|Project Rationale and Linkage to Country/Regional Strategy
The PRC's rapid economic growth and its reliance on coal, which provided about 70% of primary energy in 2010, are causing continued rapid growth of harmful emissions. Coal combustion releases large amount of carbon dioxide (CO2), the main greenhouse gas responsible for causing climate change. Coal combustion also emits sulfur dioxide (SO2) and nitrogen oxides (NOx), which are the main causes of acid rain, and total suspended particulates, which cause serious respiratory diseases. The Government of the PRC has recognized the environmental challenges posed by the rapid increase in coal consumption and has committed to achieve a reduction in carbon intensity of 40% 45% by 2020, compared with 2005, primarily by targeting reductions in energy intensity. During the Eleventh Five-Year Plan, 2006 2010, the energy intensity was reduced by 19.1% compared with a target of 20.0%. The Twelfth Five-Year Plan, 2011 2015 has set the target of reducing energy intensity by a further 16%, carbon intensity by 17%, and emissions of SO2 by 8% and NOx by 10%. Shanxi province has set a corresponding target of reducing energy intensity by 16%, carbon intensity by 17%, and emissions of SO2 by 11.3% and NOx by 13.9%.
About half of the PRC's CO2 emissions come from the generation of electricity and heat. Demand for centralized heating (or district heating) is growing rapidly along with economic development and urbanization. In 2010, the total quantity of heat supplied in the urban areas of the PRC reached 2.9 billion gigajoules and the total area covered by district heating reached 4.4 billion square meters (m2), compared with 1.9 billion m2 in 2003. Beijing and Tianjin municipalities, and 19 provinces in the PRC have adopted district heating. Despite this, district heating in the PRC still covers only 30% of the total floor area, compared with about 60% coverage in European countries. In the absence of district heating, inefficient and polluting coal-based household stoves and small neighborhood boilers continue to be widely used. The government plans to expand the coverage of district heating, which would allow to close the small, inefficient heat-only boilers, and increase the use of energy-efficient combined heat and power (CHP) plants as a heat source. District heating also allows the introduction of consumption-based billing, which enables consumers to regulate the amount of heat they consume. It avoids significant heat losses in the system, reinforcing the energy efficiency of district heating.
Shanxi is an underdeveloped inland province in the PRC's north-central region. It covers an area of about 156,300 square kilometers. The heating season lasts for 5 months and temperatures can fall below 20 C. Shanxi's gross domestic product per capita in 2010 was $4,107 equivalent, which is about 88% of the national average ($4,686). It ranks 18th among the PRC's provinces. Shanxi is well known for its rich coal resources, estimated at about one-third of the PRC's total coal reserves. In 2011, it produced 870 million tons of coal, about one-fourth of the PRC's total coal production and an increase of 17.7% over 2010 production. It faces serious pollution and environmental problems that are closely related to the mining, use, and transport of coal.
The underground coal mines in Shanxi release large amounts of methane during operation, commonly referred to as CMM. The capture and use of CMM not only helps avoid serious mining accidents but provides large environmental and climate change mitigation benefits. ADB supported a CMM project in Jincheng, in one of the largest coal mines in the province (footnote 2). It was the first such project in the province that demonstrated the twin benefits of greater coal-mine safety by capturing methane and of utilizing the captured methane for electricity generation and as fuel for household consumption. In 2010, more than 2.8 billion cubic meters (m3) of CMM was extracted, of which the province utilized about 0.9 billion m3 (34%), mainly for residential cooking, transport, commercial and industrial use, and power generation. Its use for district heating and space cooling has been very limited. The project rectifies this by demonstrating CMM utilization for district heating and space cooling in one city. It is also the first ADB initiative to use CMM for such purposes.
Like in many other provinces, Shanxi's rapid urbanization is fuelling demand for housing and urban infrastructure. Likewise, strong economic growth, higher incomes, and the privatization of housing are driving demand for district heating. Thus, Shanxi has rapidly expanded its coverage of heat supply, from 71.1 million m2 in 2003 to 287.4 million m2 in 2010 an annual growth rate of 21%, much higher than the national average of 12%.
Although the high growth rate of Shanxi's heat supply provides significant opportunities for the private sector, private participation has been relatively slow because (i) initial investment costs are high and financial returns low; (ii) local commercial finance institutions are reluctant to provide debt financing, particularly in remote urban areas with small markets, because of perceived high risks; and (iii) only a handful of private companies have the required technical and managerial capacity to operate such utilities, and these tend to focus on large urban areas. While some of the reforms that will remove most of these barriers are underway, district heating as an industry is still not commercially mature and requires public investment to meet growing demand, and thus remains an essential public service in Shanxi.
Due to the abundance of locally produced coal, district heating in Shanxi relies primarily on coal as a fuel source. Many of the heating systems in urban areas are old and inefficient and lack proper emission control equipment. Environmental impacts from these systems are disproportionately high on the poor and on women. Urban pollution from small boilers worsens outdoor air quality and causes significant cumulative harm to public health. Inadequate coverage of district heating in low-income urban areas drives residents to use indoor coal stoves for heating, a major cause of respiratory diseases. Women and small children are particularly vulnerable to high indoor pollution, as they tend to spend more time indoors.
The project will help solve the issues described above by extending and expanding energy-efficient district heating to more than 270,000 residents in five highly polluted urban areas of Shanxi. It will replace small, inefficient, and polluting inner-city coal-fired boilers and coal-fired household stoves with a highly energy-efficient CHP plant and large heat boilers, and with CMM supply, thereby reducing the overall environmental footprints of district heating. Lessons from previous ADB interventions of a similar type were taken into account in the project design. The project has a strong rationale as part of the ongoing energy intensity improvement in the PRC, its Energy Conservation Law, and its Energy Conservation Ordinance for Civil Construction. The project is also in line with ADB's country partnership strategy, 2011 2015 for the PRC, and its Energy Policy, which prioritizes energy efficiency projects, including district heating, and promotes access to energy for all.