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ADB

Asian Development Bank

Knowledge Product

Power of Self SufficiencyRural Biomass Development in Gansu

An Innovative Pilot Project inRural Western China

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Qidian

Zhangye

The Power of Self Sufficiency: The Story of Qidian

A micro-renewable project in a remote village in north-western China marks a significant step towardsachieving the country's aim of building a new socialist countryside by leveraging local resources andempowering the local community. The first such project to be set up after the renewable energy law wasenacted, it serves as a unique model for implementation in developing countries.

Knowledge ProductMay 2007

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Abbreviations and Acronyms

ADB Asian Development BankDSCLES DSCL Energy Services Co LtdCDM Clean Development MechanismEIRR Economic Internal Rate of Return

ERU Emission Reduction UnitsFIRR Financial Internal Rate of ReturnHH HouseholdkW kilo WattkWh kilo Watt HourLPG Liquefied Petroleum GasMDG Millennium Development GoalsM&E Monitoring and EvaluationMW Mega WattO&M Operation and MaintenanceRE Renewable Energy

TA Technical AssistanceTCE Tons of Coal EquivalentTVE Township and Village EnterpriseVAT Value Added Tax WACC Weighted Average Cost of Capital

Exchange Rate as on 1st May 2007

I US $ CNY 7.76

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Contents

Fuel For Thought 1 The Qidian Village Pilot Project

Need for Improving Rural Energy Services 2

Setting the Pilot Project Objectives 3

Taking Stalk of Gasification Technology 6

Qidian Pilot Project Implementation 8 BOTtom of the Pyramid

A Return on Energy 10

Critical Success Factors in Project 12Implementation

Next Steps for Implementation 15

Tables and Figures

Table 1

Table 2

Table 3

Table 4

Table 5

Table 6

Table 7

Table 8

Table 9

Figure 1

Figure 3

Figure 4

Figure 2

Renewable Energy Potential in

Zhangye City 3

Renewable Energy technologies inZhangye City 3

Comparison of Cost of Generation- Biomass Technology 7

What Qidian Gained A RichHarvest from Agro-waste 9

Project Cost 10

Project Financing 10

Operating Costs 10

Provisions under China's RE Law 10

WACC 11

The TA Goal 2

Participatory Approach forProject Management 12

Institutional Model for RuralEnergy Service 13

Electricity Tariff in Zhangye City 5

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Edited By:Design and Layout by: Genesis Burson-Marsteller, IndiaCover Photo: DSCL Energy Services Co Ltd., New DelhiOther Photos: DSCL Energy Services Co Ltd., New Delhi

Genesis Burson-Marsteller, India

This ADB Knowledge Product was prepared by EAEN, led by Anil Terway and including A Bhargava, with

assistance from DSCL Energy Services Company Ltd., New Delhi and may not reflect the views of ADB'sBoard of Directors.

This knowledge product is based on the output of the TA 4309-PRC :

The Gansu Provincial Government was the Executing Agency and Zhangye CityGovernment was the Implementing Agency for the TA. The pilot project was implemented with fullsupport and cooperation from Qidian village government and Shandan county government.

Renewable Energy for PovertyReduction (financed by Government of Denmark) . DSCL Energy Services Co. Ltd, Delhi were theconsultants for theTA.

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Fuel for Thought: The Qidian Village Pilot Project

Over the past decade, rapid economic development in China and the increasing use of natural resources

such as coal for energy generation have resulted in growing environmental degradation. To address this

problem, the Government of China took several initiatives under the 11th five year plan, such as enacting

a law to encourage the use of environmentally-friendly renewable energy technologies to revitalize the

rural economy.

Since 2002, the Asian Development Bank (ADB)and the Gansu provincial government have beenimplementing clean energy initiatives to provide

affordable and cost-effective energy a pre-requisite for economic growth in the region. Inkeeping with the objectives of the nationalwestern region development plan, theseinitiatives aim to protect this ecologically fragileregion, which has grown at a slower pace thaneastern China.

Qidian, a tiny village in the province, wasidentified for one such clean energy initiative.

