CDM blow to confidence of Chinese wind farm investors

CHINA: Investors have been left questioning the wisdom of investing in China after the clean development mechanism (CDM) executive board again blocked carbon financing to proposed wind projects.

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The board of the UN's carbon offset scheme refused to register 22 Chinese CDM proposals - ten of which were for wind power projects - when it met in Bonn, Germany, at the end of July. Plans for nine hydropower projects and one natural gas project were also rejected.

Of the ten vetoed wind proposals, five were earmarked for Heilongiang province, one for Liaoning, three for Hebei and one for Shandong. The prices for integrating wind power to the grid range from CNY 0.54-0.61/kWh ($0.07-0.09/kWh), indicating they are from the regions offering high benchmark grid-access prices for wind power.

All the wind projects had been submitted to earlier CDM board meetings and rejected over concerns that the Chinese government may have deliberately lowered the on-grid tariffs for wind power to ensure the projects qualified for CDM financing (Windpower Monthly, January 2010). Projects must prove to the board that emissions reduction resulting from clean power would not have been achieved without revenue from CDM carbon credits, also known as certified emissions reductions (CERs).

The board then asked developers to re-submit amended project documents, which, it is believed, they also rejected.

Li Dong, chief representative for China at carbon trading business Icecap, says the 20 rejected Chinese projects were worth CNY 200 million ($30 million) in CERs, if calculated on the first-class market transaction prices - and would have reduced carbon dioxide emissions by 2.62 million tonnes had they been built.

"CDM project incomes normally constitute 10% of wind farm earnings," says Li. "If such a trend (rejection by the CDM) is maintained, it will naturally hurt the enthusiasm and confidence of businesses to invest in wind power projects."

According to Li, international buyers of CERs are already becoming cautious about investing in wind power projects. "We will not spend any time on wind power projects, because it will not be the last time the board rejects Chinese projects," he says. "We will look for some other projects with smaller risks."

A source at China's largest wind farm developer, Longyuan Group, who asked not to be identified, says the root of the problem rests with the fact that because most CDM board members are from Europe, they do not fully understand Chinese on-grid tariffs.

The source explains that because much of the on-grid tariff information on the board's database is taken from previous applications, much of this information is now outdated or unrepresentative.

"The problem with the board is that it has absolute authority, leaving no room for others to discuss with it on an equal footing," the source adds.

Developers behind the rejected projects are weighing up their options. Electric power company Datang Group's second-stage project in Shandong Laizhou was rejected. A Datang official responsible for CDM affairs says: "Since it just happened, we are discussing what to do next, including whether to accept the board's reasons."

Longyuan Group has had three projects rejected. A company source says: "We will not have any responses for the time being. It is really hard to explain clearly the matter of on-grid tariffs, and the board is sticking to its guns."

The board's latest ruling follows protests from the Chinese government and industry about earlier rejections. In December, the National Development and Reform Commission, the government's economic management agency, denied allegations that the country's wind pricing policy had been altered in a bid to improve the chances of securing CDM financing.

"The Chinese government decides the on-grid tariffs for wind farms according to the objective rules of wind power development and the capacity of the grid to integrate wind power," the commission stated.

In a joint announcement, the nine Chinese wind power developers affected by the board's ruling said the decision would seriously damage the CDM initiative and weaken investor confidence in wind power. They also voiced concerns about the criteria used to judge projects and urged the board to re-examine the CDM registration qualifications for Chinese wind projects.

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