ESMAP Technical Paper 120/07 December 2007 47734 Scaling Up Demand­Side Energy Efficiency Improvements through Programmatic CDM Energy Sector Management Assistance Program Carbon Finance Unit World Bank Energy Sector Management Assistance Program (ESMAP) Purpose The Energy Sector Management Assistance Program (ESMAP) is a global technical assistance partner- ship administered by the World Bank since 1983 and sponsored by bilateral donors. ESMAP's mission is to promote the role of energy in poverty reduction and economic growth in an environmentally respon- sible manner. Its work applies to low-income, emerging, and transition economies and contributes to the achievement of internationally agreed development goals through knowledge products such as free tech- nical assistance; specific studies; advisory services; pilot projects; knowledge generation and dissemi- nation; training, workshops, and seminars; conferences and round-tables; and publications. The Program focuses on four key thematic areas: energy security, renewable energy, energy poverty, and market efficiency and governance. Governance and Operations ESMAP is governed by a Consultative Group (CG) composed of representatives of the World Bank, other donors, and development experts from regions that benefit from ESMAP assistance. The ESMAP CG is chaired by a World Bank Vice-President and advised by a Technical Advisory Group of independ- ent energy experts that reviews the Program's strategic agenda, work plan, and achievements. ESMAP relies on a cadre of engineers, energy planners, and economists from the World Bank, and from the energy and development community at large, to conduct its activities. Funding ESMAP is a knowledge partnership supported by the World Bank and official donors from Belgium, Canada, Denmark, Finland, France, Germany, Iceland, the Netherlands, Norway, Sweden, Switzerland, United Kingdom, United Nations Foundation, and the United States Department of State. It has also enjoyed the support of private donors as well as in-kind support from a number of partners in the energy and development community. Further Information Please visit www.esmap.org or contact ESMAP via email (esmap@worldbank.org) or mail at: ESMAP c/o Energy, Transport and Water Department The World Bank Group 1818 H Street, NW Washington, DC 20433, USA Tel.: 202.458.2321 Fax: 202.522.3018 ESMAP Technical Paper 120/07 Scaling Up Demand­Side Energy Efficiency Improvements through Programmatic CDM Christiana Figueres Michael Philips Energy Sector Management Assistance Program and The World Bank Carbon Finance Unit Copyright © 2007 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, NW Washington, DC 20433, USA All rights reserved First printing December 2007 ESMAP Reports are published to communicate the results of ESMAP's work to the development commu- nity with the least possible delay. The typescript of the paper therefore has not been prepared in accor- dance with the procedures appropriate to formal documents. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and should not be attributed in any manner to the World Bank or its affiliated organizations, or to mem- bers of its Board of Executive Directors or the countries they represent. The World Bank does not guar- antee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The Boundaries, colors, denominations, other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the ESMAP Manager at the address shown in the copyright notice above. ESMAP and the World Bank Carbon Finance Unit encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. (Papers in the ESMAP Technical Series are discussion documents, not final project reports. They are subject to the same copyright as other ESMAP publications.) Contents Acknowledgments v Abbreviations vii Executive Summary ix 1. Introduction 1 2. "Programs of Activities" under the CDM 7 3. Types of Energy Efficiency Measures and the CDM 15 A. Best Practice Programs in Energy Efficiency 15 B. Types of EE Programs 16 C. Traceability of Energy Efficiency 20 4. Integrating EE Practices and CDM Procedures 27 A. Baseline 27 B. Estimation of Emission Reductions 28 C. Monitoring 29 D. Verification 30 E. Additionality 31 5. Illustrative Case: Uruguay Energy Efficiency Project 35 6. Conclusions and Recommendations 41 Annex 1: Barriers to EE 47 Annex 2: CDM Project Cycle 51 Annex 3: Demand-Side EE Methodologies 53 Annex 4: Approved CDM Methodologies that Use Sampling Procedures 55 References 57 List of Technical Papers 59 iii Table Table 1: 2012 CERs by Project Type (July 2007) 4 Figures Figure 1: Potential GHG Emission Reduction by Technology Areas - Scenario through 2050 1 Figure 2: GHG Mitigation Measures ­ 2030 2 Figure 3: Projected Percentage of 2012 CERs