This initiative sought to create an institutionalmodel to provide affordable and reliable energyservices to poorly-served rural areas. Partlyfinanced by ADB, the project also sought todemonstrate the readiness of an indigenouslydeveloped renewable energy (RE) technology forcommercialization and wider replication.As importantly, this institutional model

maximized local ownership of the energy assets,thereby playing a key role in poverty alleviationand social development.

This Qidian initiative, which took place under anADB technical assistance (TA) program, involvedusing biomass gasification technology. The$220,000 project was designed to use the richreserves of agricultural waste in the area togenerate 200 kWh of power and produceenough gas to meet the cooking energy needs ofover 300 households. The project wasconceptualized and implemented by a team ledby New Delhi based DSCL Energy ServicesCompany Ltd. (DSCLES).

This report presents a detailed account of theapproach, the technical features, the learnings,critical success factors for sustainability and thenext steps for wider replication of such projects.

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Need for Improving Rural Energy Services

The need to improve rural energy services arisesfrom two critical factors that are uniformlyapplicable in Gansu:

Inadequate capacity to meet theincreasing energy needs of the economy,resulting in erratic supply in rural areas(especially for last-mile users)

A high percentage of coal-based powergenerating units in the overall power mix

and the associated long-term impact ofair pollution

Zhangye City, the prefecture in which Qidian issituated, lies 600 km north west of Lanzhou (theprovincial capital of Gansu). It covers 41,900 kmand has a population of 1.28 million. ZhangyeCity is one of the province's poorer areas withdeficient electricity supply and poor air quality.Approximately 80% of the population lives inrural areas, receives erratic electric supply and is

the first to experience outages during peakingshortages.

2

Poor quality and unreliable electricity supply notonly inhibits economic growth but alsoencourages switching to more polluting fuels.

Improving rural energy services using cleanenergy sources to provide direct benefits to therural poor is consistent with ADB's energy policy.It also addresses ADB's strategic focus in China ofaccelerating rural development by strengtheningrural infrastructure and services.

The TA, which was co-financed by theGovernment of Denmark, required a detailedassessment of the renewable energy technologyoptions in China, the available resources in theproject area (Zhangye City) and the lessons frompast projects. It also entailed mapping the resultsagainst the TA's development goal of improvingthe economic and social welfare of the poor andfostering rural progress by improving energy andelectricity delivery in a sustainable manner.

TA GOAL

Improve economicand social welfare of

poor and rural areas

by improving energy

and electric service

delivery

Resource

Availability

Indigenous

Technology

Options

Un-served

rural energy

needs

Capacity to

organize,

implement

& operate

2 Figure 1: The TA Goal

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Setting the Pilot Project Objectives

RENEWABLE ENERGY POTENTIAL

Zhangye City is well endowed with hydropowerresources, surplus agricultural waste (stalk),animal and poultry waste and solar energy.Providing energy services is viewed as agovernment responsibility and the rural energyoffice under the department of agriculture has amandate to develop renewable energytechnologies . Nearly 800 MW of hydropowerpotential is being developed in Zhangye City,

primarily by Gansu Heihe Hydropower Ltd, ajoint stock company.

1

Hydropower 800 MWAgro-waste 640,000 TCEAnimal/Poultry Waste 2,900,000 TCESolar Energy 3800 sunshine hours @

insolation of 148 kCal/ cm(average)

Wind Energy Annual average wind speeds

of 2.2 m/s and wind energydensity of 200 W/m

Table 1 Renewable Energy Potential in Zhangye City

Renewable Energy Potential

2

2

RENEWABLE ENERGY TECHNOLOGY AND

PROJECTS

Current renewable energy projects in ZhangyeCity include the following:

Power generation 250 MW hydropoweroperational and 350 MWunder development5.3 kW solar home systems in

890 households;Cooking Improved cook stoves;

5,700 HH Biogas plants and4, 310 solar cookers1 stalk gasification plant

Space heating 68000 m of water heatingsystem

Table 2 Renewable Energy Technologies inZhangye City (All indigenously sourced)

Application RE Projects

2

In addition to these, a wider choice ofindigenous technologies can be drawn on toprovide rural energy services.

