Martina Bosi, World Bank Holiday Inn, Montreal December 3, 2005

1. Baseline methodologies for grid-connected electricity – Context and Introduction to the Combined Margin Baseline Calculation Martina Bosi, World Bank Holiday Inn, Montreal December 3, 2005

2. Some Context

3. Outlook for Future World Electricity Generation Gas-based electricity production will triple, but coal will remain the dominant fuel worldwide Source: IEA, World Energy Outlook 2004

4. Context: Power Sector CO2 Emissions Power generation will contribute half the increase in global CO2 emissions; In 2030, coal plants in developing countries will produce more CO2 than the entire power sector in the OECD; Source: IEA, World Energy Outlook 2004

5. Generating Capacity Requirements 2003-2030 4,800 GW of new capacity will be needed to meet new demand and retirements’ Source: IEA, World Energy Outlook 2004

6. CDM and Power Generation Technology $ Finance CO Equivalent 2 Emission Reductions Industrialized Governments and Companies Developing Countries and Companies

7. CDM Portfolio (projects at PDD stage) CDM projects by sector (total:477) Annual CERs from CDM projects by sector (total:83.4 million) Source: UNEP Risoe database (28 Nov. 2005):

8. Technological Distribution of World Bank’s Carbon Finance Portfolio (total $629 million) Source: Carbon Finance Annual Report 2005 Source: Carbon Finance Annual Report 2005

9. Key CDM Methodological Challenge: the Baseline Certified emission reductions The difference between the actual project emissions and the emission baseline constitute the volume of CERs baseline emissions Project emissions time

10. Baseline Calculation Methodological challenge • one general baseline calculation: Output (kWh/yr) X emission factor (kgCO2/kWh) • Different possible methodologies to calculate emission factor(kg CO2e/kWh)

11. Impact of Different Baselines for Power Generation Projects: Example of India Wind Natural gas (BAT) Fossil fuel only 1000 960 900 Peaking 789 800 700 All sources 600 tCO2/GWh 565 Natural gas only 500 418 400 382 Natural gas (BAT) 300 200 100 0 Possible emission credits under different baselines Source: Bosi (2000)

12. Desirable Features of Baseline Methodologies For example: • Accuracy • Transparency • Conservative • Cost-effective • Consistency • Practical (e.g. based on available data)

13. Baseline Methodology for Grid-Connected Power Generation Projects: Combined Margin Approach • Most grid-connected electricity projects likely to affect both: • Operation of current or future plants, i.e. the operating margin; as well as • The building of new facilities, the build margin • Combined margin (CM) baseline methodology combines the operating and build margins • appropriate where counterfactual scenario assumed to be the ongoing expansion and operation of the grid (as opposed than 1 specific investment) Source: Kartha et al. 2002

14. Calculating the Combined Margin Baseline = Project Output (kWh/yr) X Combined Margin emission factor (kgCO2/kWh) Michael Lazarus’ presentation will provide the details! Combined Margin EF (kg CO2e/kWh) = (Operating Margin EF + Build Margin EF)/2

15. Conclusions • World electricity demand expected to double (now - 2030) • Most of growth to come from developing countries • Electricity-related CO2 emissions in developing countries projected to more than double • Opportunity for CDM to create incentive to reduce CO2 intensity • Power generation project: important part of CDM portfolio • Determining Emission Factor of Baseline: key methodological challenge • Combined Margin is attractive/promising baseline methodology • But devil is in the details

16. Thank You! Martina Bosi (mbosi@worldbank.org) www.carbonfinance.org