PCF.methodology.pcf

8/13/2019 PCF.methodology.pcf

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PCF Approaches to

Additionality, Baselines,Validation and Verification

PCF Training Workshop, 19 November 2001

PCF Training


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What do we want to achieve

today?

Understanding of the PCFs approaches to

additionality and baselines,

validation and verification/certification.

Case studies

Feedback and open issues


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Contents

I. Project Cycle: Overview

II. Kyoto Protocol Provisions for Baselines

III. PCF Baseline DevelopmentIV. Special Issues with Baselines

V. Validation, Verification and Certification

VI. Conclusions


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Part I

What are the basic concepts?


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What is the idea of the CDM?

ReduceGHG emissions in one country

to permit

an equivalentquantity of GHG emissions in anothercountry

without changing the global emission balance

How to know how much has been reduced??


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What is the PCF approach to

additionality?

Environmental additionalityis the relevantcriterion

Established as positive difference between

Baseline Emissions (counterfactual)

Project Emissions (measurable)

___________________= Emission Reductions

(if > 0 , then additional) (to be verified)


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Baseline and additionality

CO2

TimeCDMprojectCO2emissions (observable)

Real, measurableand long-term

AdditionalCO2

emissionsreduction

Baseline scenarioCO2emissions (would occur) Baseline emissions

Project emissions

fi


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How to figure out

what baseline emissions are?

Beliefs about what would happen are a starting point

Possiblebaseline scenarios

but beliefs are not sufficient: a methodological approachis needed, which can be tested

Variousbaseline methods

_____________________________________

Determine the relevantbaseline scenario


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What do we mean by

Baseline method:

Systematic way to compare alternative baseline scenarios

Baseline scenarios:

All alternative plausible courses of developmentincluding the proposed project

Baseline:

Methodologically selected, most likely baseline scenario

Baseline emissions:

GHG emissions in the baseline scenario


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What are baseline scenarios?

How can a particular product or service beprovided?

Principle of service equivalence

Examples: Electricity production using coal, natural gas, biomass,

hydro etc.

Heat production using individual boilers, district

heating

What is the time profile of different technologies

What is the regulatory and policy framework


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How to measure emissions?

Project emission are directly observable /measurable

Baseline emissions are hypothetical / counterfactual

But often real time indicators can help tell what would

happen

Develop a Monitoring Plan

Take measurements / monitor emission indicators

Calculate / assess baseline and project emissions


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How to be sure that emission reductions

are real, measurable and long-term?

Baseline Study Monitoring and Verification Plan

Validate (before project construction)

Monitoring records

Emission reduction calculations

Audit / Verify/ Certify (during project operation)


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Part II

What does the Kyoto Protocol say

about baselines?

Wh t d th K t P t l


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What does the Kyoto Protocol say

about baselines?

Criteria for CDM projects:

Real, measurable, and long-termbenefits related to

the mitigation of climate change. (Art. 12.5b)

Reductionin emissions that are additionalto any that

would occur in the absenceof the certified project

activity. (Art. 12.5c)

Modalities / guidelines elaborated by theConference of the Parties.

Wh id d h CDM


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What guidance do the CDM

modalities provide?

43. A CDM project activity is additional if anthropo-genic emissions of greenhouse gases by sources are

reduced below those that would have occurred in

the absence of the registered CDM project activity.

46. The baseline may include a scenario where future anthropogenic

emissions by sources are projected to rise above current levels, due

to the specific circumstances of the host Party.47. The baseline shall be defined in a way that CERs cannot be earned for

decreases in activity levels outside the project activity or due to

force majeure.

Wh t d th CDM d liti


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What do the CDM modalities say

about baseline scenarios?

44. The baseline for a CDM project activity is the scenario that reasonably represents the anthropogenic emissions by sources

of greenhouse gases that

would occur in the absence of the proposed project activity.

A baseline shall cover emissions from all gases, sectors and sourcecategories listed in Annex A

within the project boundary.

A baseline shall be deemed

to reasonably represent the anthropogenic emissions by sources thatwould occur in the absence of the proposed project activity

if it is derived using a baseline methodology referred to[as

follows].



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about baseline methods?45. A baseline shall be established:

(a) By project participants in accordance with provisions for the useof approved and new methodologies[];

(b) In a transparent and conservative mannerregarding the choice ofapproaches, assumptions, methodologies, parameters, datasources, key factors and additionality, and taking into accountuncertainty;

(c) On aproject-specific basis;

(d) In the case of small-scale CDM projectactivities [], inaccordance with simplified procedures developed for such

activities;(e) Taking into account relevant national and/or sectoral policiesand

circumstances, such as sectoral reform initiatives, local fuelavailability, power sector expansion plans, and the economicsituation in the project sector.