ENERGY NEEDS IN RURAL AREAS

A two-stage survey, including a field survey of300 households covering all 6 counties inZhangye City, sought to identify the energyneeds of the stakeholders and the impact on

livelihood by increasing energy availability. Keyinformation made available from the surveyincludes: (See next page)

1 Other than hydro power

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LEARNINGS and INSTITUTIONAL CAPACITY

Barring hydropower projects, the Gaotai countygasification project is the largest single projectimplemented by the rural energy office . Aperformance assessment of the projectshighlighted key issues that need to be addressedif the Qidian pilot was to be a sustainable pilot.

Technical issues:o Focus on quantityo No M&E processo Absence of a feedback mechanism,

which, in turn, limits technologyimprovements

Financial issues:o Mostly grant funded no focus on

migration to commercial operationso Withdrawal of users has led to cash-

flow problemso No financing options either in terms

of retail finance or project financeo Need to develop capacity among

program-implementing agencies toidentify and address issues that canpromote commercialization

2

There is, therefore, a need to consider otherbusiness models of inclusive development.

SETTING THE PILOT PROJECT OBJECTIVE

To this end, a participatory process ofconsultation amongst stakeholders andconsultants was adopted to set theobjective of the pilot project. This was essentiallyto develop a model for commercialization that

can support a larger business plan, and arenewable energy program that can contributeto overall development on a sustainable basis.This would, in turn, help meet the broaderproject goal of poverty reduction in harmonywith environmental sustainability.

The objectives formed the basis for determiningthe following screening criteria, which in turnresulted in location selection.

(see Figure 3)

Energy costs to total 13 to 54%depending on the electricity tariff

Large difference between summer and winter energyneeds, creating a significant impact on householdexpenditure

Confirmed availability of surplus stalk Stalk utilization in the overall energy mix of Zhangye

is very low - 35% compared with 70% in other partsof China

Severe and long winters limit opportunities for theagriculture-dependent rural economy\and theshortfalls in energy supply constrains thedevelopment of other TVEs

expenditure

2 This project, which was has been in operation since 2000, comprises a stalk gasification plant to supply gas to meet cooking energy

needs of 300 households At the time of the performance assessment only 100 households were using the gas.

PILOT PROJECT SELECTION CRITERIA

At the village level Increase in Income

Need for energyParticipationContribute to investmentFinancial returnAffordability

At the macro levelPoverty reductionReplicationSustainabilityExperience with the technology

4

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TECHNOLOGY SELECTION

Based on the assessment and screening criteriaabove, it was concluded that stalk-basedtechnologies are the best option to improve ruralenergy services in Zhangye City. Even after beingused as cattle-feed and as cooking fuel, half thestalk produced in Zhangye City is wasted. This initself is a hazard. Disposable agro-waste is eitherburnt or left to decompose. When burnt, aprecious source of renewable energy is destroyed,

even as it causes air pollution and related healthhazards. Decomposition also creates its share ofproblems. However, as a source of biomassenergy, such agro-residues have many virtuesuniquely suited to the rural milieu. Further,domestic manufacturing capacity is very welldeveloped, and specifically tailored to local fuelcharacteristics and operating conditions.

LOCATION SELECTION

The field survey indicated that the village ofQidian, located in a water-stressed region ofZhangye City and drawing its livelihood fromagriculture and coal-mining related services,offered an ideal fit for a project of this nature.

First, since applicable tariff for TVE in Qidian (thelargest component of expenditure on energy) areamongst the highest in Zhangye, its citizensdemonstrated a willingness to develop a

community-based model to augment energysupply at a lower cost.

Secondly, its demographic profile was dividedbetween poor and relatively better-off peopleproviding an ideal base to achieve the seeminglycontradictory requirements of poverty alleviationand a commercial model for improved ruralenergy services.

Finally, the region had enough surplus stalk with

no competing alternative use.

