Document of

THE WORLD BANK

FOR OFFICIAL USE ONLY

Report No: 60014-CN

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT US$100 MILLION

TO THE

PEOPLE‟S REPUBLIC OF CHINA

FOR AN

URUMQI DISTRICT HEATING PROJECT

April 21, 2011

China and Mongolia Sustainable Development Unit

Sustainable Development Department

East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the

performance of their official duties. Its contents may not otherwise be disclosed without World

Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective July 1, 2010)

Currency Unit = RMB (Chinese Yuan Renminbi)

RMB6.70 = US$1.00

US$0.149 = RMB1.00

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

CDM Clean Development Mechanism NA Not Applicable

CHP Combined Heat and Power Plant ORAF Operational Risk Assessment

Framework

DA Designated Account PAD Project Appraisal Document

DH District Heating PDO Project Development Objective

EA Environmental Assessment PIU Project Implementation Unit

EHS WB/IFC Environmental Health and

Safety

PLG Project Leading Group

EHS Environmental Health and Safety PM Procurement Manual

EIA Environmental Impact Assessment PMO Project Management Office

EIRR Economic Internal Rate of Return RMB Renminbi (Chinese Yuan)

EMP Environmental Management Plan RPF Resettlement Policy Framework

ESP Electrostatic Precipitators SBD Standard Bidding Documents

FM Financial Management SCADA Supervisory Control and Data

Acquisition

FMM Financial Management Manual SHN Shayibake Heating Network

FRR Financial Rates of Return SLA Subsidiary Loan Agreement

FYP Five-Year Plan SOE State-Owned Enterprise

GEF Global Environment Facility SW Staff-Week

HOB Heat Only Boilers TA Technical Assistance

HRBEE GEF-financed China Heat Reform

and Building Energy Efficiency

Project

TOR Terms of Reference

IBRD International Bank for

Reconstruction and Development

TSP Total Suspended Particulates

ICB International Competitive Bidding TTL Task Team Leader

IDA International Development Agency UDHC Urumqi District Heating Company

IFC International Finance Corporation

(WB Group)

UHN Shuimogou Heating Network

IFRs Interim Financial Reports UITCPO Urumqi International Technical

Cooperation Project Office

L Low UMG Urumqi Municipal Government

LIBOR London Interbank Offered Rate UUCC Urumqi Urban Construction

Commission

M&E Monitoring and Evaluation WACC Weighted Average Cost of Capital

MBD Model Bidding Documents WB World Bank

MI Medium-Impact WBPG World Bank Project Group

MFB Municipal Finance Bureau XRAO Xinjiang Uyghur Autonomous

Region Audit Office

MOF Ministry of Finance XRFB

(RFB)

Xinjiang Uyghur Autonomous

Region Finance Bureau

Regional Vice President: James W. Adams, EAPVP

Country Director: Klaus Rohland, EACCF

Sector Director:

Sector Managers:

John Roome, EASSD

Ede Jorge Ijjasz-Vasquez, EASCS

Vijay Jagannathan, EASIN

Task Team Leader: Gailius J. Draugelis, EASCS

CHINA

Urumqi District Heating Project

CONTENTS

I. STRATEGIC CONTEXT ..................................................................................................1

A. Country Context .........................................................................................................1

B. Sectoral and Institutional Context ................................................................................2

C. Higher Level Objectives to which the Project Contributes ............................................4

II. PROJECT DEVELOPMENT OBJECTIVES .....................................................................4

A. PDO ...........................................................................................................................4

B. Project Beneficiaries ...................................................................................................5

C. PDO Level Results Indicators .....................................................................................5

III. PROJECT DESCRIPTION ................................................................................................5

A. Project components .....................................................................................................5

B. Project Financing ........................................................................................................7

1. Lending Instrument ..................................................................................................7

2. Project Cost and Financing .....................................................................................7

C. Lessons Learned and Reflected in the Project Design...................................................7

IV. IMPLEMENTATION........................................................................................................8

A. Institutional and Implementation Arrangements ...........................................................8

B. Results Monitoring and Evaluation ..............................................................................8

C. Sustainability ..............................................................................................................9

V. KEY RISKS AND MITIGATION MEASURES ................................................................9

VI. APPRAISAL SUMMARY .............................................................................................. 10

A. Economic and Financial Analysis .............................................................................. 10

B. Technical .................................................................................................................. 12

C. Financial Management .............................................................................................. 13

D. Procurement ............................................................................................................. 13

E. Social (including safeguards) .................................................................................... 13

F. Environment (including safeguards) .......................................................................... 14

G. Other Safeguards Policies triggered (if required)........................................................ 15

Annex 1: Results Framework and Monitoring .......................................................................... 16

Annex 2: Detailed Project Description .................................................................................... 19

Annex 3: Implementation Arrangements ................................................................................. 27

Annex 4 Operational Risk Assessment Framework (ORAF) ..................................................... 39

Annex 5: Implementation Support Plan ................................................................................... 42

Annex 6: Team Composition ................................................................................................... 45

Annex 7: Economic and Financial Analysis ............................................................................. 46

Annex 8: Map ......................................................................................................................... 57

CHINA

URUMQI DISTRICT HEATING PROJECT

PROJECT APPRAISAL DOCUMENT

EAST ASIA AND PACIFIC

EASCS

Date: April 21, 2011

Country Director: Klaus Rohland

Sector Director: John Roome

Sector Managers: Ede Jorge Ijjasz-Vasquez;

Vijay Jagannathan

Team Leader: Gailius J. Draugelis

Project ID: P120664

Lending Instrument: Specific Investment

Loan

Sector(s): District heating and energy

efficiency services (100%)

Theme(s): Pollution management and

environmental health (34%); Other urban

development (33%); Climate change (33%)

EA Category: A

Project Financing Data:

Proposed terms: Variable spread loan has a final maturity of thirty years including a grace

period of five years.

[X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other:

Source Total Amount (US$ M)

Total Project Cost:

Cofinancing:

Borrower:

Total Bank Financing:

IBRD

IDA

New

Recommitted

343.20

0

243.20

100.00

100.00

Borrower: Ministry of Finance (MOF) / PR China and Urumqi Municipality

Responsible Agency:

Urumqi International Technical Cooperation Project Office

Urumqi Construction Commission

No. 29, Xinxing Road, Urumqi, PR China

Contact Person: Mr. Qiao Yu, Director

Telephone / Fax No.: +86-991-4617-327

Email: upmo@sina.cn

Estimated Disbursements (Bank FY/US$ m)

FY 2012 2013 2014 2015 2016

Annual 30 30 20 15 5

Cumulative 30 60 80 95 100

Project Implementation Period: February 1, 2011 – June 30, 2015

Expected effectiveness date: October 19, 2011

Expected closing date: December 31, 2015

Does the project depart from the CAS in content or other

significant respects?

○ Yes ● No

If yes, please explain:

Does the project require any exceptions from Bank policies?

Have these been approved/endorsed (as appropriate by Bank

management?

Is approval for any policy exception sought from the Board?

● Yes ○ No

● Yes ○ No (Not applicable)

○ Yes ● No

If yes, please explain:

An increase in retroactive financing from 20% to 30% of the Loan amount has been approved

by management.

Does the project meet the Regional criteria for readiness for

implementation?

● Yes ○ No

If no, please explain:

Project Development Objective: The proposed project development objective (PDO) is to

connect consumers in selected districts of Urumqi to district heating services with improved

energy efficiency and environmental performance.

mailto:upmo@sina.cn

Project description

Component A. Shuimogou District Urumqi CHP Plant District Heating Network

Construction of district heating networks with associated ancillary equipment, substations

(including building level substations), control, monitoring and dispatch systems and control

centers, meters, and maintenance vehicles, and associated civil and installation works and

recovery of public infrastructure damaged by installation in Urumqi‟s Shuimogou District.

Component B: Shayibake District CHP Heating Network

Construction of district heating networks with associated ancillary equipment, substations

(including building level substations), control, monitoring and dispatch systems and control

centers, meters, and maintenance vehicles, and associated civil and installation works and

recovery of public infrastructure damaged by installation in Urumqi‟s Shayibake District and

Tianshan District.

Component C: Institutional Development and Project Management.

