruction and Development (World Bank Group)
KP / Kyoto Protocol
MIEM / Ministry of Industry, Energy and Mines
MP / Monitoring Plan
MW,MWh / Megawatt, Megawatt-hour
NPV / Net Present Value
O&M / Operation and Maintenance
OP / Operational Policy (of the World Bank Group)
PDD / Project Design Document (for CDM projects)
RE / Renewable Energy
tCO2e / Metric tons of Carbon Dioxide equivalent
UCC / Uruguayan DNA: NationalClimateChangeUnit (Unidad de Cambio Climático)
UNFCCC / United Nations Framework Convention on Climate Change
UTE / National Administration of Electricity Generation and Transport (AdministraciónNacional de Usinas y TransmisionesEléctricas)
V, kV / Volt, Kilovolt
VER / Verified Emissions Reduction
WTI / West Texas Intermediate
Vice President: / Pamela Cox
Country Director: / Pedro Alba
Sector Manager: / Philippe Charles Benoit
Task Team Leader / Roberto Gabriel Aiello

Uruguay

UTE 10 MW Grid Connected Wind Power Farm at Caracoles Hill

contents

A.STRATEGIC CONTEXT AND RATIONALE

1.Country and sector issues

2.Rationale for Bank involvement

3.Project development objective

4.Higher level objectives to which the project contributes

B.PROJECT DESCRIPTION

1.Key indicators

2.Project components

3.Technical overview

C.APPRAISAL

1.Institutional and implementation arrangements

2.Monitoring and evaluation of outcomes/results

3.Economic and financial analysis

4.Safeguard policies

5.Critical Risks and Possible Controversial Aspects

D.ERPA terms and conditions

Annex 1: Economic and Financial Analysis

Annex 2: Additionality justification

Annex 3: Project Preparation and Supervision

Annex 4: Documents in the Project File

Annex 5: Country at Glance

1

Uruguay

UTE 10 MW Grid Connected Wind Power Farm at Caracoles Hill

Latin America and Caribbean Region (LCR)

Sustainable Development Network (SDN)

