Clean Development Mechanism & Renewable Energy – India Context.

The Clean Development Mechanism (CDM) is one of the three flexibility mechanisms under the Kyoto Protocol (KP), 1997 that enables developing countries to assist developed countries in meeting their green house gas (GHG) emissions reduction targets. Of proposed GHG abatement projects, those involving renewable energy (RE) are the most promising because they generate clean energy and promote sustainable development.
The CDM is the only flexibility mechanism that involves developing countries. It allows developed nations to achieve part of their reduction obligations through projects in developing countries that reduce emissions or 'fix' or sequester CO2 from the atmosphere.

The CDM has two key goals:

  • To assist developing countries that host CDM projects to achieve sustainable development.
  • To provide developed countries with flexibility for achieving their emission reduction targets, by allowing them to take credits from emission reducing projects undertaken in developing countries.

The rationale of the CDM is that GHGs being global in nature, can be reduced anywhere in the world with the same effect, so the CDM allows these emissions reductions to take place where it is cheapest/most cost-effective to do so.

The greenhouse gas benefits of each CDM project will be measured according to internationally agreed methods and will be quantified in standard units, to be known as 'Certified Emission Reductions' (CERs). These are expressed in tons of CO2 emission avoided (i.e. 1 tons or 1000 kg of CO2 is equivalent to one CER). Other GHGs (like methane) will be converted into CO2 equivalent terms for the purpose of common unit. When the Kyoto Protocol becomes fully operational, it is anticipated that these 'carbon credits' will be bought and sold in a new environmental market; in fact, they are already becoming a commodity.

How does CDM work?
The main elements of the Bonn Agreement with regard to the CDM are as follows (ENB, - 2001):

  • Establishment of the CDM executive board. (CDM - EB)
  • Sinks to be allowed (but only afforestation and reforestation, subject to a cap of 1% base year emissions, times five).
  • No eligibility for nuclear power.
  • Host country prerogative to develop sustainable development criteria.
  • CDM funding to be additional to Official Development Assistance (ODA).
  • Small scale projects to have simplified procedures.

General attributes of the CDM

Any project activity starting after January 1, 2000 will be eligible for registration and earn CERs if it meets the interim criteria for CDM projects agreed to during COP 7 held in Marrakech. Final rules and modalities for the CDM were approved during COP 8 held in October 2002 in New Delhi.

To use the CDM, certain procedures will have to be followed and approvals obtained. There are also several ways that a company can participate in the CDM. It can invest directly in a project and receive a return in the form of CERs. Depending on the financial structure of the deal, it may also receive a financial return. Alternatively, a company can simply agree to purchase CERs as they are produced. This reduces the risk to the buyer of CERs, but will come with a higher price tag.

Special simplified procedures were developed to make approval and implementation of the following types of small-scale CDM projects easier, termed Fast Track projects:
Renewable energy project activities with a maximum output capacity equivalent of up to 15 MW;
Energy efficiency improvement project activities that reduce energy consumption on the supply and/or demand side by up to the equivalent of 15 GWh per year; and,
Other project activities that both reduce the anthropogenic emissions by sources and that directly emit less than 15 kiloton’s of carbon dioxide equivalent annually.

Basic rules and procedures governing CDM projects.
Real GHG Emissions Reductions

To qualify for credits, GHG emissions from a project activity must be reduced below those that would have occurred in the absence of the project. Without this "additionality" requirement, there is no guarantee that CDM projects will create incremental environmental benefits, contribute toward sustainable development in the host country, or play a role in the ultimate objective of stabilizing atmospheric GHG concentrations.
Any CDM project therefore requires the estimation of 'baseline' emissions - ("those without the project, less the actual emissions") that will occur after a project has been implemented.

CDM Project Cycle and Responsible Entities
Each CDM project must follow a prescribed process to earn certified emissions reductions. A typical CDM project would have to go through the following process cycle in which EB, Operational Entity, and Host country would play their respective roles. This cycle also indicates the role of the CDM project promoter.