0.46

0.475

37%

23%

0.31

0.31

24%

9%

0.55

0.8

39%

68%

0 0.5 1 1.5 2

Zhangye

Qidian

Zhangye

Qidian

Tariff

%

ofExp

Domestic Agriculture TVE

Figure 2: Electricity Tariff in Zhangye City

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Taking Stalk of Biomass Gasification Technology

TECHNOLOGY OPTIONS FOR STALK UTILIZATION

Indigenous manufacturing capabilities are inplace for the following technologies:

stalk gasification for heating stalk gasification for power stalk-based power generation

STALK GASIFICATION FOR HEATING

Nearly 300 stalk gasification plants to producegas for use with retrofitted conventional gasstoves were installed in China with governmentsupport, including one plant at Gaotai county inZhangye City. However, only a third of the plantsare now functional due to operational problemscaused by poor gas quality. These operationalproblems led to declining user interest andconsequent cash flow constraints as a result ofwhich several of these first-generation projects

have closed.

Most of the technical problems have since beenovercome by domestic manufacturers andresearch institutes. In particular, research led bydomestic universities has yielded improvementsin the gas clean-up systems reducing the tarcontent in gas from 25g/m to less than 20mg/m .

3

3

STALK GASIFICATION FOR POWER

In the initial stages of development, stalkgasification was considered unsuitable for powergeneration owing to the poor quality of the gasgenerated. With advancements in clean-uptechnology, however, many rural industries (likerice milling) in eastern and central China, whichhave small captive power requirements, haveadopted stalk gasification for power generation.

Such plants initially operated on dual fuel mode.More recently, technology advancement allowsfor pure-gas mode operations. The investment insuch projects is around 6500 RMB/ kW and willfall further as the market for such systems grow.

Price of stalk based cooking gas is 0.12 RMB per unitas against 0.74 RMB per unit for LPG

6

In the absence of a wholesale market from which

a yardstick tariff for cooking gas can bedetermined, the initial price set 0.12 RMB/m

is still regarded as the value of stalk gas.Gasification for heating applications alone is notfinancially viable as the delivered cost of gas iswell over this rate (see table 3).

3

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SG CookingOnly (120 HH)

SG Integratedgas and power(120 HH+200kW)

SG Power Only(200 KW)

Stalk Direct Power(24 MW)

Option Investment

Million RMB

RMB/m RMB/kWh

Delivered Net Cost of

Cost of Gas Power3

0.695 0.25 -

1.60 0.12 0.43

1.30 - 0.38

300 - 0.45-0.52

Table 3 : Comparison of Cost of Generation from varioussources

STALK FOR DIRECT USE FOR POWERGENERATION

Both in China and in the rest of the world, stalk-based power generation using conventionalboilers is comparatively the most advancedtechnology. However, given the scale of suchprojects, this option has a relatively lower impactvis--vis the TA goal of poverty reduction inharmony with environmental sustainability.

STALK GASIFICATION INTEGRATED MODEL

Though stalk gasification for power generationhas the advantages of lower investment and cost(see table 3), there are fewer direct benefits tohouseholds as compared to the heating mode.

Therefore, an integrated gas and power modelwas selected for the pilot project that would notonly increase the scope for income generation,

but also provide access to cleaner cooking fuel,sharply reducing indoor air pollution and,thereby, healthcare costs.

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Qidian Pilot Project Implementation - BOTtom of the Pyramid

The Qidian village pilot project comprises a stalkgasification-based power generation and gasdistribution system to provide 200 kW of energyfor export and cooking gas for 320 households.The plant is an integrated model, which includesa 900 m /h gasifier with a 200 m gas tank and a200 kW generator. A 10 km pipeline networkhas been laid to connect individual householdsto the gas supply.

The project was installed by Jinan Bai Chuan

Tong Chuan Ltd., Shandong, with gasificationand gas clean-up technology developed byShandong University and the gas engine byChongqing Dajiang Power Equipment Co., Ltd). .Designed on the Build-Operate-Transfer (BOT)model, the project was commissioned in March2006 and marked a successful example of gasproduced from leafy biomass being used to runa gas engine, without the support ofconventional liquid fuel.