Strengthening the capacity of UDHC and Urumqi in Project management, monitoring, and

evaluation; and supporting UDHC‟s and Urumqi‟s institutional development through the

provision of technical assistance, training, study tours, and operational support.

Safeguard policies triggered?

Environmental Assessment (OP/BP 4.01)

Natural Habitats (OP/BP 4.04)

Forests (OP/BP 4.36)

Pest Management (OP 4.09)

Physical Cultural Resources (OP/BP 4.11)

Indigenous Peoples (OP/BP 4.10)

Involuntary Resettlement (OP/BP 4.12)

Safety of Dams (OP/BP 4.37)

Projects on International Waters (OP/BP 7.50)

Projects in Disputed Areas (OP/BP 7.60)

● Yes ○ No

○ Yes ● No

○ Yes ● No

○ Yes ● No

○ Yes ● No

○ Yes ● No

● Yes ○ No

○ Yes ● No

○ Yes ● No

○ Yes ● No

Conditions and Legal Covenants:

Financing Agreement

Reference

Description of Condition/Covenant Date Due

Loan Agreement (LA),

4.01 and 4.02

The Subsidiary Loan Agreement has

been executed between Urumqi and

UDHC and duly authorized or ratified by

Urumqi and UDHC.

Effectiveness condition

Project Agreement (PA),

Annex A to Schedule,

Paragraph 11

Except as the Bank shall otherwise agree,

UDHC shall maintain for each of its

fiscal years after its fiscal year ending on

December 2011, a ratio of operating

expenses to operating revenues not

higher than 90%.

During implementation

Project Agreement (PA),

Annex A to Schedule,

Paragraph 12

Except as the Bank shall otherwise agree,

UDHC shall maintain a ratio of current

assets to current liabilities of not less

than 1.3.

During implementation

Project Agreement (PA),

Annex A to Schedule,

Paragraphs 11(c) and 12

(c)

If any review shows that UDHC would

not meet the financial covenant

requirements for UDHC‟s fiscal years

covered by such review, UDHC shall

promptly take all necessary measures

(including, without limitation,

adjustments of the structure or levels of

its tariffs in order to meet such

requirements.

During implementation

Project Agreement (PA),

Schedule, Paragraph 2

(a)

For the purposes of carrying out the

Project, the Project Implementing Entity

shall relend the proceeds of the Loan to

UDHC under a Subsidiary Loan

Agreement, with terms and conditions

acceptable to the Bank.

During implementation

Project Agreement (PA),

Annex A to Schedule,

Paragraph 5 and 6.

UDHC and UMG shall undertake to: (a)

carry out the Project with due diligence

and efficiency and in accordance with

appropriate management, financial,

engineering and public utility practices

and social and environmental standards

acceptable to the Bank, including the

Anti-corruption Guidelines applicable to

the recipient of the Loan proceeds other

than the Borrower, and provide, promptly

as needed, the funds, facilities and other

resources required for the purpose; and

(b) without limitation on the foregoing,

take all measures necessary to ensure that

the Project shall be implemented in

accordance with the Environmental

Management Plan and the Resettlement

Policy Framework.

During implementation

1

I. STRATEGIC CONTEXT

A. Country Context

1. Economic development of central and western regions in China is a high priority of

the central government. A policy-induced investment boom tilted toward western and central

China is a part of the central government‟s efforts to spread benefits of economic growth into its

less developed regions. Due to its deep integration with the world economy, China‟s coastal

region was hit directly by weakening external demand during the height of the global financial

crisis in 2008. The ripple effect of the slowdown in the eastern areas quickly led to deceleration

in the Western and Central regions, despite the small relative size of the exporting sectors in

these two regions. However, due to strong efforts by the central and local governments to

maintain economic development policies, fixed asset investment growth in these two regions was

generally higher than that in the eastern region, leading to higher industrial production and GDP

growth. This in turn is driving greater demand for urban services and improved quality of life.

2. China has made impressive efforts to reduce its energy intensity and the environmental impacts of energy use during the 11

th Five-Year Plan (FYP) period (2006-

2010) and this is expected to continue in the 12th

FYP (2011-2015). In the 11th FYP China

adopted an energy intensity per unit of GDP target and reported a 19.1 percent reduction over the

five year period. This quantitative and binding target helped reverse the upward trend of energy

intensity in the preceding 4-5 years and, importantly, establish energy conservation as a top

priority at all levels. During this period, a large number of small inefficient coal -fired power

plants and energy-intensive factories have been closed down. Among the other major energy

efficiency programs is a central government program of 10 key projects covering a

comprehensive list of measures. These measures include building energy efficiency and the

replacement of distributed, inefficient, and polluting small coal-fired boilers for heating with

central heating supply. These efforts, complemented by flue gas desulfurization campaigns

(especially for coal fired power plants), have also helped China move toward its goal of reducing

SO2 emissions by 10 percent over the 11th Five Year Plan. China has declared its commitment to

a target of 16 percent energy intensity reduction during the 12th FYP.

3. Due to the size of its population and the nature of its economy, China’s domestic energy efficiency policies significantly bolster global actions in climate change mitigation.

On November 26, 2009, China reaffirmed its commitment to addressing climate change

mitigation and announced a national goal of reducing CO2 emissions per unit of GDP by 40% to

45% by 2020 from 2005 levels. Continued energy conservation is an integral part of its plan to

meet this climate change mitigation target. China included a target of 17% carbon intensity

reduction in the 12th FYP.

4. China will continue to face local and global environmental sustainability challenges and energy security concerns as it strives to meet its growing energy needs that fuel rapid economic

and social development. One of the major challenges is unprecedented urbanization. While

export-oriented, industry-led growth has been the main driver in the growth of energy

consumption, rapid urbanization and the emergence of a consumer class with higher

requirements for improved living standards are emerging determinants of energy growth. Urban

growth in China has spearheaded a well known construction boom. Sixty percent of China‟s

2

building stock in 2006 (about 10 billion m2 of residential area) was built after 1996 and it is

estimated that another 60 percent of China‟s building stock in 2030 will be built after 2006.

B. Sectoral and Institutional Context

5. Urumqi is a major economic center in western China but is one of China’s most polluted cities. Urumqi, with a population of 2.3 million, is the capital of the Xinjiang Uyghur

Autonomous Region, and has been a principle target for development under the central

Government‟s initiatives to develop poorer, western provinces. During the late 1990s, it

experienced accelerated growth in its building stock and, commensurately, in urban services.

6. Urumqi is one of 113 polluted cities designated for special attention nationally to

improve air quality. Various international studies have shown that excessive air pollution

causes premature mortality, morbidity, reduced activity days, chronic respiratory diseases, etc.

Children, elderly and the poor are most vulnerable, due to the lack of means for mitigation

exposures (either due to weak health or lack of resources). There is a lack of health data

available for Urumqi; however, the elevated levels of air pollution are a strong indication of

negative health effects on its population.

7. Urumqi has targeted modernization of the district heating sector as a key air pollution

mitigation measure. Due to traditional design approaches and low environmental standards

enforcement, space heating is estimated to contribute 16% of annual average concentrations of

SO2, and 8% of PM10 and NOx, respectively. While heating‟s relative share of pollution load is

less than that of industry on an annual average basis, pollution is more severe in winter during

the six month heating season.1 During the 2008 heating season, average SO2 concentrations were

three times, and PM10 concentrations were twice as high as national standards. 23% of the

district heating plants meet SO2 emission standards. On average, only 50% of winter days

comply with applicable air quality standards. As in other cities, heating services follow

traditional sector planning, where small and larger dispersed heat only boilers (HOBs) were

constructed in the center of new apartment complexes. Overall, the municipality is promoting

expanded use of Combined Heat and Power Plants (CHPs) and larger district heating networks,

because they are more energy efficient (compared to producing electricity, hot water, and steam

separately), reliable, and can absorb the costs of pollution control due to economies of scale. As

of 2008, CHPs supplied only 13 percent of the 98 million square meters of total heating floor

area of Urumqi.

8. The main fuel for heating is coal. Aside from coal fired CHPs, coal fired district heating boilers supply about 63% of Urumqi‟s heated floor area. Space heating alone is estimated to

consume 14% of annual coal consumption in the city. The municipality has increased use of gas

for heating, but only in very limited areas where large scale district heating is not feasible. Gas

is strictly controlled and mostly imported, raising major security of supply concerns for a vital

service such as heating.

