CDM projects in Africa

Anders Arvidson outlines the methodology used in assessing the viability of and potential for CDM projects in Africa.

The author is a Research Fellow and Programme Manager with the Stockholm Environment Institute in Stockholm, Sweden.

The Stockholm Environment Institute has recently carried out a study commissioned by the Swedish Energy Agency with the objective of identifying and assessing possible Clean Development Mechanism (CDM) projects that could be carried out in Africa with Swedish financing.

The study included a screening process to identify countries and potential Clean Development Mechanism projects as well as the development of a detailed two-level evaluation methodology to facilitate the analysis and comparison of the potential projects.

Country identification

The Stockholm Environment Institute project team first made a desktop assessment of each African country’s political stability, investment conditions and their capacity to carry out Clean Development Mechanism activities. This initial assessment was based on information available through institutes such as Freedom House and Institutional Investors Credit Ranking.

The study also considered each country’s participation and level of activity in different climate initiatives and projects such as the Prototype Carbon Fund, established by the World Bank, together with the status of country reports under the United Nations Framework Convention on Climate Change (UNFCCC).

Discussions were held with the United Nations Environment Programme’s Collaborating Centre on Energy and Environment. An additional criteria for choice of country was the extent to which local stakeholders had identified and to some extent developed project outlines for possible Clean Development Mechanism projects.

Based on the country analysis and availability of local stakeholders with project ideas, South Africa and Ghana were chosen for more in-depth country studies.

Project identification

Several climate initiatives supported by the Netherlands, the Riso United Nations Environment Programme, the United Nations Industrial Development Organization and other international players have been aimed at strengthening a country’s capacity to identify, prioritize and implement Clean Development Mechanism projects. These processes often have several years of duration.

As there was limited time for this study, the identification of projects was based mainly on previously identified and documented project ideas and supporting information from stakeholders for projects that were envisioned to as Clean Development Mechanism projects. The study reviewed approximately twelve potential projects from which five were chosen for full assessment.

The five projects which were identified and assessed were:

Kumasi Steam and Power Company in Ghana;
Improved Waste Management and Landfill Gas Recovery in the Greater Johannesburg Metropolitan Area in South Africa;
Strengthening Energy Management in the Ghana Water Company in Ghana;
Environmentally-Sound Energy Efficient Low-Cost Housing in South Africa; and,
Gold Mining Energy Efficiency in South Africa.

Project assessment

A screening tool was developed to consider the different qualities required for a Clean Development Mechanism project from the different stakeholders’ perspectives. Projects deemed to have a high chance of being successful had to meet various requirements from the host country, the investing country, the project owners and other stakeholders. These requirements related to cost-effectiveness, ease of implementation, contributions to sustainable development and other key characteristics.

The screening tool was based on a set of nine different criteria arranged in a two-level evaluation process.

Three of these criteria were classified in the first level as ‘hurdle’ criteria. The characteristics and the qualities of the identified projects assessed under the hurdle criteria were considered to be the basic conditions a project needed to fulfil in order to come into consideration as a Clean Development Mechanism project.

The remaining six ‘sub-criteria’ were used to give a more finely-tuned picture of the project’s qualities in order to be able to judge which projects would have a high chance of being successful.

First-level criteria

The three first level hurdle criteria cover:

first, eligibility and host country approval;
second, cost-effectiveness; and,
third, sustainable development impact.

Hurdle Criteria No 1, Eligibility and host country approval:
1.a Prospects for approval and support of the host country and international community within the existing policy and institutional environment.
1.b Likelihood of passing environmental, financial and investment additionality tests.
1.c Project activity qualification under UNFCCC Article 12 guidelines.

Hurdle Criteria No 2, Cost-effectiveness:
2.a Estimated incremental or capital investment cost per expected emissions reduction output.
2.b Short investment or energy savings payback period from the perspective of the project owner.
2.c Overall economic and social benefits relative to the Swedish financial contribution.

Hurdle Criteria No 3, Sustainable development impact:
3.a Positive local environmental and health impacts.
3.b Net employment generation and improving livelihoods.
3.c Macro-economic benefits, for example, balance of payments, reduction of fuel imports, etc.
3.d Engendering a more sustainable use of existing natural resources.
3.e Barrier removal and potential for market transformation.
3.f Opportunity for training and policy support along core Swedish areas of expertise.

First level hurdle criteria

As part of Hurdle Criteria No 1, the study looked at how the projects could lead to real measurable emissions reductions that are additional to the emissions reductions that would have taken place without the project.

Another aspect that was treated under Hurdle Criteria No 1 was the likelihood for approval of the project from the host country. We made this assessment based on the host country’s development priorities, previous projects and political actions in support of similar projects.

To create favourable conditions for Clean Development Mechanism project implementation in a country, it is advantageous if the country has, through a political process, considered and provided guidelines for the types of projects that are of priority to the country and how they relate to the national priorities for sustainable development. For example, with support from the United Nations Environment Programme, Ghana has increased national awareness of climate change, and the issues surrounding it, and the possibilities to implement Clean Development Mechanism projects.

Relevant government agencies, non-governmental organizations, the private sector and research institutions have collaborated on developing indicators for sustainable development and criteria for choice of greenhouse gas abatement projects.

Yet another aspect under Hurdle Criteria No 1 was the question of how easily the baseline could be identified, measured and adjusted.

Emission reductions from Clean Development Mechanism projects have to be defined, measured, controlled and potentially adjusted during the project’s lifetime. This study considered the institutional capacity at the national level and also at the project level in terms of the complexity and cost for control, evaluation, reporting, verification and certification of the baseline for the individual projects.