Given early setbacks in gasification technology, itwas not surprising that the stakeholdersexpressed concern about the technology and thecommercial viability of the project. Moreover,although the local authorities understood thatgas could be used for cooking and powergeneration, they were apprehensive about theoperation of a grid-connected power plant ofsuch a small size and based on a technologyunder development.

3 3

To tackle these problems, an energetic outreachprogram was launched as part of the TA,deputing local people to institutions working onbiomass projects to educate them on gasificationgas clean-up and power generation technology.Several community-level workshops were alsoorganized to sensitize the local people about thedo-ability and economic and environmentalbenefits of the project.

Thus, once work began, local cooperation was

total. The gasification plant was located onnearby wasteland owned by the villagecommittee and was transferred to the project innext to no time. The time required to developthe project, including the approval process andimplementation, was just 8 months. Theconstruction time, including the gasificationplant, gas distribution pipelines and powerevacuation system connecting to the 10 kV grid,took a record 5 months.

The electricity generated by the project issupplied to the utility. This makes it the firstproject to become eligible for the preferentialtariff for power generated from biomass projectsunder the new policy announced by thegovernment of China in January 2006.

8

Burning Bright: How the integrated gas and power model works

STALK STALK CUTTER STALK CONVEYOR GASIFIER

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INCOME

From the Grassroots

Power Profits

(Direct annual income in RMB -earned by households)

Income from selling stalk 77,760Savings on LPG 19,200Direct employment - 8 people 43,200Total direct income to Qidian 140,160Direct income/ household 438

(Share of profits in RMB - from thegas and power station)

Power Sold 380,640Gas Sold 69,120Total Revenue 449,760Expenses 176,160Net Profit 273,600Profit share/ household 855

Additional direct income to households- 10%

SOCIAL

Achieving the MDGs

created local jobs

Gender empowerment

of eradicatingextreme poverty and hunger throughsustainable development

The plant has : Directly for operation andmaintenance of the plant Directly for managing fuel logistics Indirectly by encouraging villageenterprises due to improved availabilityof power

with accessto cleaner cooking fuel, women havebeen freed of the daily burden ofcollecting and drying stalk, cleaningup afterwards, saving at least 3 hoursper day which could be used for otherproductive work with an earningpotential of 15 -30 RMB per 12 hourwork day.

ENVIRONMENTAL

improving indoor air

quality.

carbon- neutral

potential

carbon tradingmarket.

Traditional stoves and heaters usingfirewood and coal release products ofincomplete combustion leading topoor leading to poor indoor air quality.The gas from the project offers a moreefficient method of using stalk residuesreducing unburnt elements releasedinto the air and

Agro-waste power generation is aprocess and can

mitigate the negative impacts ofemissions from coal-based powersupply in Zhangye City.

768,000 kWh of clean electricitygenerated annually from the Qidianproject has the to earn 660Emission Reduction Units (ERUs) fromthe rapidly growing

Table 4 What Qidian Gained - A Rich Harvest from Agro-waste

CLEAN UP SYSTEM BLOWER

HOUSEHOLDGAS STOVES

GAS TANK

POWER GENERATOR

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A Return on Energy

The cost of the Qidian project was 1.74 millionRMB and included the following:

Land, site development & civil 0.20Plant and machinery 1.54- Gasifier package 0.42- Generator package 0.37- HH systems & gas distribution 0.55- Grid interconnection 0.20

Table 5 : Project Cost

Project Cost Component Cost in MillionRMB

Total Project Cost 1.74

The project was financed by equity from thevillagers and a grant from ADB:

The funding for the pilot project comprised onlyequity, which will not be typical for expectedcommercial operations. A more realistic debt-equity ratio of 60: 40 has been assumed and thefinancial indicators below are based on thisassumption.