9. District Heating in China has a large potential for energy efficiency and for reducing

impacts on the environment. Nationally, China‟s urbanization and construction boom is

driving growth in demand for heating services in China‟s cold climate provinces. Approximately

1 Tsinghua University Research Center for Energy Efficiency in Buildings, China Building Energy Efficiency

Annual Report 2008.

3

550 million people (43% of China‟s population) now live in northern and western provinces

where Cold and Severe Cold building code zones apply, and space heating is required by law.

By 2005, about 326 out of China‟s 661 cities were equipped with district heating facilities.2 In

the early stages of urbanization, cities invested in small and medium coal-fired boilers to provide

space heating to new urban areas. Nearly all older boiler heating systems rely on outdated

heating supply system designs with boiler efficiencies of a reported 40-60% (compared to about

75-79% efficiency of larger boilers), and use inferior dust or sulfur removal equipment. They

are not hydraulically connected to each other, removing advantages of economies of scale that

would make energy efficient operating modes and improved pollution controls cost effective.

The impact on human health and city aesthetics, with coal dust and slag in residential centers,

and smoke stacks emitting black smoke over apartment buildings, is severely detrimental.

10. District heating in China represents one of the last vestiges of the old-style welfare system in China. The unreformed heating sector presents no incentives for consumers to

respond to market-based energy costs because heat, unlike water or electricity, is billed on a flat

floor area basis and many state-owned enterprises (SOEs) pay for a share of the heating bill.

Reform of urban heating system design, pricing, metering and bill payment systems has been

gradually emerging on the national agenda since 2003. In July 2003, the central government

issued instructions to move ahead with implementing heat system reform in pilot cities of

China‟s 16 northern provinces and autonomous regions, including Urumqi municipality. The

goals of heat reform are to „commodify‟ heating by addressing key sector issues: (a)

discontinuing employer payment of heating bill and making households responsible for payment

of the heating bill; (b) introducing heat metering and billing based on consumption, promoting

consumer control of heating and building energy efficiency; (c) developing safe, clean and

demand-responsive heat supply systems; (d) reforming heat pricing; and (e) accelerating reform

of heating enterprises, consolidating many small enterprises in cities, introducing competition,

and fostering and standardizing the heat market. Reforms involve major organizational and

institutional challenges at local levels many of which lack the capacity to rapidly overhaul the

supply, consumption and billing of heating. Thus, the pace of reform has been less than hoped

for, with few buildings charged according to the meter after eight years of reform efforts.

11. Modernization of district heating systems can remove important technical barriers to

implementation of district heating sector reform, which has been slower than hoped for.

Un-metered space heating has had major negative impacts on design approaches, technology

choice and operation of heating systems, and business models. Previously, building codes did

not mandate consumer control devices, a pre-requisite for consumers to respond to pricing

signals and adjust to desired consumption. Generally, thermal integrity standards were low or

weakly enforced. Due to lack of thermostats, existing heating system operation needs to

guarantee heating at the furthest part of the network by varying water temperatures at the heating

plant. This supply-driven approach results in over-heating of buildings closer to the boiler plant

and under heating at the edge of the network – forcing consumers to supplement with more

expensive heating (i.e., electricity) or to open windows. It also requires larger pumps and

pipelines to guarantee service standards. End-use control devices are now required in new

buildings in Urumqi and in its building energy efficiency renovation program. As end use

devices become ubiquitous, district heating systems need to switch to a demand-driven operating

mode, which varies temperature and water automatically based on energy needs of buildings.

2 IFC consultant report, Co-and trigeneration and heath systems policy report and market research, March 14, 2008.

4

This transition requires enabling technologies, such as frequency controlled pumps, automatic

temperature controls and control systems, which will save pumping costs and energy, and in

some cases, reduce required pipeline dimensions. With this project, Urumqi would like to create

the technical conditions that would enable more rapid adoption of district heating reforms in the

future.

12. While the pace of heat reform has been very gradual in Urumqi as in the rest of China,

Urumqi has taken some important initial steps in heat reform. Urumqi municipality was included

in the World Bank‟s GEF-financed China Heat Reform and Building Energy Efficiency Project

(HRBEE). HRBEE requires each pilot heat reform city to submit a city-wide heat reform and

building energy efficiency plan. Urumqi‟s plan includes specific targets for more energy efficient

buildings such as 16.5 million m2 (about half of projected new construction from 2006) built

according to a new 65% energy efficiency standard (which saves 15% more in energy compared

with the current 50% national standard) and 13 million m2 billed according to metered heat by

2011. Urumqi has not achieved these ambitious targets, but the GEF project will continue to

provide policy support to accelerate their achievement.

13. District heating has the potential to generate significant local and global

environmental co-benefits. In addition to reducing large amounts of local emissions of SO2,

significant levels of CO2 can be reduced through modernization of district heating systems.

Compared with the baseline, the proposed project could save an estimated 34.5 thousand tons of

SO2, 17.7 thousand tons of dust, and 1.9 million tons of CO2 emissions over a five year period

(2010 – 2014). Should the CDM be revived, this project could be a strong candidate for carbon

financing as a result of its potential carbon reduction emissions. The Bank has already signed

two emission reduction purchase agreements for district heating, one of which is similar to the

proposed project.

C. Higher Level Objectives to which the Project Contributes

14. The proposed project is consistent with the 2006-2010 Country Partnership Strategy (CPS - discussed by the Executive Directors on May 23, 2006) which seeks, among other themes, to

engage China on managing resource scarcity and environmental challenges, through inter alia

reducing air pollution and optimizing energy use. The Government of China has requested that

the new CPS for 2011-2015 be coterminous with, and aligned to, its 12th Five Year Plan,

covering 2011-2015, which will be available in spring 2011. The objectives of the Project are

expected to be consistent with the new CPS.

II. PROJECT DEVELOPMENT OBJECTIVES

A. PDO

15. The proposed project development objective (PDO) is to connect consumers in selected districts of Urumqi City to district heating services with improved energy efficiency and

environmental performance

5

B. Project Beneficiaries

16. Stakeholders in this project are the Urumqi Municipal Government, district heating

companies, and customers. UMG is highly committed to this project. The Vice Mayor in charge

of this project is the former PMO director of the successful World Bank transport project.

Urumqi Heating Company will benefit from this project as presented in the Financial Analysis

(Section VI A). The Borrower has undertaken a social analysis for the project. The vast majority

of stakeholders support the project due to its environmental benefits.

C. PDO Level Results Indicators

17. Key results will be measured by the indicators given below.

Energy efficiency performance indicators

Reduced standard coal consumption for heating per connected floor area

Environmental performance indicators

Reduced dust annual boiler plant emissions per connected floor area

Reduced SO2 annual boiler plant emissions per connected floor area3

Reduced CO2 annual boiler plant emissions per connected floor area4

III. PROJECT DESCRIPTION

A. Project components

18. The proposed project consists of three components: (A) Shuimogou District CHP Plant District Heating Network (UHN) Component; (B) Shayibake District CHP Heating Network

(SHN) Component; and (C) Institutional Development and Project Management Component.

19. Component A: Shuimogou District CHP Plant District Heating Network (UHN) (estimated cost US$196.8 million; US$56.14 million IBRD financing). The proposed component

will finance the construction of the UHN district heating (DH) system. The base heat load of the

UHN district heating system will be supplied by the Huadian Weihuliang coal-fired CHP Plant,

built in 2009 with a capacity of 2x330 MWp (power output) and 2x350 MWth (heat output). The

peak heat load will be supplied by the coal-fired Hualing heat-only boiler (HOB) plant with total

heat capacity of 290 MWth owned by Nuan Wanjia Heating Co., Ltd. The total heated floor area

supplied by UHN will reach about 14.73 million m2 by 2015, of which about 5.93 million m

2 is

new planned heating area. After component completion, the DH system will replace use of 14

coal fired heat-only boiler (HOB) plants including 53 coal fired boilers with a total capacity of

about 923 MWth component will include construction of: (a) about 55 km of primary and

secondary network; (b) a pressure isolation station; (c) about 46 new consumer heating

substations and reconstruction of about 45 existing substations (including several building level

substations for demonstration purposes); (d) a heat metering station at the CHP plant; (e) a

3 According to the design, desulphurization and dust collection efficiencies will increase from 15% to 90% and from

82% to 99% after environmental upgrading measures for peak load boilers. 4 Referring to the default value of the Intergovernmental Panel on Climate Change (IPCC) 2006, one ton of standard

coal can be converted to 2.78 tons of CO2.