An example of a project that would probably be relatively more complex and expensive is from South Africa where energy efficient houses were assessed.

The project, Environmentally-Sound Energy Efficient Low-Cost Housing, aims to facilitate the construction, on a large scale, of improved low-cost housing either in Kimberley or in Port Elizabeth in South Africa. The project would lead to emissions reductions through:

use of building materials that require very little energy in producing;
reduced heating and cooling needs through adapted architecture;
reduced electricity use for lighting through use of energy efficient lighting; and,
reduced energy needs for cooking and water heating through use of renewable energy technologies integrated into the construction of the house.

An investment representing 20-25 per cent of the total capital investment of the houses would mean about US$600 per house. This contribution, it is estimated, could lead to a reduction of carbon dioxide emissions of about 50 tons of carbon dioxide during a 20-year period. The cost for each ton of reduced carbon dioxide would then be US$12.

There is strong support within the South African government for a project such as this that would contribute to improving the living conditions for poor households which, at the same time, introduced energy efficiency and renewable energy technologies in the housing sector.

The baseline is calculated to be based on reduced and avoided future greenhouse gas emissions. Energy consumption and indoor air pollution in improved houses and in ‘reference’ houses have been going on for a year by the initiators of the project. Despite this, it is likely that the definition and monitoring of the baseline will be relatively more costly than for other projects identified. A relatively large follow-up study of energy use in the households and how this changes over time would probably be required. With a larger geographical spread and a spread over many different types of households and users the project could become more costly in terms of monitoring.

Second-level sub-criteria

In undertaking the second-level evaluation methodological process, the six remaining sub-criteria were applied.

Sub-criteria No 4, Replicability and expansion:
4.a Possibilities for local, national and regional replicability.
4.b Opportunities to expand the scope of the existing project.

Sub-criteria No 5, Implementation factors:
5.a General ease of implementation and project management, that is, minimal foreseeable barriers.
5.b Baseline is easily defined, measurable, and adjustable.
5.c Models and precedents for successful implementation.
5.d Sound policy framework and political support.

Sub-criteria No 6, Capacity of project owners:
6.a General management skills and business experience.
6.b Knowledge of the CDM and stages of the project cycle.
6.c Willingness of stakeholders to ‘own’ or champion the project.

Sub-criteria No 7, Investment risk:
7.a Technical risks.
7.b Environment, health and safety risks.
7.c Counter-party credit risk.

Sub-criteria No 8, Greenhouse gas mitigation:
8.a Contribution of the project to the national greenhouse gas mitigation strategy.
8.b Greenhouse gas mitigation impact relative to the total national or sectoral emissions.
8.c Minimal possibilities for cheating or emissions ‘leakage.’

Sub-criteria No 9, Effective technology transfer:
9.a Area of Swedish technological expertise and experience.
9.b Opportunities for the sustainable transfer of Swedish goods, services and know-how.
9.c Contribution to host country’s technological advancement.

Second level hurdle criteria

One assessment under Sub-criteria No 5, implementation factors, was to consider to what extent the national political framework would support the Clean Development Mechanism activity. For example, independent power production is, in many African countries, an untried concept and could constitute an uncertainty for some project types. At the same time, a project activity that stimulates change and demonstrates new approaches and methods can have a positive effect if it can contribute to the elimination of market barriers.

The Kumasi Steam and Power Company project is aimed at building a combined heat and power plant powered by residual waste from a sawmill in Kumasi in Ghana. The planned cogeneration plant is situated on the site of an existing sawmill industry where the fuel is generated. The sawmill and a neighbouring brewery will be the main consumers of the electricity and heat that is produced.

The project will generate carbon credits by offsetting the following:

open burning of wood wastes;
the use of grid power;
the use of residual oil fired boilers at the brewery; and,
the use of back-up diesel generators.

The capacity is estimated to be 3 to 6 Mwe. The estimated cost of building the plant is US$7.3 million with an additional US$4 million needed for other fixed assets and other contingencies. The estimated annual income should be US$4.5 million with a payback period of around two to five years.

The expected emissions reduction during the lifetime of the project, which is intended to be 20 years, is 500,000 tons of carbon dioxide. The Clean Development Mechanism investment is estimated to be US$5 per ton of carbon dioxide. The baseline is derived from future expected electricity production based on natural gas on the margin. Currently, electricity on the margin is generated using crude oil. Establishment, monitoring and adjustment of the baseline is considered to be relatively uncomplicated since a large share of the baseline is based on the energy consumption within a limited number of industries.

There is support for the project within the ministry responsible for Clean Development Mechanism investments. The project would have positive effects on the country’s priorities relating to sustainable development. This will be through the creation of the first example of cogeneration from renewable energy sources in Ghana as well as through the concretization and exemplification of the existing framework for independent power production. The project will also contribute to reducing hazardous air pollution.

In regards to Sub-criteria No 6, capacity of project owners, an assessment of the project owner’s management experience and capability was made. This assessment also included the project owner’s knowledge of the Clean Development Mechanism project cycle.

In conclusion

The many questions that arose from the initial study together with the assessments required illustrates the complexities inherent in identifying appropriate projects. There is a good deal of breadth and depth of institutional capacity that is demanded of project owners, of governments and of investors when considering Clean Development Mechanism projects.

Further information
Anders Arvidson, Stockholm Environment Institute, Box 2142, Lilla Nygatan 1, SE-103 14 Stockholm, Sweden. Fax: +46-8-7230348. Email: anders.arvidson@sei.se. Web: www.sei.se.