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about baseline methods? (contd)

48. In choosing a baseline methodology []select fromamong the following approaches

the one deemed most appropriatefor the project activity,

taking into account any guidance by the executive board, and

justify the appropriateness of their choice:

(a) Existing actual or historical emissions, as applicable; or

(b) Emissions from a technology that represents an economicallyattractive course of action, taking into account barriers toinvestment; or

(c) The average emissions of similar projectactivities under-taken in the previous five years, in similar social, economic,environmental and technological circumstances, and whoseperformance is among the top 20 per cent of their category.


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What about the crediting period?

49. Project participants shall select a crediting periodfor a proposed project activity from one of thefollowing alternative approaches:

(a) A maximum of seven yearswhich may be

renewed at most two times, provided that, for eachrenewal, a designated operational entity determinesand informs the executive board that the originalproject baseline is still valid or has been updated

taking account of new data where applicable; or

(b) A maximum of ten yearswith no option ofrenewal.

Any guidance on


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Any guidance on

leakage and boundaries?

50. Reductions in anthropogenic emissions by sources shall beadjusted for leakage[].

51. Leakage is defined as the net change of anthropogenic

emissionsby sources of greenhouse gases which occurs

outside the project boundary, and which is measurable andattributable to the CDM project activity.

52. The project boundary shall encompass all anthropogenic

emissionsby sources of greenhouse gases under the control

of the project participantsthat are significant and

reasonably attributableto the CDM project activity.


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Part III

How does the PCF determine

project baselines?

How does the PCF system


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How does the PCF system

for baseline establishment work?

At Project Idea Note (PIN) stageBaseline discussions with PCF team

Preparation of Project Concept Note (PCN)

Discussions with project proponent

Possibly reconnaissance missions

After PCN

Formal Baseline Study (BLS)

Monitoring and Verification Protocol (MVP)Emission Reduction Projection

Validation

What is the purpose of the


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What is the purpose of the

baseline study?

The baseline studyIs a systematic and methodological analysis to

determine the most likely development scenario and its

evolution in time in absence of the Kyoto Protocol

mechanisms.

Is the basis for the projection of emission reductions.

Credibly demonstrates environmental additionality.

Provides all arguments, facts and evidence in support ofthe determined project baseline, so that the baseline can

be validated.

b li


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PCF baseline process

Information on

project

project context

Kyoto Protocol

etc.

Possible

baseline methods

Baseline method

selected

Plausible

baseline scenarios

Baseline scenario

selected

Criteria for baseline

method selection

Monitoring and Verification Protocol

Project specific tools and instructions on emission related data socio-environmental impacts quality assurance verification

Some criteria of


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Some criteria of

baseline method selection

Type of problem:Major one of a kind fixed-asset investment

Demand side intervention: many consumers

Size of investments

E.g., small project rules?

Availability / accessibility of information

E.g., can risks be quantified?

Costs of methods

Note:Baseline method depends on identified

(supply/service) problem, not on proposed project.

Which baseline methods


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Which baseline methods

has the PCF applied to date?

Project-by-project methods Investment / financial analysis Latvia, Morocco, Chile

Scenario analysis Uganda

Control groups (Brazil, Latvia MVP)

Expert opinion (Uganda BLS)

Standard-oriented methods Sectoral baselines, benchmarks (Costa Rica, Chile)

Technology matrix, default baselines,

Top-down baseline, ...

Require political decisions

Hybrid methods Political guidance on key parameters

Guidance on how to treat policy decisions (policy baselines)


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Investment Analysis


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Investment analysis is a rigorous approach ...

Behavioral assumption:Rational investor maximizes return on investment under given

constraints: financial analysis

Public decision maker maximizes public benefit under given

constraints: economic / cost-benefit analysis

Baseline definition:

The baseline is the (time dependent) investment alternative

(scenario) with the highest IRR or the highest NPV or the

lowest costs (all risk adjusted).

not considering GHG emissions or the value of ERs.


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and an established methodology

Distinguish between private and public sector projects. Create a menu of investment alternatives (scenarios)

that deal with the problem on hand / satisfy an identified

demand (service equivalence).

include only plausible scenarios (constraints)

include zero investment scenario (BAU) and proposed

project

Include alternative investment start times Determine investment constraints and parameters

(regulatory policy, costs, risks, etc.but not ERs).


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How has the PCF applied


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pp

investment / financial analysis?