6

dedicated monitoring and dispatch system (SCADA) and control center with associated

equipment; (f) maintenance vehicles and equipment; and, (g) associated civil and installation

works and recovery of public infrastructure damaged by installation (i.e., resurfacing roads).

20. Component A will be implemented in two parts: the 2010 investment program totaling

US$44.8 million equivalent, which the municipality has completed with its own funds, and the

2011-2014 investment program totaling US$152.0 million equivalent, which will be supported

by the World Bank loan and counterpart funds.

21. Component B: Shayibake District CHP Heating Network (SHN) (estimated cost US$145.0 million; US$42.6 million IBRD financing). The proposed component will finance

construction of the SHN district heating (DH) system. The base heat load of the SHN district

heating system will be supplied by the Hongyanchi coal-fired CHP Plant (a part of the Guodian

Group Ltd.), built in 2010 with a capacity of 2x330 MWp (power output) and 2x350 MWth (heat

output). The peak heat load will be supplied by two coal fired HOB plants, Shiyue HOB and

Lanzhu HOB with a total installed heating capacity of 311 MWth, owned by Xinjiang Guanghui

Heating Co., Ltd and Urumqi Lanzhu Centralized Heating Co., Ltd., respectively. The total

heated floor area supplied by SHN will reach about 14.74 million m2 by 2015, of which about

3.35 million m2 is new planned heating area. After component completion, the DH system will

replace use of 31 coal-fired heat-only boiler (HOB) plants including 87 coal fired boilers a total

capacity of about 1,368 MWth. The component consists of construction of: (a) about 39 km

channel length of primary and secondary network; (b) a pressure isolation station; (c) about 22

new consumer heating substations (including several building level substations for demonstration

purposes) and reconstruction of about 28 existing substations; (d) a heat metering station at the

CHP plant; (e) monitoring and dispatch system (SCADA) and control center with associated

equipment; (f) maintenance vehicles and equipment; and, (g) associated civil and installation

works and recovery of public infrastructure damaged by installations (i.e. , resurfacing roads).

22. Component B comprises two parts: the 2010 investment program totaling US$58.6 million

equivalent), which the municipality has completed and financed with its own funds, and the

2011-2014 investment program totaling US$86.4 million equivalent, which will be supported by

the World Bank loan and counterpart funds.

23. Component C: Institutional Development and Project Management (cost US$1.27 million; IBRD financing: US$1.01 million). The institutional development and project

management component includes technical assistance, training, study tours and project

management support primarily to UDHC, but also to Urumqi municipality, through the following

activities: (a) support UDHC project management and monitoring of environmental and social

safeguards; (b) study on optimization of a multi-source heat network, its management and

monitoring of environmental and energy efficiency performance; (c) update the UHN and SHN

emergency plans to enhance safety and reliability; (d) international and domestic study tours for

operational knowledge exchange; (e) training of UDHC staff, including on WB policies and

project management requirements; (f) IT system to strengthen billing and accounting; and (g)

office equipment and related software for UDHC‟s WBPG to strengthen project management.

7

B. Project Financing

1. Lending Instrument

24. The lending instrument is a Specific Investment Loan. The loan will be a United States

Dollar - denominated, variable spread loan with a maturity of 30 years including five years‟

grace period, at the Bank‟s standard interest rate for LIBOR-based US dollars, with a Front-end

fee of 0.25 percent.

2. Project Cost and Financing

Component

Cost

(million

US$)

IBRD

Financing

(million

US$)

%

IBRD

Financing

A. Shuimogou District Urumqi CHP Heating

Network Component (UHN) 178.50 56.14 31%

B. Shayibake District CHP Heating Network

Component (SHN) 131.30 42.60 32%

C. Institutional Development and Project

Management 1.30 1.00 77%

Total Baseline Costs 311.10 99.75 32%

Physical contingencies 14.50

Price contingencies 10.30

Total Project Costs 335.80 99.75 30%

Interest During Construction 6.20

Front-End Fee 0.25 0.25

Initial Working Capital Requirements 0.90

Total Financing Required 343.20 100.00 29%

C. Lessons Learned and Reflected in the Project Design

25. Lessons from Industry Practices. The proposed Project incorporates lessons and

innovations from industry practices in China and Europe: (a) promotion of use of waste heat

from CHP plants for district heating is considered good practice in Europe and is promoted by

the central government in China; (b) demand-driven enabled operation in the primary and the

secondary networks allows the system to respond more efficiently to individual customer

requirements, saving on pumping and energy costs, compared to traditional supply-driven

operating modes; (c) metering across the heating supply chain enables best practice control and

optimization, and provides necessary data for calculating two part heat tariffs; (d) building level

8

substations are to be piloted to demonstrate energy efficiency and heating quality benefits

associated with linking substations to fewer buildings compared to conventional designs and

preferences for larger substations.

26. Approach to Innovation. Experience gained during preparation and implementation of this

project will support Bank efforts to promote more energy efficient and less polluting forms of

space heating in China. District heating in transition economies has a legacy of being operated

by conservative technicians and this is also the case in China. The proposed stepwise approach to

innovation and modern technologies through pilots, with policy development support from the

GEF HRBEE project for related sector issues such as building energy efficiency and heat

pricing, is an established method for introducing new ideas and incubating innovations in China.

If successful, the project will contribute to an overall strategy for scaling up modern district

heating approaches in Urumqi and other cities. Through a series of projects5, a critical mass of

well implemented examples should further accelerate acceptance of new ideas in district heating.

This type of project could be replicated in other large cities.

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

27. The Bank loan to the People‟s Republic of China will be on-lent to the Xinjiang Uighur

Autonomous Region, which will in turn on-lend funds to Urumqi Municipal Government (UMG)

following standard arrangements used on similar Bank projects in China. UMG will on-lend the

proceeds of the Bank loan to the Urumqi District Heating Company (UDHC) under a Subsidiary

Loan Agreement, satisfactory to the Bank.

28. A Project Leading Group (PLG), chaired by the Mayor of Urumqi, has been established by

UMG to provide high level guidance to the project and coordinate policy and institutional issues,

as needed. The Urumqi International Technical Cooperation Project Office (UPMO) has been

established in the Construction Commission and is responsible for overall management and

oversight of the proposed Project.

29. The Project will be implemented by the Urumqi District Heating Company (UDHC), a

state owned enterprise established in 1984 and the largest DH company in Urumqi. UDHC has

established an implementation unit, the World Bank Project Group (WBPG), composed of four

units (procurement, finance, engineering management, and operations) with full-time staff from

relevant departments within the UDHC. UDHC has set up two divisions, one for each network,

to operate and maintain the project assets after their construction.

B. Results Monitoring and Evaluation

30. Annex 1 lists the PDO level results indicators for the project, as well as the intermediate

results indicators for each component. UDHC will be responsible for the implementation of

monitoring plans, meter calibration, and preparation and submission of periodic monitoring

reports to UPMO, including inputs to the semi-annual project progress reports and annual reports

on compliance with performance indicators and covenants. It will also report on its business plan

5 About 17 cities are engaged through Bank / GEF supported DH operations.

9

and financial performance. Based on inputs from UDHC, UPMO will evaluate interim results

and ensure corrective actions are taken as necessary. UPMO will also submit these reports to the

Bank.

C. Sustainability

31. Long term sustainability will depend on effective development of DH/CHP as the main

municipal heating energy system with effective and efficient operation and maintenance (O&M).

The Project will move the municipal heating system toward sustainability by addressing major

energy efficiency and environmental penalties associated with the use of distributed boilers in

the city and increasing heat demand by taking advantage of economies of scale through increased

coverage of DH/CHP systems. The project will introduce meters and monitoring and control

(SCADA) systems which will collect data that, if properly used, could start to build more robust

heat load estimates, optimize heating supply operation, help prioritize O&M budgets, and

provide referential heat load data for future DH system planning and design. The project also

includes technical assistance to improve the capacity of UDHC to operate the new integrated

network and optimize network management.