Source Foreign Local Total Percent

A. Equity Capital1. Villagers 0.50 0.50 28%

2. Township Govt 0.15 0.15 9%3. County Govt 0.10 0.10 6%4. ADB Grant 0.99 0.99 57%Total 0.99 0.75 1.74 100%

Table 6: Project Financing

Project operatingexpenses Maintenance costs

Consumables for the generator(as per manufacturersspecifications)

Salaries and wages

Working capital Receivable Power sold 1Month; Gas Supplied 1 MonthInventory 1 Month stock of fuelPayable Operating Expense 2 Months

Table 7: Operating Costs

Fuel cost @ 50 RMB/T

Under China's recently enacted renewable energy

law the following benefits will be applicable tothe pilot project.

Preferential tariff Guidelines for tariff issuedCost of grid interconnection byutility

Fiscal incentives IT holiday for first 5 yearsApplicable VAT is 8.5% (against 17%normal VAT rate)

Table 8: Provisions under China's RE Law

10

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Yardstick Tariff

Yardstick feed-in

tariffdesulphurizedcoal-based

powergeneration in2005 in the

province

Subsidy price

of 0.25CNY/kWh(applicable for15 years from

the date ofpower

production)

= +

Based on these guidelines, the Gansu ProvincialPrice Bureau has approved a tariff of 0.61RMB/kWh (inclusive of VAT) for the project with

effect from February 2006. The gas stream willearn revenue at 0.12 RMB/m .

The post-tax real WACC is calculated as 2.15%.

3

Based on the above, the FIRR for such a project,when implemented under commercial financing,is 3.1% against the WACC of 2.15%. EIRR was23.5% against the hurdle rate of 12%.

Projects of this type are excellent candidates forCDM assuming CERs are available at $10/ T, theFIRR of the Qidian project would be 6.1%.

Amount in million RMB 1 0.74Weighting 57.25% 42.75%Nominal cost 6.12% 10.00%Income tax rate 33% 33%Tax-adjusted nominal cost 4.10% 6.70%Inflation rate 3% 3%Real cost 1.07% 3.59%Weighted component 0.61% 1.54%WACC 2.15%

Table 9: WACC

Financial component DomesticLoan EquityOwners'

In January 2006, the National Development andReform Commission (NDRC) issued guidelines fordetermining tariff for renewable energy-basedpower generation projects. Under theseguidelines, the government fixed price which willbe applicable for purchase of power from thestalk gasification pilot project is 0.492 RMB/kWh.The gas stream will earn a revenue at 0.12RMB/m .3

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Critical Success Factors in Project Implementation

Indigenous Technology

Participatory Process

Indigenously developed technology especiallysuited to the local resources and conditions iskey to the successful technical demonstration ofthe Qidian project.

Since these systems are simple and easy tomanufacture, it is possible to target fast- trackimplementation of such projects.

In the case of the Qidian project, theparticipatory eco-system within which it isdesigned represents a truly a socialtransformation business model. An iterativeprocess of concept, consultation and, outreachwas adopted to ensure that all stakeholders werefully engaged at the design and implementationstage.

ProjectImplementation

ProjectConfiguration

Community ProjectImplementation Cell

TechnologyEvaluation

Cost BenefitAnalysis

Energy NeedAssessment

CapacityAssessment

Affordability andWTP

Institutional Arrangement

In the past, village communities in China ranmost gasification plants on a cost-share and not-for profit basis. Staff members were engaged ona part-time basis since the output was limitedto cooking energy only.

Since the pilot involved a radical shift in terms oftechnology, it was felt that a new institutionalmodel should be part of a long-term migrationstrategy in which a single company can builtoperate and maintain such plants. (See figure 4)

12

Figure 3: Participatory Approach for ProjectManagement

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In fact, a similar approach was adopted for thedevelopment of hydropower in the province. Theinstitutional capacity-building process adoptedhas resulted in the creation of strong in-househuman resource, project development andproject management capabilities. This model canbe replicated for the development of suchprojects that have a more direct impact on ruralpoverty reduction.

Learning from first-generation projectsunderscores the importance of cash-flowmanagement for the long-term sustainability ofsuch projects. In the past, due to the nature ofthe programs, this aspect was not an area offocus. Under the TA, support was provided to

Financial Sustainability

put in place a business transaction process forfinancial management of the project.Subsequently training on-the-job and offline

was extended to the operators.