Example: Latvia Objective: solve waste management problem in Liepaja

The project was treated as a private sector investment

Plausible investment scenarios were described andanalyzed by Task Manager in a feasibility study

Financial and Economic IRRs were provided

Ranking of alternatives with and without carbon value

Baseline: highest IRR without carbon value

Project: highest IRR with carbon value

How has the PCF applied


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Liepaja: Economic Analysis of Alternatives

0.00%

1.00%

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6.00%

1 2 3 4 5 6

Options

InternalRateo

f

Return

IRR without C revenues IRR with C revenues

Baseline

PCF project

pp

investment / financial analysis?

Example: Latviawaste management

How has the PCF applied the


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ppleast cost method?

Examples: Morocco, Chile

A public (Morocco) or a private (Chile) sector project?

A comparison of investment alternatives on the basis of costper kWh is typically used inpower projectsplanning.

The PCF methodology examines the: Expansion plan: Additionality of investment What is the next system expansion?

What is the systems long-run marginal cost?

When would the proposed project be implemented?

Dispatch model: Emission reductions Which power source is displaced at the operating margin?

MVP bases verifiable ERs on observed dispatch.

Chile: 5th Region Generation and Dispatch


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Chile: 5 Region Generation and Dispatch

to Meet Future Demand (to scale)

0

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 202

Chacabuquito Existing Hydro Combined Cycle Dispatched Coal

GWh

New 300 MW CC plants


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Scenario analysis is difficult


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Scenario analysis is difficult

Not very well defined as a methodology.

Use if non-economic constraints are predominant

Employ a multi-dimensional, risk-based scenario analysis,to identify most likely course of development

Attempt to understand and describe all aspects andcircumstances that contribute to an investment decision, inparticular risks and other barriers

Combine with other methods if available (e.g. costs)

Provide data and/or expert opinions and references that canbe confirmed by a validator.

Note: The project proponents or consultantsbeliefs orsimple statements cannot be validated.

How has the PCF used


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scenario analysis?

Example: Ugandasmall hydropower

A typical electric power development project. -- Plausible projectalternatives: Business-as-usual small-scale inefficient diesel generation

Grid interconnection with main grid

Regional hydropower development

Simple, not risk-adjusted cost-per-kWh ranking shows that current situation (small private diesel gensets) is most expensive

investor needed (West Nile population unable to make investment)

grid extension to West Nile is cheapest, and

proposed hydro-project ranks second cheapest

But: Non-economic constraints and barriers are predominant Investment / financial analysis overshadowed by high non-quantifiable risks

(which drive the baseline).

Suitable control groups not available.

How has the PCF used


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scenario analysis? (Contd?)

Example: Uganda (contd)

Undertake multi-dimensional, risk-based scenario analysis

Investment risks (expert opinion), cost analysis, market structure

Current situation (small gensets) is least risky: baseline

Multi-dimensional, risk-based scenario analysis identifiesand describes reasons, why

grid extension is currently not a feasible option

current situation (small gensets) would persist

Baseline study backs these findings with confirmable

information (e.g., expert opinion) MVP checks if baseline study claims remain valid

Indicators for grid extension and major fixed-asset investment inWest Nile region


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Control Groups

How to use control groups?


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Two types of control groups Different group of consumers or facilities that are not involvedin and/or affected by the CDM project

Same group of consumers or facilities before implementation of

proposed project (historic baseline)

Control group must be situation-specific

The selected control group is the baseline: Describe the

baseline!

Must be similar in all aspects but for the CDM project

Often complicated, but can be combined with other methods

Useful for projects with large number of units (e.g. households)



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g pContd

MVP to measure critical control group indicatorsIf possible, use observed control group emissions asbaseline emissions

Combine control group data with other relevant data inproject area, such as activity level

Distinguish two questions:

What is the quantity of baseline emissions?

Decreasing baseline emissions as members of control groupswitch to new technology?

Replace new technology in control group with old technology?

When does the baseline shift?

How many members of control group have to switch?

Has the PCF used control groups?


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Has the PCF used control groups?

Example: Latvia, Uganda

Not directly.But control group-like methods have been

used to project and measure ERs

Uganda: Survey of private gensets and electricity demand to

project growth. (historic control group) (baseline study) Latvia: When will landfills be used for power generation? (MVP)

Uganda: When does a major non-removable investment occur in

the region. (MVP)

We hope to experiment with control groups, for example: Transport projects

Demand side energy conservation projects

PLANTAR The proposed project


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PLANTAR The proposed project

Example: BrazilPlantar: Charcoal for pig ironObjective:

To make charcoal from sustainably managed plantations a viablealternative to coal/coke in pig iron production

Project:

23,100 ha of FSC certified fuel wood plantationson degradedpasture or old plantation lands: (3,300 ha x 7 years);

Cerrado forest ecosystem rehabilitation: 478 ha

Improved Charcoal production(reducing methane, and local airpollution from condensable oils/tars, and particulates)

Charcoal displacing Coal/Cokein Blast Furnace Pig ironproduction


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Standard Baselines

How would standard-oriented


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baselines work?