32. The project will also move part of the heat chain into billing based on real energy consumption data. This important institutional change will introduce incentives for further cost

containment and energy efficiency. Experience with this stepwise introduction of meter based

billing is expected to build confidence and pave the way to switch from existing building floor-

based tariffs to heat meter-based retail tariffs, the final step in providing incentives for efficient

energy use for heating in the built environment. The project‟s technical assistance will support

UDHC to accommodate meter based billing in its billing and accounting system. This should

contribute to creating an enabling environment for heating price and billing reform to be more

quickly adopted in the city.

33. Although improved efficiency can help lower costs, the reluctance of municipalities to

adjust tariffs to offset rising input costs has in the past led to the need for restructuring of heating

companies‟ balance sheets. If input cost increases cannot be absorbed by the heating companies,

operating performance will suffer and emission controls weakened to reduce costs. A high

collection rate is also one of critical issues for DH company development. Thus far, these issues

are less pronounced in Urumqi than in other parts of China because the coal price in Urumqi is

far lower relative to those in the east. The project includes financial covenants that address

financial performance, and operating performance indicators that especially focus on

environmental impacts. This combination allows for the retention of an open dialogue during

supervision on various aspects of sustainability.

V. KEY RISKS AND MITIGATION MEASURES

34. Project investments are straightforward and the project‟s technical approach is based on standards that are built on existing experience of the Urumqi District Heating Company and

Urumqi Municipal Government. While the network design is challenging due to large pressure

differences within the new network, the feasibility studies included hydraulic analyses which

identified locations where hydraulic separation is needed to regulate network pressure. The

municipality has demonstrated during the 2010 construction season its intent to intensively

supervise implementation. Technical assistance is provided through the project to address

10

UDHC‟s relative lack of experience in optimizing operation of a DH system with multiple heat

sources and distribution companies at this scale. Intensive Bank supervision in the first few

years of implementation is planned to support UMG and ensure effective project launch.

35. There has been rioting in the city that has been widely reported in national and worldwide

media in July 2009, but since then the situation has stabilized. A social analysis of the project

concluded the project enjoys strong support among the local communities. Nevertheless, a

traffic management plan has been put in place to address temporary inconveniences associated

with network installation and municipal policies addressing potential risks to component results

– specifically mitigation of traffic disturbances, re-employment of small boiler workers and

heating assistance for the poor – will be included in the project‟s social monitoring plans. These

arrangements would help to provide actionable information in the unlikely event that measures

do not achieve their intended mitigation objectives.

36. Slow connection rates to the network remain a substantial risk because the municipality‟s

boiler closure program is new and the company has little experience with new commercial

relationships. The UMG also has a framework in place for the boiler closure program which

provides options, including sale of the business to the UMG, conversion to a distribution

business and purchase heat from the new network, closure of unlicensed boilers with a right to

keep land with changed zoning. The commercial agreements were reviewed by the Bank team.

While they fall short of international practices they are considered an improvement over

prevailing Chinese contractual arrangements in the heating sector. Key performance indicators

will also be used as part of supervision to monitor financial performance. The Bank team plans

to engage the UDHC after construction of the network on approaches to consumer services as

part of supervision.

VI. APPRAISAL SUMMARY

A. Economic and Financial Analysis

Economic Analysis

37. This project is about changing the way apartments are heated before, using dispersed large and small inefficient and polluting boilers, connecting them to CHP-based district heating

networks. This new system improves energy efficiency and environmental performance of the

DH system resulting in coal savings and reduction of pollution compared to the baseline. The

economic analysis of the project compares the with-project and without-project alternatives,

taking into account all comparable costs of the two. Project alternatives include: (a) base load

from coal-fired CHPs and peak load from coal-fired HOBs; and (b) construction of the heat

transmission and distribution system as in the project description. The without-project alternative

includes: (a) the continuation of existing heating methods based on local coal-fired boilers, and

(b) new coal-fired boilers for new building areas (these boilers would have emission reduction

equipment to fulfill current environmental requirements).

38. A cost-benefit analysis was conducted to estimate the economic internal rate of return

(EIRR) of the project compared to the without-project alternative. The economic costs include

the total investment costs of both alternatives. The major benefits were estimated by taking into

account the following: (i) fuel efficiency improvements generated by replacing local, inefficient

11

coal-fired boilers by heat supply from the CHP plants; (ii) reduced heat losses generated by

improving existing substation; (iii) operation, maintenance and repair costs variances for both

alternatives; and (iv) environmental benefits of reduced dust, SO2 and CO2 emissions as a result

of the project. In the base case, the project EIRR is 21.3%. Sensitivity analysis on the impact of

increased investment costs, reduced benefits and importance of environmental benefits , indicate

that if investment costs increase by 20 percent, the EIRR would be 15.3%, while the EIRR would

be 19.1% with benefits reduced by 20%. Without environmental benefits, the EIRR would be

11.7%.

Financial Analysis

39. Project financial analysis. The project‟s financial viability has been assessed by

comparing the financial rates of return (FRRs) for the SHN and UHN investment components

and for the combined project as a whole with their respective weighted average cost of capital

(WACC). The financial analysis resulted in an FRR of 8%. The FRRs are higher than the

WACC for each component and for the combined project. The project FRR also meets

Government‟s feasibility study guidelines on required rates of return for similar public

infrastructure projects. The FRRs are adequate for enabling UDHC to maintain an overall

satisfactory financial performance, and meet the agreed financial performance indicators.

Sensitivity analysis in regard to the effect on the FRRs of variations in key variables has been

carried out. Further details are given in Annex 7 to the PAD.

40. Financial sustainability. During the period 2007 to 2009, UDHC reported profitable

operations. During the project implementation period, UDHC will be undertaking a major

investment program, including the proposed World Bank financed project, which will result in a

very substantial increase in its operations. This will result in large increases in the levels of its

operating expenses and debt service, and will require UDHC to correspondingly increase its

annual revenues. Key factors that affect UDHC‟s revenue generation are: (i) the rate of growth

of heat demand; (ii) heat sales tariffs adequate to cover any increases in operating expenses,

including heat purchase costs; (iii) revenue collection performance; and (iv) continuing to

achieve greater efficiency in its operations and maintenance (O&M) expenses.

41. A detailed analysis, including financial projections, of UDHC‟s financial performance in the period 2010 to 2020 has been carried out, and is kept in the Project Files. A summary of

results and key indicators is provided in the Annex 7. The projections indicate that, subject to

UDHC and the Government undertaking the specified actions to mitigate possible risks

(discussed above in Section V), UDHC should be able to generate sufficient revenues each year

to meet its financial obligations to cover its (a) cash operating expenses, (b) debt service, and (c)

agreed contributions to investment financing, and to meet the financial performance indicators

listed below.

42. Financial performance monitoring and financial covenants: To monitor UDHC‟s

performance in meeting its financial obligations, the following indicators are proposed to be

used:

(a) A working ratio (cash operating expenses/collected revenues) of not higher than 90%;

(b) A current ratio (current assets/current liabilities) of not less than 1.3; and

12

B. Technical

43. Detailed feasibility studies prepared for the two district heating areas define the technical

solutions, pipeline routes and locations for the pressure isolation stations, as well as investment

costs for all sub-components and expected benefits. All proposed technical solutions are based

on well tested solutions and equipment with mature technologies. In 2010, UDHC successfully

implemented part of the system which already supplies heat from the CHP plants to final

customers.

44. After project completion, 45 coal-fired local boiler plants, including 140 coal-fired boilers with about more than 2291 MWth in the city center, will no longer operate. This will reduce coal

consumption in downtown Urumqi. The base load heat will be generated by coal-fired CHP

plants, located outside the city center, and the peak load by coal-fired peak load boilers. The

peak load boilers will be equipped with flue gas cleaning equipment for SO 2 and dust removal.6

These will be financed by the owners of the peak load boiler plants and are outside the project

scope.

45. Urumqi‟s unique geological topology, featuring a high elevation difference over 150

meters between heating plants and consumers, requires special attention on system design for

safe operation of the two networks. The DH system design has to ensure the following three

conditions everywhere: (a) no over-pressure; (b) no water evaporation due to low pressure; and

(c) no vacuum. Because of the high elevation difference between the CHP and the consumer

area, a three hydraulic separated network system has been designed with heat exchanger stations

to meet these three conditions: (a) the primary network from the CHP to the pressure isolation

stations, with a design pressure of 2.5MPa and a temperature of 135°C; (b) the secondary

network from the pressure isolation stations to the consumer heating substations, with a design

pressure of 2.5-1.6MPa and a temperature of 120 °C; and (c) the heat distribution network from

the heating substations to the radiators inside the buildings, with a design pressure of 1.0MPa

and a temperature of 90°C.