CDM Project Cycle

Activity	Definition	Responsible Entity
Project Development	Developing a CDM project	Project Promoter
Project Design Document	Developing a CDM - PDD	Project Promoter
Validation	Independent evaluation of PDD, including calculations of baseline emissions and estimated project emissions	Operational Entity
Host Country Approval	Approval from Host government - Mandatory	Project Promoter & Host Government
Registration	Formal acceptance of a validated PDD	Executive Board
Project Implementation & Monitoring	Commissioning & operation of the CDM project and measuring & recording project performance related indicators/parameters	Project Promoter
Verification	Periodical independent review of monitored GHG reductions	Operational Entity
Certification	Written assurance on the actual GHG reductions verified	Operational Entity
Issuance of CERs	Issue of Certified Emission Reductions (CER), based on OE's certification	Executive Board

Eligibility to Participate in the CDM
CDM credits will only be granted to national governments and companies in Annex 1 countries, which have ratified the Kyoto Protocol. The Ministry of Environment and Forests (MOEF), the nodal ministry of the Indian government for climate change related activities has already announced interim criteria for eligibility of projects under CDM.
The MOEF is in the process of establishing the NA for CDM projects. The host country approval process also includes consultation with local stakeholders, whose comments must be considered before the CDM project is submitted for approval. In addition, a host country, upon review of a preliminary project proposal, may require an environmental impact assessment (EIA), which will also have to be completed before the project can proceed.

Renewable Energy (RE) under CDM in India

Renewable energy deserves global attention and accelerated promotion due to its dual benefits of augmenting energy security as well as mitigating GHG emissions.
There are various reasons for India to push renewable energy viz.
The inability of conventional systems to meet growing energy demands in an equitable and sustainable manner.
The large scale and negative impact of conventional energy production and consumption on the physical and human environment.
The need for meeting energy needs of an unserved population in rural and remote areas as well as those residing on islands.
Need for maintaining a properly diversified energy mix. Such a diversified portfolio would also help in minimizing the socio-economic impact if the supply of a particular fuel were to break down.

Over the past decade, several RE technologies have attained technological maturity, leading to commercialization. They are biomass power, solar energy (photo voltaic and thermal), small hydro and wind energy.
The current policy environment has been instrumental in creating one of the largest and most diverse renewable energy programs in the world. The RE potential and achievements of various RETs are given below.

Renewable energy status in India

Source/Systems	Approximate potential	Achievements
Biogas plants (nos.)	12 million	3.50 million
Improved cook stoves (nos.)	120 million	35.2 million
Biomass power/ cogeneration	19500 MW	450 MW
Biomass gasifiers		52 MW
Wind energy	45000 MW	1702 MW*
Small hydro power	20 MW/sq. km	96 MWp
Waste-to-energy	1700 MWe	22 MWe
Solar water heating (collector area)	140 sq. m	0.65 sq. m
as on 31 August 2002, Source: MNES * as on 31 December 2002 MW, MWp, MWe - Mega Watt, Mega Watt peak, Mega Watt Electrical equivalent sq.meter - sq.meter.

The focus has been on utilizing renewable energy technologies that can help traditional fuels to be used in more efficient manner; meet basic energy needs for cooking and lighting; and provide energy to the rural industry so as to improve the overall quality of life in India. RETs are also aimed at complementing and/or replacing fossil fuels in urban-domestic, commercial, and industrial applications. Renewable energy projects get a positive push through CDM (over other candidate projects) because CDM projects must assist developing countries in achieving sustainable development. According to 'Energy after Rio-Prospects & Challenges-1997'(UNDP Publication 1997) renewable energy and energy efficiency must both be an integral part of any future energy system that addresses the issues of sustainable development. Furthermore, since rural development too, is an intrinsic part of sustainable development, RET based CDM could be a vital means for many developing countries to meet their rural energy demand.
In India, as far as CDM are concerned, the Government of India has given priority to efficient technologies in power generation, centralized and decentralized renewable energy options, and energy efficiency.

