How Large Hydro Undermines the Principles of the CDM – The Dardanelos and Bujagali Projects (Newsletter #10)

As of this week there are 1529 Hydro projects seeking CERs through the CDM. But large hydro power projects seriously un-dermine the objectives of the CDM because hardly any of them are additional. Concerns about the additionality of 17 of these projects based in China have been highlighted by Board members prior to this week’s meeting. This week’s meeting will decide whether to put them officially under review, a first step towards rejecting them.

But the additionality of large hydro projects is not only an issue in China. Below you will find a comment by International Rivers on the Bujagali Hydropower Project in Uganda that applied for the CDM in July 2010. This project that claims 904,000 annual emission reductions clearly shows the typical problems of large hydro projects in the CDM: the extra CDM revenue is often just additional cash for project developers but was not decisive for the initial investment decision, making the project non-additional. This means that, if registered, non-additional projects generate fake CERs which replace real emission reduction obligations and therefore serve to increase global GHG emissions.

Large hydro projects not only face criticism for their lack of additionality. Their failure to contribute to sustainable development is well known, as they often destroy homes and lives. Below you will find another short note on the Dardanelos project in the Brazilian Amazon which applied for CDM status in February 2010. Despite being non-additional, the project has caused outrage amongst indigenous people who occupied the site in July 2010 because the project was built on an ancient burial ground.

International Rivers Comments on CDM Project Design Document for Bujagali Hydropower Project, Uganda15:

To understand the largely fictional nature of this application to the CDM one needs only to read the first line of the PDD. “The Bujagali Hydropower Project is a proposed hydropower facility . . .” It is not proposed. It is well over half complete. This basic fact is not mentioned anywhere in the PDD. The Bujagali Dam will be completed regardless of whether or not it is able to receive income from selling CDM offsets. It is non-additional and should not be validated as meeting the CDM’s requirements.

According to the latest online issue of Bujagali Energy Limited’s newsletter, as of 31 March 2010, engineering for the project was 91% complete; procurement 99% complete; and construction 58% complete. Project commissioning was at that time set for the third quarter of 2011. It has since been set back until 2012 – but there is no mention anywhere in the extensive on-line and hard copy literature about Bujagali that it will not be completed if it is not approved under the CDM.

The PDD bases its flimsy case for Bujagali’s additionality on the claim that CDM income was “considered” by project participants before construction started in 2007. This is certainly true. Bujagali had already tried (and failed) to apply for the CDM under its previous guise as an AES project. The Government of Uganda, the current project developers (IPS and Sithe Global), and the World Bank, were all well aware that the project could receive some tens of millions of dollars a year in extra revenue were it approved under the CDM. But to claim that the investors and developers only went ahead with the project because of the potential for CDM income is blatantly misleading.

Bujagali was one of the most contentious World Bank projects of the 1990s and early 2000s (see numerous documents at www.internationalrivers.org/en/africa/bujagali-dam-uganda). The World Bank, the Government of Uganda, and the developers, first AES, and then Bujagali Energy Limited repeatedly claimed during these years that the project was the best, least-cost option for increasing electricity generation in Uganda — yet they never mentioned that carbon credit income was necessary for the project to be viable. None of the various economic and financial reviews of the project states that CDM income was necessary for project viability or for attracting investors.

The PDD also claims that “anticipated CER revenues contribute significantly to mitigating” risks such as lower demand growth, low hydrology and capital cost escalation.” Yet according to the EFES: “the expected economic return of the Bujagali project is high and very robust to adverse outturns” (p.139) in the key parameters including lower demand growth, low hydrology and cost escalation.

The PDD recognizes that the EFES identifies Bujagali as the least-cost power supply option for Uganda. Yet its authors attempt to wriggle out of the problem this poses for their argument that Bujagali really wasn’t a very attractive investment, by saying that being least-cost “does not necessarily attract private investors.” This is true. But it is also true that Bujagali did attract a private investor (with the help of $360 million in loans and guarantees from the World Bank and more from other international public sector funders).

The PDD states that “In February 2003, the Dutch government decided to abstain from buying emission reductions from the Project. Short-ly thereafter [actually it was 6 months later – see below] AES decided to discontinue the development of the Project.” The clear implication is that the Dutch decision led to AES’s withdrawal. The reality is that, just as in this application for the CDM, carbon credit income was never an important consideration for AES

A 2004 Harvard Business School case study of Bujagali (http://www.people.hbs.edu/besty/projfinportal/casehbs.html) explains  the context of AES’ withdrawal:

“AES suddenly announced on August 8, 2003 that it was pulling out of the Bujagali project . . .“It boils down to two results,” Dale Perry, the Bujagali project director, explained, “lowered returns for AES in the ongoing project balanced against increased risk.  Those lower returns come about because there are some continued project delays.” Another AES executive added, “The delay boosted costs, and the Ugandan government wouldn’t agree to higher power prices to cover the expenses.”

AES pulled out of Bujagali because of delays and uncertainties caused by a range of factors including a local and international environmentalist campaign against the project, criticism from Ugandan parliamentarians about the terms of the PPA, a corruption investigation by the US Dept. of Justice, and several postponements of World Bank financing.

In conclusion, this is a deeply deceitful PDD containing false claims, deliberately misleading implications, and material omissions. Bujagali should not be validated for the CDM.

Dardanelos Hydropower Plant Project Activity

The Dardanelos project applied for CDM status in February 2010. This is also when, according to the project design document16, the plant turbines started operation. The last turbine covered by the CDM project started operation in August 2010. However, the project design document fails to mention an important aspect that was highlighted by Leonor Mendes (UFMT) in the following comment17 submitted during the public consultation period:

Dear UNFCCC team,

I would like to call the attention that this project is well known among specialists of the power sector in Brazil as one of the “Botox” hydro power plants. This expression comes from the fact that those projects (including the 261 MW Dardanelos Hydro Power project) represent old projects, which have been previously conceived, but ended up being treated as brand new projects by the Brazilian regulatory frame-work. The story of the “Botox” projects has began even before the Brazilian Power sector reform in the 1990’s. These cases reach their final steps in the 2007 auction, already under the revised Brazilian power sector model launched in 2004, which marked the opportunity of the so-called “Botox” projects to participate close deals to sell long term Power in a specially designed auction. The so-called “Botox” power plants are analyzed in details in the study:

REGO, E. R. Usinas Hidrelétricas “Botox”: aspectos regulatórios e financeiros nos leilões de energia. 2007.

The complete study is made available online at the website of the Brazilian Energy Agency (ANEEL):http://www.aneel.gov.br/biblioteca/trabalhos/trabalhos/Dissertacao_Erik%20Eduardo.pdf

I am really surprised that consultants who are known for their deep knowledge about the Brazilian power sector as well for their expertise in the CDM (one of the involved consultants is even a member of the CDM Registration and Issuance Team) could put together a PDD for a 261 MW project which is clearly not additional. How the proposed CDM project can be regarded as additional if it was conceived before the design of the CDM flexible mechanism? More and more I am convinced that several of the CDM projects represent real cherry picking opportunity for some “creative” people.

It is also noteworthy that the whole environmental licensing process for this project faced protests and court actions from several parties. See details at the following articles:

http://www.ecolnews.com.br/usina_dardanelos/dardanelos.htm
http://www.amazonia.org.br/noticias/print.cfm?id=178598
http://www.jornaldaciencia.org.br/Detalhe.jsp?id=38981

The last article even highlights that the EIA was approved in a secret and not transparent section involving local authorities of Mato Grosso State… What a shame!

Despite being clearly non-additional, the project has caused outrage amongst indigenous people who have occupied  the site in July 2010 because it has been built on an ancient burial ground. See recent BBC coverage18 of 26 July 2010.

15 http://cdm.unfccc.int/Projects/Validation/DB/JXV07TLO7KBYTY9LPCX5JHSR8HRYT0/view.html
16 http://cdm.unfccc.int/UserManagement/FileStorage/7VAFDL3XBJ1GE4M98YZNTWSUPOI2Q0
17 http://cdm.unfccc.int/Projects/Validation/DB/PXVVMF3ECA13AMDZDRLCT8EHDC42ER/view.html
18 http://www.bbc.co.uk/news/world-latin-america-10759465