At the end of March this year, the international-hydropower-association issued a Policy Statement on hydropower and the Clean Development Mechanism (CDM). The statement was designed to explain the workings of the CDM and detail the role of hydro power projects within it. An initiative of the iha’s Markets and Investment Working Group, the Policy Statement was produced after it was considered there was a need to let the general membership know more about carbon markets. The Association has been monitoring the CDM market over the past few years and, following events during and after the UN Climate Change Conference held in Copenhagen in December last year, and the intense scrutiny Chinese CDM hydro projects have recently received, it was felt the time was now right to disseminate information on hydro’s role and positioning in the CDM.

The Policy Statement has five key messages which are highlighted below:

1. The CDM remains the main international mechanism currently in place to directly mobilise private sector capital for clean development worldwide;

2. The CDM also remains an important way for Developing Countries to avoid or mitigate greenhouse gases through an international mechanism;

3. Hydropower is the CDM’s leading deployed renewable energy: this is likely to continue. In addition, the sustainability of hydropower has been defined and measuring tools exist to indicate performance – this brings greater confidence to all parties involved;

4. There are disincentives to hydropower reservoir projects in current CDM rules, which mean significant missed opportunities for increased climate change mitigation and adaptation – these should be addressed in future CDM reform;

5. The world’s hydropower sector calls upon governments to elevate the future of the CDM post-2012 on their agendas for Mexico (2010) and South Africa (2011), and strongly supports the current CDM reform being implemented by the CDM Executive Board, as a step in the right direction.

What is the CDM?

Before looking at hydropower’s role in the CDM, it is useful to take a look at the history and development of the credit scheme. The CDM is one of the three flexible mechanisms of the Kyoto Protocol being the first global, environmental investment and credit scheme of its kind. It allows entities based in developed countries to develop emission-reducing projects in developing countries, and generate tradeable carbon credits corresponding to the volume of carbon emission reductions achieved by those projects. These credits can be counted towards meeting Kyoto targets in developed countries. The tradable credits are known as Certified Emission Reductions (CERs) with one CER equivalent to one metric tonne of carbon dioxide avoided or reduced.

CDM projects cover a wide array of sectors and technologies involving energy consumption or generation, ranging from the installation of renewable energy generation plants to landfill methane capture, and from animal waste management to fossil fuel switching. The first CDM project – a landfill methane reduction project in Rio de Janeiro, Brazil – was registered on 18 November 2004. Since then, more than 2200 CDM projects have been registered worldwide, reducing more than 336M tonnes of CO2 per year.

The mechanism has successfully enabled developed countries to offset their GHG emissions, alongside domestic reduction and avoidance, while enabling cleaner development in developing countries.

The role of hydropower

Out of the total 2201 projects registered (as of 10 May), over 550 are hydro, meaning it is the CDM’s leading deployed renewable energy technology. This is likely to continue in the short, medium and long term, says IHA, mainly due to the fact that:

• There is significant remaining hydro potential worldwide, particularly in developing countries;

• Hydropower technology is in an advanced state of development, leading to greater investor confidence;

• The industry has significant economies of scale; and

• Hydro projects tend to have a high energy density, therefore it can off-set higher amounts of CO2 per unit of cost. “Hydropower’s prominent position is due to the comparatively favourable low-carbon characteristics of the technology, but the multiple benefits that it provides aside from just climate change mitigation are also becoming increasingly important” said Richard Taylor, IHA Executive Director. “For example, hydropower’s energy storage and operational flexibility means it’s enabling the greater use of other renewable energy technologies, enhancing mitigation efforts. Also, in the near term, hydropower’s water management capabilities will become even more valuable in the context of climate change adaptation.”

CDM hydropower projects that gain registration have to demonstrate a high level of sustainability. Registered hydropower CDM projects comply with the sustainability laws and regulations of the project-host countries they take place in. In addition, a significant proportion of registered hydropower CDM projects also voluntarily impose upon themselves international sustainability assessment frameworks such as IHA’s Sustainability Assessment Protocol (2006).

The EU Emissions Trading System (ETS) is presently the largest emissions trading scheme in the world. Hydropower CDM projects over 20MW that wish their CERS to participate in the EU ETS must comply with the EU Harmonised Guidelines and Template for Hydropower CDM projects (2009), a regional sustainability assessment framework. Indeed, leading CDM project developers and auditors utilise IHA and EU sustainability assessment frameworks as standard practice.

With the cross sectoral review of IHA’s Sustainability Assessment Protocol (2006), being conducted by the Hydropower Sustainability Assessment Forum, likely to produce a revised Sustainability Assessment Protocol in late 2010, the already high sustainability performance of hydropower CDM projects that gain registration will continue to improve.