by Project Type (July 2007) 3 Figure 4: Number (%) of Projects by Sector (July 2007) 3 Figure 5: The Long Tail of GHG Reductions 8 Figure 6: Degree of Traceability of Emission Reductions 20 Boxes Box 1: Determination of the CDM Program Activity (CPA) 11 Box 2: The Split Incentive Barrier 33 iv Acknowledgments This Issue Paper has been prepared with support from the World Bank's Sustainable Development Network 2006­2007 Integration "Challenge Fund Initiative," and co-funded by ESMAP and the Carbon Finance Unit, under a joint "ESMAP ­ Carbon Finance" Activity P105185, by a task team led by co-Task Team Leaders Ashok Sarkar (ETWES) and Martina Bosi (ENVCF), and authored by consult- ants Christiana Figueres1 and Michael Philips. The authors are grateful for the valuable inputs received from Varadarajan Atur, Martina Bosi, Richard Hosier, Jeremy Levin, Klaus Oppermann (kfW Carbon Fund), Ashok Sarkar, Govinda Timilsina, Chris Warner, and Zhihong Zhang of the World Bank. The initial draft also benefited from comments received from participants during a workshop held in the World Bank in August 2007. The paper was inspired by the recent UNEP RISOE publication, Potentials and Barriers for End-Use Energy Efficiency Under Programmatic CDM. Please address questions or comments to Martina Bosi (mbosi@worldbank.org) and Ashok Sarkar (asarkar@worldbank.org). 1Christiana Figueres is a member of the CDM Executive Board. The views expressed in this paper are her own and not the position of the Executive Board. v Abbreviations ACEEE American Council for an Energy-Efficient Economy AM Approved Methodology AMS Approved Small-Scale Methodology CDM Clean Development Mechanism CER Certified Emission Reduction CFL Compact Fluorescent Lamp CO2 Carbon dioxide COP Conference of the Parties (to the UNFCCC) COP/MOP Conference of the Parties serving as the Meeting of the Parties to the Kyoto Protocol CPA CDM Program Activity CPA-DD CPA Design Document DOE Designated Operational Entity DSM Demand-Side Management EB Executive Board (of the Clean Development Mechanism) EE Energy Efficiency ER Emission Reduction ESCO Energy Service Company GEF Global Environment Facility GHG Greenhouse Gas GWh Gigawatt Hour IEA International Energy Agency IFC International Finance Corporation IPCC Intergovernmental Panel on Climate Change IPMVP International Protocol for Measurement and Verification Procedures vii SCALING UP DEMAND­SIDE ENERGY EFFICIENCY IMPROVEMENTS THROUGH PROGRAMMATIC CDM LoA Letter of Approval Mt CO2e Million Tonnes of Carbon Dioxide Equivalent MP Methodology Panel (of the CDM Executive Board) M&V Monitoring and Verification pCDM Programmatic CDM PoA Program of Activities PoA-DD PoA Design Document SSC Small-Scale CDM Project UNFCCC United Nations Framework Convention on Climate Change WB World Bank viii Executive Summary Improving energy efficiency (EE) is one of the most promising approaches for achieving cost-effective global greenhouse gases (GHG) reductions. However, it is severely underrepresented in the Clean Development Mechanism (CDM) portfolio. Just 10 percent of the emission reduction credits traded in the carbon market are from EE projects. In particular, small, dispersed, end-use EE measures--which entail significant GHG mitigation potential, along with other clear, local, and direct sustainable devel- opment benefits--have been largely bypassed by the carbon market. Under the World Bank's Sustainable Development Network Integration "Challenge Fund Initiative," a joint "ESMAP - Carbon Finance Unit" team examined the synergies and possibilities of scaling up implementation of dispersed, demand-side EE efforts using the emerging programmatic CDM (pCDM) concept. This paper focuses on the key recommendations of this analysis, the potential scaling-up opportunities, and underlying operational synergies between EE programs in developing countries and pCDM. The modalities of traditional CDM have been set for individual, stand-alone, emission reduction proj- ects that are implemented at a single point in time (e.g., one renewable energy power plant). While CDM rules allow "bundling" of several of these projects together for registration purposes, the specif- ic sites where they will occur must be known ex-ante and they must all occur at the same point in time. These conditions generally cannot be met by most dispersed demand-side EE programs, whose emis- sion reductions occur over a period of time and in numerous locations (households/industries/cities). In addition, participants in energy-efficiency programs may not be known at the outset because the pro- gram may depend on gradual take-up of incentives. The December 2005 COP/MOP decision to include "programs of activities" (PoAs) in the CDM opens the door to