Objective:simplify baseline determination for project developerreduce transaction costs and risks for investor

control gaming

Tool:public provision of pre-approved baselines for project

categories (not yet available)

Philosophy:

additionality on averagepolitical decision (equity, development priorities)

research and pilot application in concrete projects

F i t b h k


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For instance benchmarks

Prepared for fairly homogeneous category of projects/technology / circumstances, a sector, power grid etc.

Often based on activity level/ efficiency

For instance: baseline benchmark in kg coal/kWh

Methodshistoric: average energy efficiency in power sector (last five years)

present: efficiency of latest addition to grid

projection: expected technology

Country/region-specific: local circumstances, energy policies etc.

Needs proof that

benchmark is applicable, because project falls in project category

Has the PCF used standard baselines?


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Has the PCF used standard baselines?

Example: Costa Ricasmall renewables Not directly: Baseline standards are highly political.

But sector-wide analysissupports small independent

power projects

BLS: System-wide cost benchmarkbased on characteristics of

national power system and expansion plan

MVP: Carbon intensity factorfor marginal / displaced power in

power sector based on observed dispatch behavior

Simplified approach for each small projectbls: Generation cost higher then benchmark additionality

mvp: kWh output times carbon intensity factor ERs


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Part IV:

Which special baseline problems

has the PCF encountered?


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Conservative estimates

Project time horizon / crediting time

Dynamic baselines?

ODA

Power systems Cross-border reductions

Policy baselines & perverse incentives

Development related emission Leakage

Small projects

Does the PCF used i b li ?


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dynamic baselines? No.But the PCF recognizes that baseline scenarios

evolves in time E.g., the PCF project may go forward anyway in X years

Latvia must comply with EU law in Y years.

The baseline study

discusses the time dimension of the baseline identifies possible shifts in activity levels and baseline scenarios

The MVP

includes indicators for activity levels and baseline shifts

adjusts baseline emissions accordingly PCF baselines are

constant regarding baseline methods and technical parameters

variable regarding activity levels and anticipated types of activities

Morocco Wind Farm Project


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How do we think aboutPCF j t i t ?


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PCF projects in power systems?

System capacity

Base load capacity

replacementMajor capacity

addition (Morocco)

Micro capacity

addition (Costa Rica)

Base load

Dispatch

margin

Coal Coal Wind

Thermal

HydroDispatch

additional?

How do we deal with GHG reductionsth t i the t ?


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that occur in another country?

Latvia

ER occur in neighboring countries due to lower power imports.

PCF decided not to buy these reductions.

Costa Rica

Central American power pool becomes operational duringproject lifetime.

Project depends on ERs from the entire power pool.

What to do?

Swaziland ERs can only be generated by backing out coal-based power

imports from South African.

A political issue?

What does the PCF think about

d l t i t i j t ?


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development assistance in projects?

The possibility that projects may be financed with ODAmust not make them non-additional.

The PCF does not consider ODA in determining the

baseline.

ODA should fill the financing gap after the project hasobtained revenues from selling ERs.

At current low carbon prices, many renewable projects

must be topped up with ODA.

It seems that ODA cannot be used to purchase ERs.

=> Can we consider projects with ODA automatically

additional?

How should the PCF deal with theissue of perverse incentives?


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issue of perverse incentives ?

Punish a country for good policies and laws, ifthose policies are driven by domestic benefits?

What if these policies and not enforced / enforceable?

What if they are in excess of national interests?

What if they are just right but might be relaxed toaccess CDM funds?

Reward a country for bad policies?

What if national standards are insufficient to meet

domestic needs?What if insufficient national policies / standards are

driven by desire to increase flow of carbon finance?

Where does the PCF face thepolicy baseline problem?


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policy baseline problem? Latvia

Prepares for EU accession Solved: No legal obligation to collect LFG until accession

Morocco Wants wind energy to increase supply security

Proved irrelevant: Morocco unwilling to go ahead with project without

concessional finance Uganda

Wants to develop the West Nile region, politically important

Irrelevant: No willingness and ability to subsidies as needed, ODA fills gap.