46. Pre-insulated pipes will be used in Bank financed components and directly buried for

primary and secondary networks with some compensators. Sectioning valves will be installed

every 2-3 kilometers along the main transmission lines and at each pipeline branch for ease of

maintenance. The project design consultant has experience with the design of large pipeline

networks based on the non-compensation method.

47. Heating substations, new and renovated, will include heat exchangers to separate heat

distribution networks from heat transmission networks. Substations will have heat meters and

local automation systems to optimize the operation of substations and regulate water

temperatures to buildings in accordance with weather conditions. All substations will also be

connected to the company-wide monitoring and dispatching system (SCADA) which allows

operators to remotely change parameters at each substation. The dispatch center will monitor and

dispatch heat supply from the CHP plants and the peak load boiler plants to optimize operation,

hydraulic situation, and to maximize reliability of heat supply to customers.

48. Heat metering systems have been designed at different heat supply levels. Heat meters are

installed at CHPs and peak load boiler plants, and will be installed in all heating substations. All

6 The CHPs already have emission control equipment installed and operating.

13

new buildings will have building level heat meters to facilitate the future switch to consumption

based billing.

C. Financial Management

49. The Bank loan proceeds and the oversight of the Designated Account will be managed by the Xinjiang Uyghur Autonomous Region Finance Bureau (XRFB). A financial management

capacity assessment was conducted by the Bank and actions to strengthen project financial

management capacity have been agreed with the relevant implementing agencies. The financial

management assessment concluded that, with the implementation of these proposed actions, the

financial management arrangements would satisfy the Bank‟s minimum requirements under

OP/BP 10.02. Annex 3 provides additional information on financial management.

D. Procurement

50. UITCPO Procurement Assessment. The Urumqi International Technical Cooperation

Project Office (UITCPO) will be responsible for ensuring that the obligations of UMG under the

Project Agreement are executed. UITCPO will: a) play the leading and coordinating roles in

project implementation and procurement activities; b) provide guidance to UDHC on

procurement and contract management; c) review procurement documents prepared by UDHC;

and d) supervise and monitor procurement activities carried out by UDHC. Staffing in UPMO is

adequate for the nature and extent of procurement work envisaged under the project.

51. UDHC Procurement Assessment. Procurement will be carried out by the Urumqi District Heating Company (UDHC). The UDHC World Bank Project Group (WBPG) includes a

procurement unit. Four full-time procurement staff in place have substantial experience in

procurement of locally funded projects, but have no direct experience with Bank-financed

projects. All four procurement staff have attended the World Bank procurement training course.

UDHC is capable of managing large infrastructure contracts.

52. The procurement risk is UDHC‟s lack of experience in procurement of Bank-financed

projects. This risk will be mitigated through: close coordination with UPMO and guidance from

UPMO; targeted training and capacity building of UDHC staff; and close supervision by

UITCPO and the Bank.

53. UDHC has prepared a procurement plan for the initial 18 months of the project, which is

acceptable to the Bank.

E. Social (including safeguards)

54. A project social analysis identified the project stakeholders (citizens, religious people, shop keepers, communities, schools, hospitals, local markets, mosques, heating company employees,

municipal departments in charge of traffic management, and PMO) and through broad

participation of project stakeholders, public consultations, interviews, focus group discussions,

and substantial data gathering and analysis, concluded that all groups fully supported the project.

Stakeholder concerns focused on three major issues: traffic disturbance during construction;

workers affected by the small boilers closure program; and impact of heat pricing on low-income

families. Based on the social analysis, the following documents have been prepared: traffic

14

management plan; emergency management plan (e.g., water main breaks from installation);

monitoring plan for municipal policy addressing workers affected by its small boilers closure

program; and monitoring plan of UMG‟s policy to protect low-income families from unexpected

increases in heat pricing.

55. Urumqi has more than 50 different Chinese ethnic minorities or groups: (Uygurs, Han, Kazaks, Kirgiz, Mongols, etc) totaling 637,000 people, about 27% of population. 75% of them

live in the inner-city area and the rest in peri-urban areas. Most of these populations have

immigrated to Urumqi since 1951. The characteristics of indigenous peoples listed in the Bank‟s

OP 4.10, Indigenous Peoples, are not found in the project area. In particular, they are neither

considered to have collective attachment to ancestral territories in the project area nor have they

faced forced severance from these ancestral lands. The Indigenous Peoples policy is therefore

not triggered.

56. Since the Bank-financed pipelines will dispatch heat from two existing plants and will be

connected to the main heating network financed and installed by Urumqi in 2010, a due diligence

review was conducted on the two plants and the main heating network. The two plants were built

more than 10 years ago and their expansions were completed respectively in 2008 and 2010 on

company-owned lands without involving any resettlement. The due diligence review concluded

that small scale resettlement activities for the installation of the main heating network financed

by Urumqi in 2010 were in compliance with Bank policies.

57. The project design has avoided land acquisition and involuntary resettlement. A resettlement policy framework has been prepared to address the land acquisition and resettlement

impacts of any changes to the project design.

F. Environment (including safeguards)

58. The proposed project is a Category A project as per the Bank OP/BP 4.01. By eliminating

the use of locally polluting heat boilers and connecting to an integrated heating system supplied

by CHP plants and peak load boilers with strengthened emission controls, the project is expected

to contribute to a net reduction of coal consumption and associated emissions.

59. Temporary moderate environmental impacts are foreseen during the construction phase, such as noise, dust, solid waste disposal, worker safety, social and traffic disturbance, and chance

finds of cultural relics. Standard measures to mitigate the typical impacts of construction

activities are described in the Environmental Assessment (EA) and in the Environment

Management Plan (EMP).

60. The EMP includes a traffic management plan and appropriate mitigation measures identified during the social analysis process. Good practices from the 2010 construction program

will be continued, e.g., distribution of a bilingual (in Chinese and Uyghur) information booklet

about construction activities, schedule, and alternative routes to affected residents.

61. A due diligence review conducted on the construction work carried out in 2010 found that

the work had been executed consistent with Bank environmental safeguard policies. A due

diligence review of existing facilities (two CHP plants and three peak load boiler houses) that

will supply heat to the project networks carried out during project preparation concluded that

these facilities are compliant with national and local emission standards, as well as with those of

the WB/IFC Environmental Health and Safety (EHS) guidelines.

15

62. Environmental Assessment (OP 4.01). Following the requirements of Bank OP 4.01 and

relevant domestic regulations, the project includes an EA for each of the two project networks.

Each EA presents baseline environmental and socio-economic conditions, impact assessment,

alternative analysis, public consultation process, and the EMP. An executive summary of each

EA was prepared in line with Bank requirements for Category A projects. Annex 3 provides

more details on the EAs and the EMPs.

G. Other Safeguards Policies triggered (if required)

63. Not applicable.

16

Annex 1: Results Framework and Monitoring

Project Development Objective (PDO): The proposed project development objective (PDO) is to connect consumers in selected districts of Urumqi to district heating services with improved energy efficiency and environmental performance.

PDO Level Results

Indicators* Co

re

Unit of

Measure Baseline

Cumulative Target Values**

Frequency Data Source/

Methodology

Responsibility

for Data Collection

Description (indicator

definition etc.) YR 1

(2010)

YR 2

(2011)

YR3

(2012)

YR 4

(2013)

YR5

(2014)

Indicator One: Energy efficiency performance indicator7: Reduced annual boiler plant coal consumption for heating per connected floor area.

tce / million m2

0 4.9 5.1 5.1 5.1 5.1

annual Note 8 see below. UDHC

Indicator Two: Environmental performance indicators: Reduced SO2 annual boiler plant emissions per connected floor area.

tons/ million m2

0 245 247 248 248 248

annual Note see below. UDHC

Indicator Three: Environmental performance indicators: Reduced dust annual boiler plant emissions per connected floor area.

tons/ million m2

0 127 128 129 129 129

annual Note see below. UDHC

Indicator Four: Environmental performance indicators: Reduced CO2 annual boiler plant emissions per connected floor area.

tons/ thousand m2

0 13.7 14.0 14.1 14.1 14.1

annual Note see below. UDHC

Indicator Five: Financial performance indicators: Maintain working ratio not higher than 90%

percent

-- -- -- ≤90 ≤90 ≤90

annual Note see below. UDHC

7 All the above PDO indicators are calculated by comparing coal consumption and emissions of the without-project alternative to the with-project alternative. The difference (reduction of coal consumption and emissions) is divided by the connected floor area. 8 Calculated according to CDM methodology AM0058 based on actual data records as applicable.

