The importance of clean development mechanism for small hydro power plants

doi:10.1016/j.renene.2013.06.021

Renewable Energy

Volume 60, December 2013, Pages 643-647

https://doi.org/10.1016/j.renene.2013.06.021 Get rights and content

Highlights

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Clean development mechanism is not a subsidy for implementation of small hydro projects in Brazil.
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A CDM project requires at least 11 MW capacity to minimize the risks related to economic return.
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Feasibility of CDM projects is more sensitive to CER values than to internal rate of return.

Abstract

The present study sought to examine the importance of CDM for the implementation of small hydro in Brazil, assessing its advantages, disadvantages and limitations. An analysis of official documents of all SHPs in activity, under construction, and approved in Brazil was performed, including all existing CDM projects for small hydro in the country. A sensitivity analysis was performed to determine the point of zero net loss for CDM SHP projects, considering: minimum, maximum, and average Certified Emission Reduction (CER) values; minimum, maximum, and average costs of CDM project development, both for small and large scale activity; and variations in the internal rate of return (IRR). The main conclusion was that CDM for SHP in Brazil cannot be considered a subsidy for implementation of these projects, but may increase their revenue. It was found that, among the 431 SHPs which became active in the country since 2001, 339 did not implement CDM projects, suggesting that the importance of this mechanism as an incentive was uncertain. It was also found, under the investigated conditions, that investment in a CDM project requires a minimum installed capacity of approximately 11 MW to minimize the risks related to economic return. The variation in the value of the CER is more important than the variation of the Weighted Average Cost of Capital (WACC), as verified through sensitivity analysis. It was also found that CDM projects of large-scale activity, as well as small hydro projects in isolated systems, have a lower risk compared to small-scale projects which belong to the NIS (National Interconnected System).

Introduction

Energy is an essential input for economic development and its demand is increasing worldwide. Human activities are directly related to the use of energy, with per capita consumption being used as an indicator of economic and social development, and developed countries showing a significantly higher energy consumption than developing countries.

In order to fulfill current human needs, 81.3% of the energy used on the planet is generated from the burning of fossil fuels, with petroleum, natural gas and coal being the main sources. It is known that this type of power generation has resulted in the emission of greenhouse gases (GHGs) and that the accumulation of pollutants in the atmosphere is one of the probable causes of the climate changes that have been observed [1].

Brazil has a privileged potential for hydro electricity generation: 78.2% of the electricity generated in the country originates from hydro. In 2010 Brazil was the second largest producer of hydropower in the planet, with 403 TWh, taking second place to China's 722 TWh. Considering installed capacity, Brazil's 79 GW takes third place, behind China, with 171 GW, and the US, with 100 GW. Finally, considering the hydro share in total domestic electricity generation, Brazil comes second, with 78.2%, behind Norway, which has 94.7% of its domestic electricity generated by hydropower [2].

Brazil has been making new investments to expand its hydroelectric generation. Currently, more than 18.8 TWh are under construction, 11.2 TWh of which correspond to Belo Monte plant [3].

Under this scenario, the generation of energy from renewable sources such as hydropower, Small Hydro Power (SHP), biomass, wind, tidal and solar have become important to continue the development process, supplying the growing demand for energy, with the advantage of offering “cleaner” energy.

There are currently two main incentive mechanisms for SHP projects in Brazil. The Clean Development Mechanism (CDM), which is international in scope, and the Incentive Program for Alternative Electric Energy Sources (PROINFA). The first is a global solution established in Article 12 of the Kyoto Protocol, and the latter was implemented through Brazilian Law No. 10,438, in 2002.

The Clean Development Mechanism (CDM), created by the Kyoto Protocol to promote climate change mitigation, might help increase investor interest in SHPs. CDM projects enable the reduction of GHG emissions to be converted into carbon credits which can be traded in international markets. This may foster investment in SHPs, increasing their financial attractiveness, and drawing the attention of energy sector investors in the country. The usually small profitability of a SHP can be used to prove the additionality of the associated CDM project, demonstrating that an economically feasible project may obtain CERs.

A SHP, depending on details of project implementation, may be configured as a CDM, since it is an alternative for the generation of clean, renewable electric energy. Although several authors argue that SHPs cause little or no environmental impact, and might be considered a source of clean energy, Abbasi and Abbasi [4] found that, by considering the environmental impacts per kilowatt of power generated, SHPs cause environmental impacts no less significant than those of large centralized plants.

In this context, the current study investigates whether CDM can influence the outlook of SHPs in Brazil, based on official documents published by the Brazilian National Agency of Electric Energy (ANEEL), the Ministry of Science, Technology and Innovation (MCTI), the Ministry of Mines and Energy (MME), and the CDM Executive Board (UNFCCC).

Section snippets

Small hydro as CDM in Brazil

The Designated National Authority shows 51 PDD records for CDM projects involving 92 SHPs. These represent only 22% of the power of the SHPs in operation, construction and granted in the country since 2001.

As shown in Table 1, 68 SHPs with CDM projects are in operation generating “cleaner” energy, by reducing GHG emissions to the atmosphere, thus contributing to sustainable development. The projects listed as “under construction” and “granted” still have a long wait until RCEs may be issued,

Feasibility analysis

The economic feasibility analysis described below aimed to determine the break even point of CDM projects for SHPs in Brazil. Three CER reference values were considered, all based on the period between January 2, 2008 and August 31, 2011: € 7.50, minimum historical value; € 13.59, mean value; and € 22.60, the maximum value. Information provided by the Ministry of Environment of Japan and Global Environment Centre Foundation (2006) [10] was employed to set the values of minimum, average and

Conclusions

The study evaluated the importance of CDM for the implementation of SHP in Brazil, investigating conditions under which CDM becomes feasible and financially interesting. It was noted that the number of SHPs with CDM in Brazil may increase significantly, since 339 enterprises, which started operations since 2001 or are expected to start in the near future, have not yet submitted CDM projects.

The analyses revealed that power density can be considered a limiting factor for SHP CDM projects.

References (14)

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Small hydro and the environmental implications of its extensive utilization
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Nitin Tanwar
Clean development mechanism and off-grid small-scale hydropower projects: evaluation of additionality
Energy Policy
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IEA – International Energy Agency
Key world energy statistics 2010
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IEA – International Energy Agency
Key world energy statistics 2012
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ANEEL – The National Agency of Electric Energy. Available from:...
ANEEL – The National Agency of Electric Energy
Monitoring of small hydropower plants with installation license
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PORTAL PCH. End of embargo releases 137 SHPs in Paraná. Available from:...

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Technical noteThe importance of clean development mechanism for small hydro power plants

Highlights

Abstract

Introduction

Section snippets

Small hydro as CDM in Brazil

Feasibility analysis

Conclusions

Renew Sustain Energy Rev

Energy Policy

Key world energy statistics 2010

Key world energy statistics 2012

Monitoring of small hydropower plants with installation license

Technical note
The importance of clean development mechanism for small hydro power plants