Date: November 5, 2009
Country Director: Pedro Alba
Sector Manager/Director: Philippe Benoit/Laura Tuck
Project ID: P102341
Lending Instrument: World Bank Spanish Carbon Fund / Team Leader: Roberto G. Aiello
Sectors: Renewable Energy (100%)
Environmental Screening Category: B
Themes: Climate Change (P); Pollution management and environmental health (S)
Project Financing Data:
[ ] Loan [ ] Credit [ ] Grant [ ] Guarantee [X] Other: Carbon Finance
For Loans/Credits/Others: The project does not involve Bank financing. Total Bank Carbon Financing through the purchase of CERs for an amount of EUR 0.48 Million (approx USD 0.70 Million).
Financing Plan (USDm.)
Source / Local / Foreign / Total
Spanish Carbon Fund (SCF)
UTE (Counterpart)
Spanish Government (debt swap)
TOTAL / 18.9 / 1.02
10.8 / 0.70
18.90
10.80
30.40
Responsible Agency: National Administration of Electricity Generation and Transport (UTE)
Estimated payments (Bank FY/EUR)
The Bank plans to purchase Emissions Reductions (ERs) for an amount of EUR 0.48 Million. Indicatively, this could lead to payments as in the following schedule:
FY/EUR / 2011 / 2012 / 2013 / 2014
Annual / 72,000 / 156,500 / 156,500 / 95,000
Cumulative / 72,000 / 228,500 / 385,000 / 480,000
Project implementation period: 2010–2014. This period refers to the duration of the ERPA (Emissions Reduction Purchase Agreement) with the SCF. However, the project crediting period under the CDM is 7 years, renewable for another two 7 year-periods.
Expected effectiveness date: December 2009
Expected closing date: December 2014
Does the project depart from the CAS in content or other significant respects? / ○ Yes ● No
Does the project require any exceptions from Bank policies?
Have these been approved by Bank management?
Is approval for any policy exception sought from the Board? / ○ Yes ● No
○ Yes ○No
○ Yes ● No
Does the project include any critical risks rated “substantial” or “high”? / ○ Yes ● No
Does the project meet the Regional criteria for readiness for implementation? / ● Yes ○ No
  1. STRATEGIC CONTEXT AND RATIONALE
  1. Country and sector issues
  1. Uruguay’s indigenous energy resources are limited to hydropower and biomass and other renewable sources; however, the former has been practically developed in its entirety and the latter entails relatively high costs. Therefore, the country is dependent on imports for a large part of its supply of modern primary energy.
  1. Uruguay has a relatively modest demand for energy. Energy demand in Uruguay is relatively low on a per capita basis compared to other Latin American countries. While Argentina and Chile consume about 1,000 and 1,200 Tons of Oil Equivalent (toe) per habitant per year respectively, Uruguay’s consumption is only about 600 toe per capita per year. Electricity consumption is, however, high on a per capita basis compared to other Latin American countries. In fact, at 875 kWh per inhabitant per year, it is the highest in the region (exceeded only by Barbados). Argentina and Chile consume about 749 and 536 kWh per capita per year respectively, while the averages for the Latin American and Caribbean Region and for the Southern Cone are at 457 and 683 kWh respectively.
  1. The power sector in Uruguay exhibits characteristics and issues of hydro-based generation, with 70% of installed capacity being hydro. Almost all of the country’s domestic electricity generation is produced by four hydroelectric facilities that exploit almost all of the hydro-electrical potential of the country: Terra (152 MW), Baygorria (108 MW), Palmar (333 MW), and Salto Grande (945 MW). The remainder of the installed generation capacity is mostly covered by expensive small thermal power plants (with the exception of the larger, but still fairly expensive 200 MW Punta del Tigre diesel power plant that went online in 2007) and mobile diesel generators, mostly activated during peak demand. This leaves Uruguay vulnerable to seasonal rainfall patterns, even if under normal hydrological conditions Uruguay can supply its off-peak domestic demand.
  1. This is increasingly a problem, since following the crisis of 2001-2003, Uruguay has resumed a positive growth pattern (7% GDP growth in 2006, 7.4% in 2007, 10.6% in 2008 and 3% expected for 2009), leading to a higher dependency on imports from Brazil and Argentina in years of low rainfall. Electricity consumption in Uruguay is currently above 7 TWh per year, with over 2 TWh from imports in dry years. Electricity consumption is expected to increase 3% annually for the next years. There are a few hydro generation sites but with limited potential, so future electricity needs will require the installation of new thermal units. However, high and volatile international oil prices, together with uncertainties regarding natural gas supply from Argentina or Bolivia and a total absence of fossil fuel reserves in Uruguay pose barriers to an expansion of generation capacity through thermal plants.
  1. At the beginning of 2004 and 2006, Uruguay underwent a prolonged period of drought, acutely reducing its generation capacity from hydro-electrical sources. In addition, since 2004, Argentina started to experience difficulties to satisfy its domestic demand for energy and natural gas, with direct repercussions on its firm delivery contracts with neighbouring countries, including Uruguay. During 2004 and 2005, Uruguay was able to obtain some back-up energy from the regional market at prices far below the costs of its own thermal generation, benefitting from low prices in the Argentine spot market and from hydraulic surpluses in Brazil. Furthermore, 2006 set a record with over 2,800 GWh imported from Argentina and Brazil, at average prices of US$57.9/MWh and US$63.8/MWh respectively. However, import prices increased significantly in 2008, when the average was US$146.5/MWh from Argentina and US$340.5/MWh from Brazil.