17

INTERMEDIATE RESULTS

Intermediate Result (Component One): Shuimogou District Urumqi CHP Heating Network Component (UHN) All indicators are cumulative from the beginning of the project.

Intermediate Result Indicator One: Connected heated area to UHN network

Million m2

0 1.0 9.0 13.0 14.0 14.7

annual Note 9see below. UDHC

Intermediate Result Indicator Two: Kilometers of pipelines installed.

Km of pipelines 0 20 35 45 50 54

annual Note see below. UDHC

Intermediate Result Indicator Three: Construction of new pressure regulating stations (large substation).

Number of stations 0 0 1 1 1 1

annual Note see below. UDHC

Intermediate Result Indicator Four: Number of substations constructed or rehabilitated.

Number of sub-stations

0 10 60 80 90 90

annual Note see below. UDHC

Intermediate Result (Component Two): Shayibake District CHP Heating Network (SHN)

Intermediate Result Indicator One: Connected heated area to SHN network

Million m2 0 5.0 8.0 13.0 14.0 14.7

annual Note see below. UDHC

Intermediate Result Indicator Two: Kilometers of pipelines installed.

Km of pipelines 0 20 30 35 39 39

annual Note see below. UDHC

Intermediate Result Indicator Three: Construction of a pressure regulation station (large substation).

Number of stations 0 0 1 1 1 1

annual Note see below. UDHC

Intermediate Result Indicator Four: Number of substations constructed or rehabilitated.

Number of sub-stations

0 15 30 45 50 50

annual Note see below. UDHC

9 Recorded at the start of the project and whenever newly installed pipelines or equipment start operation.

18

Intermediate Result (Component Three): Institutional Development and Project Management. All indicators are cumulative from the beginning of the project.

Intermediate Result Indicator One: Strengthening the billing and accounting system of UDHC.

Set of TA activities

Ongoing HRBEE assess-ment study

TOR of HRBEE assess-ment study available

HRBEE assess-ment study available;Procure and carry out equipment installa-tion

Equip-ment installed and used

annual NA UDHC

Intermediate Result

Indicator Two: Technical assistance to UDHC and study of how to optimize the multi-heat source operation, management and monitoring.

Set of TA activities

Draft TOR available

Draft TOR available

Draft TOR available

Selection of Consul-tant and Inception Report available

Draft Final Report available

Final Report available

annual NA UDHC

Intermediate Result Indicator Three: Number of study tours implemented.

Number of study tours

0 0 7

domestic 1 internatl

14 domestic

2 internatl

17 domestic

2 internatl

20 domestic

2 internatl

annual NA UDHC

19

Annex 2: Detailed Project Description

1. The proposed project consists of three components: (A) Shuimogou District Urumqi CHP

Power Plant Heating Network (UHN) Component; (B) Shayibake and Tianshan Districts CHP

Heating Network (SHN) Component; and (C) Institutional Development and Project

Management Support Component. The total estimated project costs are 3 RMB billion

(US$343.2 million equivalent). The proposed indicative financing plan includes an IBRD loan

of US$100 million, about 30% of total estimated project costs, which is proposed to partially

finance investment and technical assistance costs. The municipality has implemented part of this

investment program in 2010, which amounts to about US$100 million equivalent or about 30%

of total estimated project costs. Investments in 2010 were financed from own sources including

loans from local commercial banks.

2. The Urumqi District Heating Company (UDHC), a municipal State Owned Enterprise, is

proposed to be the IBRD sub-borrower and will implement the project under the overall

supervision of UMG. UDHC will own and operate the newly integrated district heating

networks.

3. Technical Approach. Typically, a district heating system involves three main components, a heat source, heat transmission (“primary”) network and heat distribution to buildings through

heating substations. Heat sources generate high temperature hot water which circulates in a

closed loop system, transmitting heat energy through substations to a secondary closed loop

network, which in turn transmits lower temperature water (for safety) to heating elements

(radiators, floor heating, etc.). Heat sources in this project are Combined Heat and Power Plants

and Heat Only Boilers (HOBs) which produce high temperature water for the primary network.

4. By supporting the development of an integrated CHP-HOB system, the project will

improve the performance and quality of district heating services in Urumqi and have a major

impact on improving air quality in the city. On project completion, 45 coal-fired local boiler

plants, including 140 coal-fired boilers with about more than 2,291MWth in the city center, will

no longer operate. This will reduce coal consumption in downtown Urumqi. The base load heat

will be generated by coal-fired CHP plants, located outside the city center, and the peak load by

coal-fired peak load boilers. The peak load boilers will be equipped with flue gas cleaning

equipment for SO2 and dust removal.10

These will be financed by the owners of the peak load

boiler plants and are outside the project scope.

5. Technical challenges and design. Urumqi has a unique geological topology featuring a high

elevation difference over 150 meters between heating plants and consumers. For safe operation,

the DH system design has to ensure the following three conditions everywhere: (a) no over-

pressure; (b) no water evaporation due to low pressure; and (c) no vacuum. Because of the high

elevation difference between the CHP and the consumer area, a three hydraulic separated

network system was designed with heat exchanger stations to meet these three conditions. They

are: (a) the primary network from the CHP to the pressure isolation stations with a design

pressure of 2.5MPa and a temperature of 135°C; (b) the secondary network from the pressure

isolation stations to the consumer heating substations with a design pressure of 2.5-1.6MPa and a

temperature of 120°C; and (c) the heat distribution network from the heating substations to the

radiators inside the buildings with a design pressure of 1.0MPa and a temperature of 90°C.

10

The CHPs already have emission control equipment installed and operating.

20

6. Pre-insulated pipes will be used in Bank financed components and directly buried for

primary and secondary networks with some pipe expansion compensators. Sectioning valves will

be installed every 2-3 kilometers along the main transmission lines and at each pipeline branch

for ease of maintenance. The project design consultant has experience with the design of large

pipeline networks based on the non-compensation method.

7. The heating substations, new and renovated, will include heat exchangers to separate heat

distribution networks from heat transmission networks. Substations will have heat meters and

local automation systems to optimize the operation of the substations and regulate water

temperatures to the buildings in accordance with weather conditions. All substations will also be

connected to the company-wide monitoring and dispatching system (SCADA) which allows

operators to remotely change parameters at each substation. The dispatch center will monitor and

dispatch the heat supply from the CHP plants and the peak load boiler plants to optimize

operation, hydraulic situation, and to maximize reliability of heat supply to customers.

8. Heat metering systems have been designed at different heat supply levels. Heat meters are

installed at CHPs and peak load boiler plants, and will be installed in all heating substations. All

new buildings will have building level heat meters to facilitate the switch to consumption based

billing in the future.

9. Component A: Shuimogou District CHP Plant District Heating Network (UHN) (estimated cost US$196.8 million; US$56.14 million IBRD financing). The proposed component

will finance the construction of the UHN district heating (DH) system. The base heat load of the

UHN district heating system will be supplied by the Huadian Weihuliang coal-fired CHP Plant,

built in 2009 with a capacity of 2x330 MWp (power output) and 2x350 MWth (heat output) and

owned by Huadian Group, Ltd. The peak heat load will be supplied by the coal -fired Hualing

Boiler Plant (6x29MWth and 2x58MWth, in total 290 MWth) owned by Nuan Wanjia Heating

Co., Ltd. of the Hualing Group Heating Company, Ltd. The total heated floor area supplied by

UHN will reach about 14.73 million m2 by 2015, of which about 5.93 million m

2 is new planned

heating area. The total heat load will be about 973 MW th. After component completion, the DH

system will replace the use of 14 coal fired HOB plants (9 larger plants totaling about 886 MW th

and 5 smaller plants totaling about 36 MW th) including 53 coal fired boilers with a total capacity

of about 923 MWth.