All of these sustainability efforts reflect the substantial progress, over the past two decades, that hydropower has made in striking the balance between environmental, social and economic parameters.

Status of hydro in the CDM

Due to uncertainty regarding the net greenhouse (GHG) emissions status of reservoirs, ‘power density criteria’ have been applied to hydropower projects. The effect of this is that reservoir hydropower projects of more than 15MW, subject to a few limited exceptions, may not participate in the CDM.

More than minor GHG emissions from reservoirs have been detected at a few reservoir sites. However, the actual net GHG emissions of most of the world’s reservoirs are likely to be low, especially when compared against other energy technologies.

IHA and the international-hydrological-programme (ihp) of UNESCO commenced an international research effort on the GHG emissions status of reservoirs, in 2008.

As a result of this research reservoir hydropower projects could be admitted to the CDM in the near future, as definitive information becomes available on their net GHG emissions. Until this occurs, IHA says that significant opportunities are being missed, which include:

• Further CO2 avoidance and reduction;

• Tapping into the unique ‘energy-side’ characteristics of reservoir hydropower, known in energy policy as ‘ancillary services’, which provide support to other variable and base-load low-carbon power generating technologies; and

• Tapping into the unique ‘water-side’ characteristics of hydropower, known in climate change policy as ‘co-benefits’ which increase hydropower’s role in climate change adaptation at the intersection of water and energy.

Regions represented

Currently, the Asia Pacific (78%) and Latin America (18%) regions lead in hydropower CDM deployment. Only eight countries (Bhutan, Cambodia, Lao PDR, Madagascar, Mali, Nepal, Tanzania, and Uganda) among those categorised as Least Developed Countries (LDCs) by the UN have so far initiated a hydro CDM process – consisting of only 13 hydro projects, less than 0.9% of the total hydro projects in the CDM pipeline. Among those projects, only three are registered, representing 0.4% of that total. Those projects are:

• (i) E7 Bhutan 70kW micro hydropower project in Bhutan;

• (ii) Dagachhu 114MW hydropower project in Bhutan; and

• (iii) West Nile Electrification Project (WNEP) in Uganda.

Interestingly, the Dagachhu 114MW hydropower project – developed to enable Bhutan to export clean energy to India – has been registered as the first ever cross-border initiative under the CDM.

Part of the Asian Development Bank’s (ADB) Green Power Development Project for Bhutan, Dagachhu is expected to reduce CO2 emissions by about 500,000 tonnes per year, especially through exports to India, which relies heavily on coal-fired power plants for electricity generation. The project will help mitigate carbon emissions in India while generating additional revenue from CDM to make the project viable in Bhutan.

A further notable feature of the Dagachhu project is participation by multiple Bhutanese and international stakeholders, marking it as the first public-private partnership in infrastructure investment in Bhutan. The special company established to manage the project is led by Bhutan’s state-owned utility, Druk Green Power Corporation (DGPC) and India’s leading energy company, Tata Power Company.

The total cost of the project is around $200M. ADB has committed an $80M loan to the project, of which $51M from ADB’s Ordinary Capital Resources is financed for debt while the balance of $29M is used for DGPC’s equity. Co-financing is being provided by the National Pension and Provident Fund of Bhutan and the Raiffeisen Zentralbank Österreich AG (RZB) of Austria through export credit of Österreichische Kontrollbank AG (OeKB).

The Austrian government, through the Austrian Development Agency, has provided engineering support toward the project while ADB is providing assistance with overall capacity development to help strengthen policy and institutions of the Bhutan power sector.

“This project will deliver economic and social benefits on wider fronts. The project’s royalties will contribute to low-cost electricity supply to rural domestic customers in Bhutan and at the same time provide the government of Bhutan with a long-term revenue stream to support its development programs for poverty alleviation,” said Kaoru Ogino, Senior Energy Specialist of ADB’s South Asia Department.

The project structuring was promoted with support from the Japan Special Fund, established by the government of Japan and administered by ADB. It has also received assistance from ADB’s Technical Support Facility under its Carbon Market Initiative during the process of the CDM registration.

Developing potential

There are undoubtedly many more projects like Bhutan’s Dagachhu that would benefit from the CDM. However, LDCs with hydro potential need extra help to access and better use carbon finance to catalyse their development. These challenges are being highlighted in the work of IHA’s Markets and Investment Working Group, but, as IHA points out – at the moment the CDM remains the main global, environmental investment and credit scheme currently in place to directly mobilise private sector capital for clean development. For this reason, the Association has called on the world’s governments to raise the importance of the CDM in their agendas. It is concerned that with no legally binding international treaty arising from Copenhagen (2009), the long-term future of the CDM is uncertain.

For further details please contact: Lau Saili, Policy Analyst, IHA. Email: