Guatemala: El Canada Hydroelectric Project

1. Guatemala: El Canada Hydroelectric Project A Case Study for Discussion

2. Contents • Introduction to the El Canada Hydroelectric Project • Elements of the El Canada Hydroelectric Project Baseline • Proposed New Baseline Methodology • Application of the Proposed New Baseline Methodology to the El Canada Hydroelectric Project

3. Introduction • Background Information • Guatemala has interconnected power system: the National Interconnected System (NIS) • The Guatemalan power sector is organized by the wholesale market which establishes clear criteria for merit order dispatch and thus of injection to the NIS. Dispatch to the NIS is by strict economic order, considering the need to supply demand, the opportunity cost of water, and the operational cost of the thermal units. This results in older plants with higher fuel and operating costs usually being dispatched last as peaking plants.

4. Introduction • Project Description • 43 MW peaking run-of-river hydroelectric plant located on the Samala River, Guatemala • Project will collect flows from the tailrace of an existing power plant through a diversion dam. Water will be conduced to a regulating reservoir and will be conveyed from the reservoir to the powerhouse by a 2,400 m long penstock. • Project is expected to generate electricity of 178Gwh/year. • Output of the Project to be sold to the Grid through a commercial distributor on a 10 year Power Purchase Agreement.

5. Introduction • Main Source of Emission Reductions • Displacement of electricity from fossil fuel thermal power generation • Yearly Reductions • 144,180 tons of CO2 per year • Projected Reductions in 21 years • 2,541,840 tons of CO2 (low)

6. Elements of the Baseline • Baseline Scenario • Baseline scenario consists of the current plants in the NIS plus capacity expansion without the Project. • Method of Determining Baseline Scenario • Economic Analysis – Least Cost System Expansion • The baseline scenario was determined on the basis of comparison of costs of alternative generation options. • Fossil fuel thermal power generation options, specifically a mid-sized coal fired steam plant, are currently available to private investors in Guatemala at lower total generation costs than the proposed project activity.

8. Project Additionality Assessment CDM Project Baseline: Lowest Cost Generation Cost $/MWH Hydro Coal Gas Diesel

9. Elements of the Baseline • Leakages • None • Boundary • Geographic Boundary – Guatemala’s National Borders • System Boundary – NIS • Time Boundary – 21 years (duration of the Crediting period)

10. New Baseline Methodology • Approach selected to calculate baseline emissions : • Option (b) of Par. 48 of Marrakesh Accords:The baseline is a scenario that represents emissions from a technology that represents an economically attractive course of action, taking into account barriers to investment. • Approach proposed to assess project additionality: • “Least Cost Analysis of Power Capacity Expansion”

11. New Baseline Methodology • Justification of the Applicability of the Methodology to the El Canada Hydroelectric Project: • A least cost analysis is usually the method of choice in national power planning, because it minimizes the overall economic costs of satisfying the national demand for power. • The private sector invests in power capacity expansion in order to maximize return on investment. Everything else being equal, projects and technologies with the lowest costs per unit of electricity output are likely to yield highest returns.

12. New Baseline Methodology • Justification of Additionality • The project meets the requirement of environmental additionality, because its existence and operation will have the effect of reducing GHG emissions below a level that would have occurred in the baseline scenario. (i.e. the Project will significantly reduce the reliance of the NIS on fossil fuel for power generation and is not associated with any leakage, therefore it will reduce emissions as compared to the baseline)

13. New Baseline Methodology • Steps for Applying Baseline Methodology: “Least Cost Analysis of Power Capacity Expansion” • Confirm that the following conditions are met: • Boundaries can be clearly identified and information on the characteristics of the system is available • Competitive market for system expansion investments and electricity sales • Baseline and monitoring methodology are compatible • Determine the geographic and system boundaries • Confirm that there are only two plausible baseline scenarios, namely the relevant interconnected system and the system’s expansion over time a) with the project; or b) without the project

14. New Baseline Methodology • Steps for Applying Baseline Methodology: • Define generation characteristics (e.g. base or peak load) and identify alternative options for power capacity expansion that are readily available within the baseline method boundaries • Calculate conservative figures showing the: a) total generation cost of alternative (least) cost power expansion option with the same generation and operational characteristics; b) expected total net generation costs of the project.

15. New Baseline Methodology • Steps for Applying Baseline Methodology: • Compare the Project’s expected KwH costs with the least cost alternative to show that the project is not economically attractive and therefore not part of the baseline. • Costs should be adjusted for income from sales of power and emission reductions to obtain cost figures that are comparable between power options. • A standard power planning cost formula should be used. (nb: an example of cost calculation is the EPRI TAG method.) • The same cost formula or general calculation method for the project and its alternatives must be used to ensure that cost are comparable and consistent. Calculations must be conservative.

16. New Baseline Methodology • Steps for Applying Baseline Methodology: • Describe the baseline scenario and its expected development over time • Determine that, in comparison with the baseline scenario, the project scenario will have lower emissions, and that, therefore, the project is environmentally additional.

17. Application of New Baseline Methodology • How Methodology was Applied in the Context of the El Canada Hydroelectric Project Activity • Step 1: All Conditions are met • Boundaries of NIS can be clearly identified • Power sector does not feature centralized expansion planning, but an open market in which private power producers compete • Selected monitoring methodology includes collection of data reflecting the relevant system expansion and the day-to-day operation of the Power System.

18. Application of New Baseline Methodology • How Methodology was Applied in the Context of the El Canada Hydroelectric Project Activity • Step 2: Boundaries were clearly identified • Step 3: Only two alternative scenarios are plausible, namely the NIS and its expansion a) with the proposed project; or b) without the proposed project • Step 4: As a run-of-river project, it is likely to operate in the base or intermediate load range based on economic dispatch A mid-sized (150MW) coal fired steam plant is readily available as system expansion option for investors.

19. Application of New Baseline Methodology • How Methodology was Applied in the Context of the El Canada Hydroelectric Project Activity • Step 5: Total net generation cost for a mid-sized coal fired steam plant was calculated at US$38.7/MWh using EPRI TAG method.Total net generation cost for the Project is US$48/MWh. • Step 6: The project is not the least cost option. It is not economically attractive and therefore not the baseline. • Step 7: The system currently relies on Thermal plants and diesel engines to satisfy peak load demand and for general power dispatch at the margin. This is expected to continue in the future with or without the El Canada Project. It is likely that, in the absence of CDM projects, new thermal base load capacity will be added to the system in the decade.

20. Application of New Baseline Methodology • How Methodology was Applied in the Context of the El Canada Hydroelectric Project Activity • Step 8: The project is environmentally additional because it reduces emissions relative to the baseline scenario. • Baseline Emissions per year: 144,180 tons of CO2 • Emissions reductions per year: 144,180 tons of CO2 • Emissions reductions for 21 years : 2,541,840 tons of CO2 (low)