10. The component will include construction of: (a) about 55 km of primary and secondary

network; (b) a pressure isolation station; (c) about 46 new consumer heating substations

(including several building level substations for demonstration purposes) and reconstruction of

about 45 heating substations; (d) construction of a heat metering station in CHP, (e) construction

of a dedicated monitoring and dispatch system (SCADA) and control center, including

associated equipment; (f) maintenance vehicles and equipment; and (g) associated civil and

installation works and recovery of public infrastructure damaged by installation (i.e. resurfacing

roads).

11. Component A will be implemented in two parts. The 2010 investment program totaling

US$44.8 million equivalent, which the municipality has already completed including the

following:

(a) Construction of 22.4 km of district heating network from the CHP plant.

(b) Connection of 1.190 million m2, including 1.07 million m

2 of new buildings.

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(c) Connection to 10 substations, including construction of 7 new and reconstruction of 3

substations.

(d) Heat metering station at CHP and pressure regulation substation.

(e) Associated civil and installation works and recovery of public infrastructure.

This part of the new system will replace the use of 3 HOB plants with 6 coal-coal fired boilers

(22 MWth).

12. The 2011-2014 investment program totaling US$152.0 million equivalent, which will be

supported by the World Bank loan and counterpart funds, includes the following:

(a) Construction of about 32.4 km of district heating network. (b) Connection of about 13.54 million m

2, including 8.68 million m

2 of existing

buildings, and 4.86 million m2 of new buildings.

(c) Connection to about 81 substations belonging to UDHC, including construction of 39

new (including several building level substations for demonstration purposes) and

reconstruction of 42 substations, as well as connection to about 69 substations

belonging to the heat distribution companies.

(d) Construction of SCADA and control center, including associated equipment.

(e) Maintenance vehicles and equipment.

(f) Associated civil and installation works and recovery of public infrastructure.

This part of the new system will replace the use of 11 HOB plants with 47 coal-coal fired boilers

(901 MWth).

13. This implementation schedule is presented in the table below:

A. Shuimogou District Urumqi CHP Heating Network Component (UHN)

2010 2011 2012 2013 2014 Total

Connected heating area [million m2] 1.19 8.03 4.2 0.79 0.52 14.73

Connected heating area existing buildings 0.12 6.88 1.8 0 0 8.8

Connected heating area new buildings 1.07 1.15 2.4 0.79 0.52 5.93

Pipeline length installed [km] 22.4 18.7 8.7 4.2 0.8 54.9

Number of connected heat exchanger stations 10 97 43 6 4 160

New substations 7 14 15 6 4 46

Reconstructed substations 3 40 2 0 0 45

Number of substation belonging to others 0 43 26 0 0 69

Number of HOBs 6 23 24 0 0 53

number of boilers closed 6 23 24 0 0 53

Capacity of closed boilers [MW] 22 683 218 0 0 923

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14. The corresponding cost estimate is shown in the table below:

A. Shuimogou District Urumqi CHP Heating Network Component (UHN)

（ in US$ millions equivalent）

Total 2010 2011-2014

Network Pipelines 108.6 32.8 75.8

Primary pipelines 44.4 19.5 24.9

Secondary pipelines 60.0 13.2 46.8

Distribution pipeline replacement 4.2 0.1 4.1

Primary Network Pressure Regulation 14.7 3.5 11.2

Heat Metering Station 0.1 0.1 0.0

Pressure Isolation Station 14.6 3.4 11.2

Control Center for UDHC 7.9 0.0 7.9

Substations and Metering 18.3 0.9 17.4

New Substations 9.3 0.7 8.6

Substation Rehabilitation 3.8 0.2 3.6

Building level substations 0.7 0.0 0.7

Substation automation/SCADA 3.9 0.0 3.9

Meters at former Boiler Site 0.6 0.0 0.6

Other 29.1 3.7 25.4

Land acquisition 4.7 0.4 4.3

Road restoration 6.5 1.6 4.9

Other engineering expenses 17.9 1.7 16.2

Total Base Cost 178.5 3.9 174.6

Contingencies 14.3 3.3 11.0

Interest during construction 3.6 0.6 3.0

Initial Working Capital 0.5 0.0 0.5

Total - UHN Component 196.8 44.8 152.0

15. Component B: Shayibake District CHP Heating Network (SHN) (estimated cost

US$145.0 million; US$42.6 million IBRD financing). The proposed component will finance

construction of the SHN district heating (DH) system in the Shayibake District of Urumqi. A

small part of the Shayibake District CHP Heating Network will also cross into neighboring

Tianshan District. The base heat load of the SHN district heating system will be supplied by the

Hongyanchi coal-fired CHP Plant, built in 2010 with a capacity of 2x330 MWp (power output)

and 2x350 MWth (heat output), and owned by the Guodian Xinjiang Hongyanchi Power

Generation Co., Ltd., a part of the Guodian Group, Ltd. The peak load will be supplied by the

Shiyue HOB Plant (5x29MWth) operated by the Xinjiang Guanghui Heating Co., Ltd., and the

Lanzhu HOB Plant (4x29 MWth + 1x64MWth) operated by the Urumqi Lanzhu Centralized

Heating Co., Ltd. The total heated floor area supplied by SHN will reach about 14.74 million m2

by 2015, of which about 3.35 million m2 is new planned heating area. The total heat load is about

1,010 MWth. After component completion, the DH system will replace the use of 31 coal-fired

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HOB plants (about 11 larger boiler plants and 20 smaller coal-fired HOB plants) including 87

coal fired boilers with a total capacity of about 1,368 MWth.

16. The component consists of construction of: (a) about 39 km channel length of primary

and secondary network; (b) a pressure isolation station; (c) about 22 new consumer heating

substations (including several building level substations for demonstration purposes) and

reconstruction of about 28 existing substations; (d) a heat metering station at the CHP plant; (e)

monitoring and dispatch system (SCADA) and control center with associated equipment; (f)

maintenance vehicles and equipment; and, (g) associated civil and installation works and

recovery of public infrastructure damaged by installations (i.e. resurfacing roads).

17. Component B includes two parts. The 2010 investment program totaling US$58.6 million equivalent, which the municipality has already completed and financed with its own

funds including the following:

(a) Construction of 22.6 km of district heating networks. (b) Connection of 5.62 million m

2 including 0.74 million m

2 of new buildings.

(c) Connection to 16 substations belonging to UDHC, including construction of 1 new

and reconstruction of 15 substations, and 56 substations belonging to the heat

distribution companies.

(d) Heat metering station at CHP and pressure regulation substation. (e) Associated civil and installation works and recovery of public infrastructure.

This part of the new system will replace use of 18 HOB plants with 43 coal-coal fired boilers

(577 MWth)

18. The 2011-2014 investment program, totaling US$86.4 million equivalent, which will be

supported by the World Bank loan and counterpart funds, includes the following:

(a) Construction of about 16.8 km of district heating networks.

(b) Connection of 9.13 million m2, including 6.53 million m

2 of existing buildings and

2.61 million m2 of new buildings.

(c) Connection to 34 substations belonging to UDHC, including construction of 21 new (including several building level substations for demonstration purposes) and

reconstruction of 13 substations, and 78 substations owned by the heat distribution

companies.

(d) Construction of SCADA and control center, including associated equipment. (e) Maintenance vehicles and equipment.

(f) Associated civil and installation works and recovery of public infrastructure

This part of the new system will replace the use of 13 HOB plants with 44 coal-coal fired boilers

(790 MWth).

19. This implementation schedule is presented in the table below:

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2010 2011 2012 2113 2114 Total

Connected heating area [million m2] 5.61 3.44 5.69 0 0 14.74

Connected heating area existing buildings 4.87 2.75 3.78 0 0 11.40

Connected heating area new buildings 0.74 0.69 1.92 0 0 3.35

Pipeline length installed [km] 22.6 9.0 7.8 0.0 0.0 39.5

Number of connected heat exchaner stations 72 50 62 0 0 184

New substations 1 7 14 0 0 22

Reconstructed substations 15 12 1 0 0 28

Number of substation belonging to others 56 31 47 0 0 134

Number of HOBs 18 9 4 0 0 31

Number of boilers closed 43 25 19 0 0 87

Capacity of closed boi