  1. In 1994, Uruguay created the National Climate Change Unit (Unidad de CambioClimático, or UCC), with the following attributions: (i) organize, manage and execute activities resulting from the UNFCCC criteria compliance, (ii) identify, create and assess policies and measures as responses to climate change, and (iii) disseminate and promote technologies, practices, and process for greenhouse gas ERs. When Uruguay ratified the Kyoto Protocol in 2001, the UCC became the Designated National Authority, thereby creating the legal framework for CDM project implementation in the country.
  1. The Energy Strategy Guidelines for Uruguay were defined in 2006 by the Ministry of Industry, Energy and Mines (MIEM). This strategy includes: (i) diversifying energy sources to reduce costs and emissions, as well as increase energy security; (ii) increasing private participation in new renewable power generation[1]; (iii) increasing regional energy trade; and (iv) facilitating availability and acquisition of energy efficient goods and services, including efforts to raise public awareness regarding demand-side management interventions. According to the National Directorate for Energy and Nuclear Technology (DNETN), grid-connected wind power generation is one of the domestic resources with the highest potential in Uruguay for the medium and long term. The Uruguay Wind Farm Project fits perfectly within this framework by offering both renewable energy generation capacity and greenhouse gases emission reductions.
  1. Rationale for Bank involvement
  1. The Kyoto Protocol of the United Nations Framework Convention on Climate Change (UNFCCC) entered into force on February 2005. This international agreement commits industrialized countries to reduce their carbon emissions by an average of 5.2% below their 1990 levels during 2008-2012. The Protocol provides for two flexible mechanisms for meeting these obligations - the Clean Development Mechanism (CDM) and Joint Implementation (JI). The CDM enables industrialized countries to meet part of their obligations through the purchasing of emissions reduction from projects that generate such emission reductions in developing countries (which do not have an obligation to reduce their emissions under the Kyoto Protocol).
  1. The World Bank’s Carbon Finance Unit (CFU) helps to ensure consistency between the individual projects it supports and the international dialogue on climate change, while providing the opportunity to mobilize global experts with experience in the field, technical support for project preparation, supervision capacity, and development of linkages with other sources of expertise and funding. By mobilizing the private and public sectors on an important new source of project finance, the CFU is developing an important knowledge base and is demonstrating how insights and experience from both sectors can be pooled to mobilize additional resources for sustainable development and address global environmental concerns.
  1. The CFU currently administers 10 funds/facilities, namely: the Spanish Carbon Fund (SCF), the Prototype Carbon Fund (PCF), the Netherlands Clean Development Mechanism Facility (NCDF), the Community Development Carbon Fund (CDCF), the BioCarbon Fund (BioCF), the Italian Carbon Fund (ICF), the Netherlands European Carbon Facility (NECF), the Danish Carbon Fund (DCF), the Carbon Fund for Europe (CFE) and the Umbrella Carbon Facility (UCF).
  1. The World Bank is uniquely positioned to support this project because of its extensive experience and expertise in renewable energy and climate change as well as in its capacity as Trustee of the SCF, specifically entitled to purchase emissions reductions from the project in the framework of a debt-equity swap agreement between Spain and Uruguay. The Bank is the regional leader in this field and has implemented several renewable energy and more specifically wind power projects in the region (notably La Venta II in Mexico, and Jepirachi in Colombia), under the CDM framework. Moreover, the Bank, through its internal safeguards has extensive experience in dealing with the sensitive environmental (e.g. impact of wind turbines on bats and birds) and social (e.g. benefit sharing and land tenure) issues, and its expertise will be very valuable in all project stages as this project is to be the first of its kind in Uruguay and pave the way for others.
  1. In addition, even though this is a relatively small scale project compared to the World Bank threshold, Bank involvement also stems from the fact that the project takes place under the framework of an External Debt Swap Agreement between Uruguay and Spain, signed on April 15, 2003 and approved by Law No. 17, 665 on July 11, 2003. In May 2005, a second phase of the External Debt Swap Program for a total of about US$11 million was agreed. In this case, instead of repaying this portion of its debt to Spain, Uruguay agreed to sponsor this wind farm project and buy the necessary technology from Spanish companies. Conversely, Spain will get the carbon credits generated by this project through an Emission Reductions Purchase Agreement (ERPA) to be signed with the SCF[2]. The SCF has already included the purchase of ERs from this project in its portfolio.
  1. Project development objective
  1. The PDO for this project is to purchase 48,000tons of CO2e in the period 2010-2013.
  1. Higher level objectives to which the project contributes
