Carbon Market Watch

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Perspectives Study on Rule consistency of Grid emission factors published by CDM host country authorities

14 Feb 2011

PDF (English)

Author: Axel Michaelowa, Perspectives GmbH – 14 February 2011

Executive summary

For the CDM, electricity grid emission factors (grid EFs) directly determine the volume of Certified Emission Reductions (CERs) for all project types that relate to renewable electricity generation or reduction of electricity consumption. The higher the grid EF, the higher the number of CERs a project can generate. Designated National Authorities (DNAs), responsible for approving CDM projects in their respective host countries, have started to provide such grid EFs in order to reduce the time to search for data (and hence transaction costs) for project developers and therefore increase the attractiveness of the respective host country. Almost 20 DNAs publish them on their websites. Grid EFs can be used by all CDM project developers in these countries and thus they no longer have to embark on the costly collection of data themselves. The Indian and Chinese DNAs also publish a benchmark for efficient coal-fired power plants used in the baseline and monitoring methodology ACM0013.

This study examines whether the benchmarks published by DNAs are conforming with the CDM rules and if they are overestimating emission reductions.

The grid EF calculation is based on the combined margin approach, taking into account the following two effects caused by an electricity-related CDM project:

  1. the displacement of power in the grid which is generated by power plants operating on the margin (“operating margin”) (e.g. how much less power will be produced by conventional power plants because of the new CDM renewable facility)
  2. the delay of future power generation capacity additions to the grid (“build margin”) (e.g. how many fewer conventional power plants will have to be built).

The rules to calculate the grid EF have changed considerably over time, especially since late 2007 when the UNFCCC secretariat introduced the Tool to calculate the emission factor for an electricity system (“Tool”). This Tool defines the data requirements to establish the efficiency of power plants and their fuel use to calculate the “build margin”. If such power plant specific efficiency data is not available, conservative default values have to be used. The rules for calculating the benchmark for efficient coal-fired power plants have also been updated, most recently in September 2010.

Because a high grid EF leads to a competitive advantage for project developers, DNAs may have an incentive to publish overly high grid EF values. Yet the current CDM rules do not require that a DNA-published grid EF be validated by an independent third-party auditor (DOEs). In 2010, the CDM Executive Board (CDM EB) rejected a proposal to make such audits mandatory after considerable debate. Thus the grid EF and coal benchmarks do not currently undergo additional scrutiny once published on DNA websites.

Yet an accurate and conservative calculation of the grid EFs, according to the rules specified in the UNFCCC Tool is crucial to safeguard the environmental integrity of the CDM.

In this report, we examine the consistency of the grid EF and the benchmark for efficient coal plants published by the DNAs with the Tool and ACM 0013 by analyzing the data used for the calculations. Important data include the efficiency of recently built power plants used in the calculation of the “build margin”, the CO2 emission factor of the different fossil fuels used and overall fuel use. We find that most of the documents provided by the DNAs do not allow an external observer to judge whether the data has been collected correctly. However, there are clear indications that the grid EFs, as well as the coal power plant benchmarks, have been overestimated both in China and India.

The grid EF reported by China has changed considerably over time. Between 2006 and 2008, the EF increased yet since 2008, the EF has become more conservative, increasing by almost 20%, as China has chosen more conservative default fuel emission factors and has selected a more realistic sample for newly built coal and gas power plants to calculate the build margin. Despite these positive developments, sampling procedures for the build margin remain inconsistent with the Tool. Applying the conservative default values for the build margin (as specified in the Tool) would reduce CER volumes of non-wind renewables and energy efficiency projects by up to 7% for 2007 and 2008 vintages and 1% when applying the current Chinese EFs.

The Chinese DNA does not publish data for the sample group of power plants used to calculate the benchmark efficiencies for super critical coal power plant CDM projects (ACM0013). It is therefore impossible to assess the Chinese figures for ACM0013.

The study has found two significant shortcomings in the India EFs:

  • Non-CDM non-hydro renewable power plants are completely omitted in the calculation of the “build margin”; including them would reduce CER volumes by 3% for non-wind projects and 1.5% for wind projects.
  • Indian power sector regulation provides an incentive for power plant operators to over-report fuel use; although the extent of this over-reporting is not known, it is reasonable to assume that this could artificially inflate Indian EF by several percentage points.

The study notes positively, that the Indian grid EF report is quite transparent and India is the only country that fully complied with the Tool. The study concludes that there are serious deficiencies in the current grid EF calculations. Applying the difference between the correct calculation and the published values to the total of electricity-related projects registered in China and India between 2007 and today, we estimate an over-crediting of 11 million pre-2012 CERs, about 2.5% of total CER volume for these projects. To address the shortcomings observed, we recommend:

  • Independent validation of grid EF to address many of the shortcoming identified in this study.
  • The use of default values for power plant efficiencies for all power plants for which data is not published.
  • Inclusion of all non-CDM renewable power plants.
  • Revised grid EF should be applied retroactively if the grid EF used is found to be inconsistent with the Tool.