Further, since power supply to the grid ensuresthe availability of cash for operations andsustains stakeholder interest, the tariff wasnegotiated for approval before commissioning

the project.

At present, there is limited opportunity for suchprojects to utilize loan financing because of thelow awareness of potential opportunities and thebanks' ability to evaluate such projects. Whenconsidering projects of this type, it would be

Availability of Financing

Private Investor/Enterprise

JointVenture

UNIFIED GASSERVICE

COMPANY

State OwnedEnterprise

Existing Business Model

35% of the stations not workingdue to financial/ technical

problems

Established as part of Govt. Welfare Program; Financedby Government with contribution by villagers; not runfor profit; Duty & obligation of village community to

operate & maintain public infrastructure

Village EnergyCooperative

Figure 4: Institutional Model for Rural Energy Service

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reasonable to expect them to be financed oncommercial terms with a debt component of60 to 70% (6.12% for repayment over 8 years).Further, a 30 to 40% equity contribution mightinitially prove a strain given that initial projectswould have to bear a higher investment costuntil full commercialization is reached. In thiscase, a phased approach may be more,appropriate. One solution, for example could befor the provincial government to raise a part ofthe equity contribution. This contribution could

be reduced over time with the simultaneousincreased availability of debt through commercialbanks until a better appreciation of the potentialviability of these projects is recognized. Futureprojects of this type should also earn higherrevenue for the gas stream and additionalrevenue from carbon-markets and CDM.

14

Policy Support

Clear directives on power purchase fromrenewable energy-based power projects are vitalto provide the framework for future developmentof such projects.

The NDRC guidelines for tariff for renewableenergy projects provided the necessary policydirective for the Qidian pilot project to receivetariff approval - with support from the ADB

project the application which was filed for tariffapproval was expeditiously processed. The mainchallenge faced was in implementation of theapproval which required extensive advocacy ofthe project benefits to stakeholders.

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The Qidian project is a successful demonstrationof a technical option for rural energy serviceswith a substantial market in the region. It isestimated that more than 250 such plants canbe built in Zhangye City alone, generating over50,000 kW of power, providing indirectemployment to over 2,000 people andincreasing the average household income by10% every year.

Since a radical shift to a 100% commercial entity

has its disadvantages, a migration strategyinvolving an intermediate public-privatepartnership was put in place ahead of thetransition to commercial operations.

Enabling policy drivers are in place and a newrenewable energy fund is also being created tosupport renewable energy projects.

Investment per kW for an optimally sized plant isin the range of $ 1000/kW. With economies of

scale, a 20% reduction in cost is envisaged. Thetotal investment potential in Zhangye City aloneis $ 40 Million.

The immediate step is to put in place aninstitution with a mandate to develop theseprojects to ensure the Qidian project is replicableand sustainable.

An institutional set-up such as a joint stockcompany to combine the skills of the agriculturebureau and the power bureau would be ideal.The agriculture bureau can bring in the requiredskills of organizing the villagers to participate inthe project, ensuring the availability of stalk at a

Next Steps for Implementation

competitive price and knowledge of rural energytechnologies. The power bureau is capable ofmanaging the technical and commercialoperation and maintenance, projectimplementation and commercial aspectsnecessary for market transformation. The likelydisadvantage of high transaction costs for theinitial projects can be circumvented with thisarrangement.

Once the institutional structure is clear, a

business plan can be implemented to create aself-sustaining organization that cansystematically address the following needs:

ensuring availability of financing forproject development in a phased manner

ensuring availability of financing formanufacturers

putting in place systems for securingpower purchase from the projectsaccording to the renewable energy law

design and implementation of a robustmonitoring and evaluation system forsuch projects to manage the process oftechnology evaluation and upgradation

developing into a centre for excellencecapable of technology development

developing all-round skills needed forsuccessful development

improving access to financing for bothmanufacturing and projectimplementation, offering training toenable parameterized lending for suchprojects to meet both investment andworking capital needs

Encouraged by the initial results from the pilotproject, ADB is supporting a larger technicalassistance to promote biomass powerdevelopment in Gansu in a programmaticmanner

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