This report assesses the performance of the Shanxi Environment Improvement Project in the People's Republic of China (PRC). ADB approved a loan amounting to $102 million in December 1999 to support three clean energy subprojects:
- coal gasification plant in Taiyuan city; supplied coal gas to industrial, commercial, and residential consumers and public buildings to replace high-pollution coal use;
- an energy-efficient centralized district heating system in Datong city; and
- a coal-bed-methane/coal-mine-methane (CBM/CMM) capture, storage, transmission, and distribution system in Yangquan city
The project's immediate intended outcomes were:
- greater use of cleaner forms of energy by industrial, commercial, and residential users;
- improved air quality in the cities and reduced atmospheric emissions of sulfur dioxide (SO2), nitrogen dioxide (NO2), and total suspended particulates (TSP) or particulate matter of less than 10 microns in diameter (PM10).
The project also included advisory technical assistance (ADTA) for setting up and operating a SO2 emissions permit trading system in Taiyuan city. This market-based instrument was meant to encourage pollution reduction at minimal cost.
Summary of Evaluation
The overall performance of the project is rated as successful.
The project is highly relevant based on the project design, which is consistent with the PRC's environmental protection policies and programs initiated in the 1990s, as well as with ADB's operational strategy at the time to support the development of cleaner energy sources.
The project is effective because it meets the targeted outputs in Taiyuan and Yangquan and exceeds the target in Datong; however, the actual coal savings per unit of gas supply or district heating service are significantly lower than initially estimated in Datong and Yangquan.
The project is also efficient, despite the prevailing tariffs and especially if environmental benefits are considered.
The project is likely to be sustainable as government price coordination coupled with budgetary support is likely to ensure that:
- capacity utilization levels remain high; and
- systematic and well-structured approaches continue to upgrade managerial, technical, financial, information technology, and other skills.
- Pricing of Outputs and Services. Unchanging end-user prices meant that the output and service providers in Datong and Yangquan had to rely on budgetary support from the respective city government. It is imperative that gas and heat prices be increased for long-term sustainability of the subprojects.
- Estimation of Environmental Benefits. The overall environmental benefits of the Taiyuan and Datong subprojects are more-or-less in line with appraisal estimates. In Datong, due to lower than expected environmental benefits per unit area, the projected environmental benefits are met only by taking into account the additional 30% floor area serviced. The estimated environmental benefits in Yangquan since subproject completion fall significantly short of appraisal estimates. While potential benefits appear to have been overestimated at appraisal, such overestimation may also reflect the quality of the underlying data.
- Prerequisites for SO2 Emissions Permit Trading. The attempt to introduce SO2 emissions permit trading in Taiyuan City has shown that several prerequisites need to be in place before an emissions permit trading system can be sustained. Actual emissions should be at or below the environmental capacity. Mechanisms to reliably monitor SO2 emissions must be created.
- Integrated and Holistic View of Coal Industry. Coal is a highly polluting fossil fuel. Where the coking industry produces significantly more coal gas than needed for processing, the coal gas can be distributed to households, commercial and industrial consumers to replace coal - which will reduce emissions of SO2 and other pollutants. Where coal mining provides an opportunity to capture and use CBM/CMM gas global environment benefits can be derived from preventing its atmospheric release, and local environmental benefits can be achieved by using CBM/CMM gas as a fuel instead of coal.
- Setting Prices of Outputs and Services. While price setting in a regulated or controlled market is often a balancing act involving multi-faceted concerns, it is important to make the long-term sustainability of the service provider, including investment in its modernization and expansion, one of the prime considerations.
- Successful Implementation of Market-Based Instruments for Pollution Control. It is difficult to design a market-based instrument and make it work, be widely accepted, and achieve the intended results. Experience now makes clear the need for higher discharge fee rates and steps are being taken in that direction. The attempts to introduce the more complex SO2 emissions permit trading system also highlighted issues that need to be addressed before the SO2 emissions permit trading can be successfully implemented.
- Estimation of Environmental Benefits. Towards making reasonable estimates of environmental benefits, it is important to give specific attention to emissions estimated before and after the three subprojects began commercial operations in the respective cities. If necessary, measurements should be taken year-round for certain customer categories, to adequately capture the effects of seasonal variations.
The evaluation report proposes follow-up actions below:
Sustainability. Continue policy dialogue with responsible authorities in follow-on engagements to revise prices of clean products and services, such as coal gas, CBM/CMM, and centralized district heating.
Monitoring. Actively facilitate an improved assessment of environmental benefits of investments in clean energy subprojects by the subproject companies and other enterprises.