scaling up implementation of dispersed end-use EE activities. A PoA is a program coordi- nated by a private or public entity that provides the organizational, financial, and methodological framework for emission reductions to occur. The program itself does not achieve the reductions, but rather provides the enabling environment for others to do so. The specific measures through which the emission reductions are achieved are "CDM program activities" (CPAs). These must all apply the same ix SCALING UP DEMAND­SIDE ENERGY EFFICIENCY IMPROVEMENTS THROUGH PROGRAMMATIC CDM methodology, be implemented in the same type of facility or structure, and be coordinated by the same managing entity. However, they can occur in an unlimited number of places and can be implemented over time up to 28 years. Many observers have been concerned that the CDM Executive Board has approved few EE method- ologies. While the pCDM approach opens the CDM door more widely to energy efficiency, it is like- ly that not all EE programs, or at least not all aspects of EE programs, will be deemed eligible for the CDM in the short term. In the CDM, project activities have to be "traceable." That is, the resulting emis- sion reductions must be the directly attributable to the project, and measurement of emission reductions must be robust and unambiguous. Our analysis shows that EE programs that can be shown to directly replace inefficient technologies, or provide financing/financial incentives to do so, are more likely to qualify for the CDM. Policy-based EE programs (e.g., raising energy prices or reducing import taxes on energy-efficient equipment) are important for the increased uptake of EE equipment and activities, but may have more difficulty demonstrating direct causality--which is a key CDM criterion. Our analysis also found that application of many dispersed end-use EE efforts as PoA need not wait for the development of specific CDM baseline and monitoring methodologies. There are three already approved simplified EE methodologies for small-scale CDM (SSC) projects, and these have been mod- ified to account for leakage and are authorized to be used in the context of PoAs. Because the small- scale methodologies must be applied at the CDM Program Activity (CPA) level, the overall program savings level can exceed the small-scale threshold (maximum savings of 60GWh per year) as long as each CPA does not exceed the threshold. In order to highlight the issues raised in this paper, a Global Environment Facility (GEF) energy- efficiency project in Uruguay2 has been selected as an illustrative case study, and is presented in this paper. 2Uruguay Energy Efficiency Project, Project Appraisal Document No 28525-04. x 1. Introduction Energy efficiency (EE) is widely recognized as one of the lowest-cost "sources" of energy. It is often more cost-effective to invest in energy-efficiency improvements, particularly on the end-use or demand side, than to increase energy supply to meet the growing demand for energy services. In addition to making energy more affordable, energy efficiency contributes to energy security, economic growth, and environmental sustainability through local emissions reductions and mitigation of global green- house gases (GHGs). The projected potential of EE measures for mitigation of GHG over the next several decades is the high- est among the other available options, as estimated by the climate change scientific community and ener- gy sector practitioners. Energy efficiency could potentially account for more than half of the energy-relat- ed emission abatement potential achievable within the next 20­40 years, as identified by the International Energy Agency (IEA) World Energy Outlook (2006), the Fourth Assessment of the Intergovernmental Panel on Climate Change (2007), and the McKinsey Cost Curve (2007). Figure 1. Potential GHG Emission Reduction by Technology Areas - Scenario through 2050 Coal to gas Nuclear Fossil fuel generation Power efficiency generation End-use CCS efficiency Hydropower Biomass CCS in fuel transformation Other renewables CCS in industry Biofuels in transport Fuel mix in buildings and industry Source: IEA Energy Technology Perspectives 2006. 1 SCALING UP DEMAND­SIDE ENERGY EFFICIENCY IMPROVEMENTS THROUGH PROGRAMMATIC CDM Improved end-use (demand side) EE is the most important contributor to potential reduced emissions Figure 2: GHG Mitigation Measures ­ 2030 GtCO2-eq/yr 7 6 5 4 3 Non-OECD/ 2 EIT 1 EIT OECD 0 World total 0 0 <20 <50 <100 <20 <50 <100 <20 <50 <100 <20 0 <50 <10 <20 <50 <10 <20 <50 <10 <20 <50 <100US$/tCO2-eq Energy supply Transport Buildings Industry Agriculture Forestry Waste (potential at (potential at (potential at (potential at (potential at (potential at (potential at