Potential RE projects
As per the Indian government, the identified areas in the renewable energy sector are as follows:

Wind power	MW size wind power systems Wind machines for low wind regimes Better designed rotor blades, gear boxes, and control systems
Biomass power	Advanced biomass gasification technologies MW size biomass combustion systems High pressure cogeneration systems
Small hydro power	Low head power generation systems High efficiency systems Portable hydro sets
Village electrification	Advanced hybrid systems RE based localized grid Island electrification Innovative technology packages
Energy recovery from wastes	High rate bio-methanation systems Incineration Sanitary landfills
Solar	Thermal systems for industrial applications Solar thermal power generation Tandem solar PV cells Alternate material solar PV cells
New and alternative technologies	Fuel cell/hydrogen energy Electric vehicles Ocean energy technologies

It is clear that in India enormous and varied opportunities exist for CDM in the field of renewable energy. However, their active realization largely depends on the Government of India's policies and its expeditious handling of various formalities. This is especially so because these factors could affect the transaction cost of the project.
Contribution to the country's sustainable development is one of the major non-cost benefits that RET based CDM projects have over other options. The environmental benefits would also bring many benefits (reduction in local pollution and conservation of water resources among others) in addition to GHG abatement. In that respect, RET projects have an upper hand compared to other, non-forestry CDM projects.
Though revenue from CDM is not high enough to the make an unviable project viable, they facilitate to leverage additional finance and also address certain known risks in RE projects viz., Internal Rate of Return (IRR), tariff fluctuation etc.,

The impact of revenue from CDM on RE projects, in terms of their IRR is given below.

Technology	IRR
Energy Efficiency-District heating	< 1.0
Wind	0.9 - 1.3
Hydro	1.2 - 2.6
Bagasse	0.5 - 3.5
Biomass	< 5.2
Methane -Solid Waste Management	> 5.0
Source: PCF 2001

What can we expect as CDM evolves?

There is today, a strong, strategic advantage in the development of renewable for sustainable development. The ongoing momentum of renewable energy development coupled with the geographic benefits of resource availability provides this advantage. Since renewable energy can satisfy energy needs in an environmentally benign and cost effective manner while reducing dependence on the import of fossil fuels, India is aiming at mainstreaming of renewable in energy sector plans and policies.
The government, therefore, envisions a central role for renewable during this century. In fact, it is expected that more than half the energy needs of the rural would be met by a range of decentralized renewable energy options by 2050. Furthermore, it is also anticipated that a fourth of grid electricity would be sourced competitively from renewable by that time. Renewable energy projects would also be required to meet distributed and decentralized loads, whether they are electrical or thermal.
For translating this vision to reality, the government is seriously exploring the possibility of tapping flexibility mechanisms such as the CDM for climate change mitigation and environmental funding opportunities such as GEF, in so far as these are in consonance with national policies.
From a country's perspective, both renewable energy and energy efficiency projects are accorded high priority because they represent supply side and demand side options respectively. However, the advantage with renewable energy projects is two-fold. They not only help mitigate local and global emissions, they also support the resolution of energy security issues at national and local levels. To that extent, renewable energy projects might assume a greater role.
In the context of CDM, determining baselines as well as monitoring and verification could be significant barriers while designing energy efficiency projects, especially in case of small and scattered energy efficiency projects (for example replacing existing electrical motors with energy efficient motors). Compared to other CDM options, RETs may not be the cheapest abatement option but they aid the development process in following a sustainable path and allow a variety of local benefits. These factors could make them cost-effective for the country.
The Ministry of Non-conventional Energy Sources has already constituted the Climate Change Advisory Group on Renewable Energy to advise it on different aspects of CDM, especially on setting up baselines. The private sector has also been evincing interest in such projects. The time is therefore right for suitably formulated CDM projects to be initiated in India.
It is upon the national government and state governments to come out with complete information such as its priority areas (in terms of preferred technologies and applications), procedures and guidelines for proposing CDM projects, and sustainability criteria. This will serve two purposes: - assist the development of a portfolio of CDM projects in the country and allow clear options for potential investors.