Costa Rica

Has priority for expensive hydro power in its expansion plan Raises cost benchmark for small hydro power projects, makes them non-

additional.

How does the PCF deal withbaselines in small projects?


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baselines in small projects?

- Bundling of similar small projects in one country- Project intermediation (e.g. through ESCOs)

- Standardization of project documents

- Sectoral baseline and MVP, e.g. carbon efficiency in

power pool applied to mini-hydro power- Standard baseline study and MVP for sub-projects

- One validation and verification process for the sectorand for all sub-projects

- Standard carbon purchase contracts

- Kyoto Protocol small project rules


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Part V:

How does the PCF handle

validation, verification

and certification

Which at are the PCFskey project design documents?


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key project design documents?

Project Design Document

Baseline Study

Monitoring and Verification Protocol (MVP)

Emissions Reduction (ER) Projections

Other background documents

Why is the MVP important?


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creates transparence, reliability, verifiability, andcredibility.Serves as a project-specific performance standard.

Is a performance monitoring and measurement tool.

provides a consistent and (to be) validated system forthe flexible, yet conservative determination of ERs.

performance criteria, observable indicators, measurementmethods, default parameters, technical equations, recordkeeping systems, ER model and calculation procedures

determines clear responsibilities for all parties.

can be adapted to a variety of CDM projects.

What does the MVP contain?


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1. Instructions for systematic monitoring andrecording of emissions related data forbaseline and project case.

2. A models and tools for the calculation of ERs.

3. Targets and monitoring instructions for social,environmental, and development indicators asa measure of sustainable development.

4. Instructions for the management and qualitycontrol of the monitoring system.

5. Guidance for the verification of ERs.

What do we mean by validation?


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An independent assessment of project design and

compliance with a set of criteria. Baseline/additionality/leakage

Sustainable development

Other criteria, e.g., stakeholder participation, environmentalimpact assessment, host country approval

Carried out by qualified (accredited) independent

private sector (operational) entity (validator).

Successful validation is pre-requisite for project

registration by CDM Executive Board (EB).

What are validation prerequisites?


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Full project preparationtechnical, political, financial

Project design documents

most important: Baseline Study and MVP

PCF Preliminary Validation Protocol (PVM)

Validation guidelines

Table of requirements

Template for validation opinion

How does thevalidation process work?


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p

Selection of independent validator by PCF

Submission of project documents

Review and amendment of Validation Protocol Revised rules and modalities?

Validation procedure Desk review of documents

Interviews, possibly project visit, other evidence

Input from concerned parties

Draft validation report Clarification of issues, adjustment of project design and

documents by PCF, resubmission of documents

Final validation report and opinion

What does project implementationand commissioning involve?


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and commissioning involve?

Project operator implements MVP

Set up of monitoring system

Train monitoring and record keeping staff

Implement quality control system

Ready to monitor baseline and project performance data

Initial Verification Qualified (accredited) independent private sector (Operational)

Entity (auditor/verifier), not project validator.

Verifies & confirms readiness of project and quality managementand assurance system to generate and monitor ERs

Adjustments to MVP if needed

Establish relationship with operator

Project commissioned to produce ERs

How is monitoring done?


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Monitoring during operation is responsibility ofproject operator

To be carried out in full compliance with MVP

Read meters, collect and record data, undertake

surveys etc.

Complete self-calculating spreadsheets

Store records (paper trail)

Report to PCF and host country authorities Follow quality management and assurance system

Prepare for verification


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What is certification?


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Verifier issues written assurance (the certificate)that, during the verification period,

the project has achieved stated ERs,

in compliance with all CDM and project performancecriteria.

Certificate is legally binding statement, verifier isliable for professional work.

Executive Board (or accreditation body) can

undertake spot checksaccreditation can berevoked.

How to receive emission reductions?Who reports?


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p

Verifier informsCDM executive board and project

participants of successful certification and delivers

certificate.

Executive board issuescertified emission reductions

(CERs) into national registries.

PCF Participants receive CERs in their accounts in

national registries.

PCF and host country reportperiodically toUNFCCC Secretariat and/or CDM EB.


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Part VI:

Conclusion

Finally: What emerges


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is a complex picture:

No single, but a hybrid mixture of methods

Complexity depends on project design

Unsolved political issues

Baseline study and MVP must be seen together

Rigorous, method-driven scenario forecasts in the baselinestudyas a basis for

selection and application of monitoring tools for baseline andproject emissions in the MVP

More experience and discussion is needed!

Early (PCF) projects will contribution to the evolution of thefuture methodology for CDM & JI projects

Learning by doing concrete projects is way forward

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