  1. The Uruguay Wind Farm Project will contribute to the sustainable development of Uruguay, most notably by increasing energy supply and the substitution of crude oil and derivatives imports. Being the first of its kind, the project is designed as a small-scale pilot, aimed at being easily replicated in case of success.
  1. The project will also reduce greenhouse gas emissions by grid-connected electricity generation from wind power. The emissions reduction will arise from the displacement of fossil-fuel-based electricity generation on the national grid.
  1. PROJECT DESCRIPTION
  1. The Wind Farm Projectis located in Sierra de los Caracoles (Caracoles Hill), between national routes number 12 in the West, number 9 in the South and number 39 in the East. The hill is 303 meters over sea level. The geographical co-ordinates of the project location are 54º 57´13´´W (longitude) and 34º 37´13´´S (longitude).
  1. The wind potential for Caracoles Hill was analyzed by the Faculty of Engineering (UDELAR) under an Agreement between the Faculty and the Ministry of Industry and Energy. According to the report “Analysis of the locations to install a 10 MW wind farm” The site presents average wind speeds of 9 m/s, yielding a capacity factor of 40%.
  1. The wind farm has already been built and has already been fully operational since January 2009. The wind farm has a total installed capacity of 10 MW. In particular, the project involves five 2 MW wind turbines from VESTAS, model V80. With a total plant factor of about 40%, the wind farm is expected to produce about 36 GWh per year. The technology used is proven as it is most commonly employed in Europe and elsewhere.
  1. The technology for connection to the grid has been provided by UTE, Uruguay's national electricity company, which has the monopoly for transmission and distribution. The interconnection to the network has been made through a 31.5 kV line of about 20 km length and a boosting transformer.
  1. The project activity is expected to generate Certified Emission Reductions (CERs) and revenues through the selling of these CERs under the Kyoto Protocol CDM. The revenues obtained will contribute to the elimination of the barriers that prevent the implementation of this type of projects, among which the high cost of electricity generation from wind power due to a supply shortage in wind turbines manufacturing and irregularity of wind patterns.
  1. The project had a positive impact on local employment during construction (about 39% of the total labor needed for the project was from the immediate area) in a region with high unemployment[3]. In addition, the project involved the improvement of 4 km of an existing dirt road leading to the top of the ridge where the wind turbines are located. This has helped those landowners living near that stretch of road—and who are not directly affected by the project—to have easier, quicker access to route 39.
  1. Additionally, the emission reduction credits generated through the project activity will help Annex I countries meet their emission reduction obligations as agreed under the Kyoto Protocol.
  1. Key indicators
  1. Performance indicators: The primary performance indicator is the timely delivery of ERs for which payments will be made by the SCF in accordance with the Emissions Reduction Purchase Agreement (ERPA).
  2. The expected emission reductions generation schedule is as follows[4]:
  1. Annual: 25,555 tCO2e
  2. Up to and including 2012: 76,662 tCO2e
  3. Up to a period of 7 years:178,878 tCO2e
  4. Up to a period of 10 years:255,550 tCO2e
  5. Up to a period of 21 years:536,655 tCO2e
  1. Project components
  1. The proposed Uruguay Wind Farm Project is a small scale stand-alone carbon finance investment and therefore comprises a single component: the purchase of emission reductions from the displacement of thermal generation capacity on the Uruguayan grid by renewable energy from wind power generation.
  1. There is no IBRD lending involved in this project. The SCF, administered by the IBRD as Trustee, will purchase ERs from the project and will make annual payments, according to the ERPA, upon verification of the generated ERs by an independent entity (Designated Operational Entity, or DOE).
  1. Technical overview
  1. As agreed in the debt swap arrangement at the origin of the Uruguay Wind Farm Project, the technology used for the construction of the wind farm has been procured from a Spanish company, EDUINTER, selected by UTE through a bidding process.
  1. Each wind turbine comprises the following parts:
  2. The gondola: housing the machinery related to blade movement, orientation of the turbine, generator, etc.)
  3. The blades: they are made with a heart of balsa wood covered with several layers of glass fiber and carbon fiber where the tension is greater.
  4. The rotor: a cube on the rotation axis carrying the blades. It is connected to a gearbox that multiplies the rotation speed transferring it to a smaller axis connected to the generator.
  5. The orientation system: a mix of an anemometer (measuring wind speed), a weather vane (indicating wind direction) a rotation axis for the gondola and motors that ensure the blades are perpendicular to the direction of the wind when it is working and parallel to it (feathered) when wind speeds are too high (to avoid damaging the turbine) or too low.
  6. The tower: A tubular steel tower, made from individual sections of 20-30 meters each assembled together to reach the required height, that supports the gondola and the blades.
  1. The equipments selected (VESTAS V80) comply with the following technical specifications: