Technical ReportPDF Available
Improving Energy Efficiency in Peruvian
Boilers with the CDM
Feasibility study for a bundled CDM Project
Final Report
for Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ)
and the Peruvian Ministry for Production (PRODUCE)
January, 2003
Project lead:
Anke Herold (Öko-Institut)
Lambert Schneider (Öko-Institut)
Natalia Vizcarra
Project team:
Victor Arroyo (CINYDE S.A.C.)
Adler Chumbimuni
Marco Gonzalez (Finanzas Ambientales)
José Salazar (Finanzas Ambientales)
Öko-Institut, Institute for Applied Ecology
Freiburg Darmstadt Berlin
Binzengrün 34a Elisabethenstraße 55-57 Novalisstraße 10
D-79114 Freiburg i.Br. D-64283 Darmstadt D-10115 Berlin
0761-452 95-0 06151-8191-0 030-280 486-80
¬ 0761-47 54 37 ¬ 06151-8191-33 ¬ 030-280 486-88
www.oeko.de
Executive Summary
This study, sponsored by GTZ, assesses the feasibility of a Clean Development Mecha-
nism (CDM) project to improve energy efficiency in industrial boilers in Peru. The idea
of such a CDM project came from activities undertaken within the project “Develop-
ment of the National Capacity for Projects on CDM Activities,” sponsored by the
United Nations Development Programme (UNDP) in 1998. As a first step, in 1999, a
pre-feasibility study was conducted.
Building on these results, this study analyses the specific characteristics and circum-
stances of vapour production in Peru, provides a thorough assessment of the potential,
costs and risks for greenhouse gas mitigation, suggests a CDM baseline methodology
and a monitoring plan, illustrates the necessary institutional framework for the
implementation of the proposed CDM project and analyses how the project contributes
to Peru's sustainable development objectives.
One of the most outstanding characteristics of this project is the bundling of more than
100 small boilers into one CDM project activity. This requires a cautious setting-up of
institutional arrangements and procedures, as well as good project management. The
proposed general institutional framework of the project is illustrated in Figure 1.
Figure 1: Institutional framework for the financing of investments in boilers
Company A
Local bank
Company B
Company C
• Capacity building
• Technical advice
• Monitoring
• Payment of bonus
Negotiation of
(green) credit line
Long-term loans
Low interest rates
Sale of CERs
to the market Project
Managing
Institution
Participation
contracts
Source: Environmental Finances, Öko-Institut
One single institution should have overall responsibility for the project. This project
managing institution (PMI) may be formed as a consortium from existing institutions
in Peru. The project managing institution will manage the project and also assume the
economic opportunities and risks.
A key element of the proposal is a special credit programme administered by a com-
mercial bank. With this special credit programme, access to capital for the participating
companies would be facilitated through relatively low interest rates and lower transac-
tion costs.
The project managing institution will provide technical advice and capacity building to
companies for the improvement of energy efficiency. Participating companies commit
themselves to implement measures to improve energy efficiency or to replace boilers.
Following implementation of the measures, the PMI will be responsible for monitoring
emission reductions and certification through an independent operational entity. In a
participation contract, companies undertake to provide the PMI with necessary informa-
tion. Furthermore, companies assign rights over future certified emission reductions
(CERs) to the PMI. In exchange, the PMI pays a “bonus” to companies if they maintain
a high level of energy efficiency. The payment of this bonus should create an additional
incentive for participation in the CDM programme. The PMI may finance this bonus
with the future sale of CERs.
The proposed institutional framework is expected to help to overcome the significant
economic and non-economic barriers facing small and medium companies in Peru, in
particular with respect to access to capital. This will allow participating companies to
invest in the necessary modernization of boilers, to introduce new technologies, to in-
crease their technical and environmental perception concerning boilers and energy effi-
ciency through capacity building activities, to reduce costs for vapour production and to
increase their competitiveness. Also with regard to other aspects, the project is expected
to contribute positively to Peru’s sustainable development objectives. The proposed
measures would not only reduce CO2 emissions, but also other pollutant emissions that
currently cause serious health problems, destroy historical monuments and severely
damage the economy.
Currently, boilers in Peru are in many cases operated inappropriately. A detailed evalua-
tion of about 80 boilers revealed that average energy efficiency is about 82%, and main-
tenance practices are often poor. In many cases, relatively simple control technology,
such as automatic excess air control systems, is not installed. The average age of boilers
in Peru is 21 years, with individual boilers operating up to 70 years. Generally, there is
an enormous need for modernization. It appears, however, that energy efficiency could
be increased significantly in many boilers through the application of "good housekeep-
ing" measures, the installation of additional equipment or the replacement of burners or
boilers. These measures are in many cases cost-efficient, though they are not imple-
mented due to existing barriers.
Emissions from industrial boilers in Peru are an important source of greenhouse gases
and other important air pollutants. Carbon dioxide emissions from industrial boilers are
estimated to amount to about 4 million tonnes per year, which correspond to about 50%
of emissions in Peru's productive sector of. Sulphur dioxide emissions come mainly
from the combustion of residual oils and, at about 26,000 tonnes per year, are also sig-
nificant.
Potential and costs of GHG emission reductions are estimated with the help of a de-
tailed model, using a combined bottom-up and top-down approach. A representative
sample group of about 40 boilers is selected and several options to increase energy effi-
ciency are assessed for each boiler. For each option, mitigation costs are calculated,
taking into account the future development of energy prices, differentiated capital costs
for differing types of companies as well as specific investment and operation costs.
Emission reductions from good housekeeping activities and investments are assessed
separately, since application of good housekeeping activities are not considered to be
additional.
The calculated results of the sample group are extrapolated to the Peruvian national
level, considering several restricting factors and barriers, such as the size, age and effi-
ciency of the boilers, the willingness of companies to participate in such a CDM project
and the ability of companies to access capital. As a result, an overall marginal GHG
mitigation cost curve of the project is approximated, which allows estimation of the
feasible potential of the project (see Figure 2).
Figure 2: Marginal mitigation cost curve of the CDM boiler project
-60
-40
-20
0
20
40
60
0 40,000 80,000 120,000 160,000 200,000 240,000
Mitigation potential during crediting period (tonnes CO2)
Marginal mitigation costs (US$/tonne CO2)
Source: Calculations by Öko-Institut
The figure shows that GHG mitigation costs of most of the proposed measures to im-
prove energy efficiency are negative, which means that these measures can be imple-
mented without additional economic cost. There are, however, several barriers that hin-
der their actual implementation. The project intends to overcome those barriers by ap-
plying different strategies including technical assistance, capacity building and special
credit lines to facilitate access to capital. In this respect, GHG emission reductions asso-
ciated with investments in the improvement of energy efficiency are assumed to be ad-
ditional. It is also important to mention, that calculations in this study have been made
using conservative underlying assumptions in order not to overestimate emission reduc-
tions.
Assuming a price of about 5 US$ per tonne of carbon dioxide, the economic potential
of the project amounts to about 165,000 tonnes of CO2 during the crediting period of
the project. Another 225,000 tonnes of CO2 can be reduced by implementation of good
housekeeping activities. These estimates include the diffusion of Camisea natural gas in
the Lima region. Table 1 summarizes the main results.
Table 1: Potential of a CDM boiler programme in Peru
Number of participating boilers - 100 - 130
Total capacity of participating boilers MW 1,272
Average annual CO2 mitigation
CDM measures tonnes/a 25,396
Good housekeeping tonnes/a 35,209
Total tonnes/a 60,605
Average annual energy savings
CDM measures GJ/a 335,278
Good housekeeping GJ/a 463,536
Total GJ/a 798,814
CO2 mitigation during crediting period
CDM measures tonnes 170,638
Good housekeeping tonnes 231,566
Total tonnes 402,204
CO2 mitigation during crediting period (with Camisea gas)
CDM measures tonnes 166,188
Good housekeeping tonnes 225,528
Total tonnes 391,716
Source: Own calculations
Even though this potential is clearly smaller than that of huge CDM projects (hydro-
power-plant projects, for example), it seems sufficient to place the project in the future
CDM market. With an assumed price of US$ 5 per tonne of CO2 and excluding good
housekeeping measures, an income of approximately US$ 850,000 could be generated
from project activities. However, the global economic performance of the project can
only be fully assessed after all costs and proceeds have been analysed in a business
plan.
The implementation of the project is associated with uncertainties and certain risks.
The main uncertainty has to do with the transaction costs of the project and the amount
and size of the boilers that would participate in the project. A careful assessment of all
transaction costs, on the basis of this study, will surely be crucial to assess the minimum
required number of companies, and to select those boilers with the highest emission
reduction potential. It is recommended that pre-contracts or letters of intent be con-
cluded with a number of companies already in an early phase of project implementation.
This study also develops a detailed baseline methodology and a monitoring plan. Es-
timation of the baseline level of energy efficiency and monitoring of energy efficiency
improvements are key factors for the environmental integrity of the project. Several
approaches for the determination of the baseline level are analysed, of which the con-
tinuation of the current situation seems most appropriate. Energy efficiency appears to
vary significantly between boilers, independent of size and age. For that reason,
application of a standardized baseline level for all boilers is not possible. It is proposed
to measure energy efficiency for each boiler prior to implementation of improvement
measures. As a consequence, the final baseline emission level will be determined only
after monitoring, when data on the energy efficiency of participating boilers has been
collected.
It is proposed to limit the overall crediting period of the project to ten years. The cred-
iting period of single boilers varies, depending on the type and technical lifetime of
measures applied. In order to avoid implementation of business-as-usual as part of the
CDM project, eligibility criteria for the participation of boilers are elaborated.
Monitoring will be conducted by the project managing institution, or a subcontractor.
As a part of monitoring, data on fuel consumption and energy efficiency needs to be
collected. Information on fuel consumption will be provided by companies and checked
for consistency. After implementation of the improvement measures, energy efficiency
will be measured for each boiler once and in regular intervals thereafter for a sample
group. Correct and accurate measurement of energy efficiency will be crucial for the
whole monitoring process. It appears that there are still some difficulties in accurately
measuring energy efficiency in Peru. Therefore, special attention should be given to the
technical capacity of the institution responsible for monitoring and calculating emission
reductions.
Considering difficulties in the measurement of energy efficiency and the still unknown
magnitude of the transaction costs, a viable option will be to implement the project
without using the CDM. This will considerably facilitate project management and re-
duce transaction costs, in particular those related to monitoring requirements and other
costs inherent to the CDM project cycle. The option of doing without the CDM should
be objectively compared with the CDM option. Related costs and opportunities for each
option should be carefully assessed in the further process.
In summary, project implementation seems feasible, viable and promising, especially
due to the great benefits for small and medium companies and the project’s contribution
to the sustainable development of the country.
This study sets out the proposed steps to assess the final viability of the project and to
get it started:
1. The project managing institution has to be founded, and responsibilities need to
be assigned clearly among the institutions involved.
2. A sound business plan for the project has to be elaborated, including both options,
implementation with and without CDM.
3. Acquisition of companies. Prior to negotiations with donors and banks, it is sug-
gested that promising companies be contacted with a view to signing letters of in-
tent or preliminary contracts.
4. Negotiations with donors, banks and purchasers of CERs on the establishment of a
special credit line with favourable interest rates and facilitated access to capital.
Finally, after completion of previously mentioned steps and a positive evaluation of the
opportunities as a CDM project, the necessary steps for the approval of the CDM pro-
ject by the Executive Board can be undertaken.
GTZ / PRODUCE / Öko-Institut Improving Energy Efficiency in Peruvian Boilers with the CDM
Content
1 INTRODUCTION........................................................................................13
2 CLIMATE CHANGE AND CLEAN DEVELOPMENT MECHANISM..........17
3 INSTITUTIONAL AND FINANCIAL CONCEPT.........................................23
4 NATIONAL CONDITIONS FOR ENERGY EFFICIENCY
IMPROVEMENTS IN INDUSTRIAL BOILERS ..........................................33
5 CHARACTERISTICS OF INDUSTRIAL BOILERS IN PERU ....................53
6 EVALUATION OF TECHNOLOGICAL OPTIONS FOR THE
MITIGATION OF CO2................................................................................71
7 EMISSION SOURCES AND CDM PROJECT BOUNDARY......................81
8 CURRENT EMISSIONS OF INDUSTRIAL BOILERS IN PERU................87
9 BASELINE METHODOLOGY..................................................................105
10 MONITORING PLAN ...............................................................................129
11 POTENTIAL AND ABATEMENT COSTS OF THE CDM PROJECT ......149
12 EVALUATION AND RISK MANAGEMENT.............................................165
13 PROJECT CONTRIBUTION TO SUSTAINABLE DEVELOPMENT .......173
14 CONCLUSIONS.......................................................................................179
REFERENCES................................................................................................183
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Table of Contents
1 INTRODUCTION...................................................................................... 13
2 CLIMATE CHANGE AND CLEAN DEVELOPMENT MECHANISM........ 17
2.1 Climate change.........................................................................................17
2.2 International negotiations on climate change and CDM .....................17
2.3 CDM Modalities and Procedures...........................................................18
2.3.1 Role of the Conference of Parties serving as the meeting of the Parties to
the Kyoto Protocol (COP/MOP) ...............................................................18
2.3.2 The Executive Board.................................................................................19
2.3.3 The CDM project cycle .............................................................................19
2.4 The Peruvian approval procedure ......................................................... 21
3 INSTITUTIONAL AND FINANCIAL CONCEPT....................................... 23
3.1 General institutional framework............................................................23
3.2 Project managing institution (PMI)....................................................... 25
3.3 Identification of tasks and responsibilities............................................25
3.4 Credit programme design.......................................................................31
4 NATIONAL CONDITIONS FOR ENERGY EFFICIENCY IMPROVEMENTS
IN INDUSTRIAL BOILERS ...................................................................... 33
4.1 Reform projects in the energy sector..................................................... 33
4.1.1 Policy regarding fossil fuel taxation..........................................................33
4.1.2 Privatization process..................................................................................34
4.1.3 Energy efficiency.......................................................................................35
4.1.4 Promotion of renewable energy.................................................................35
4.2 Adopted and planned legislation............................................................35
4.2.1 Efficient energy use...................................................................................35
4.2.2 Air pollution ..............................................................................................36
4.3 The Camisea Gas Project........................................................................ 37
4.3.1 Background of the Project.........................................................................37
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4.3.2 Gas Exploitation ........................................................................................38
4.3.3 Hydrocarbon transportation....................................................................... 38
4.3.4 Current project progress ............................................................................39
4.3.5 The gas market ..........................................................................................40
4.3.6 Impact of Camisea gas on the industrial boiler sectors.............................42
4.3.7 Barriers to the introduction of natural gas.................................................43
4.3.8 Installation cost of natural gas in the residential, commercial and industrial
markets ......................................................................................................45
4.4 Financial situation in the country ..........................................................46
4.5 Current economic situation of relevant sectors with boilers...............46
4.5.1 Fishing industry.........................................................................................46
4.5.2 Textile Industry .........................................................................................46
4.5.3 Beer subsector ...........................................................................................47
4.6 Financial barriers to innovation in Peruvian industry ........................47
4.7 Climate......................................................................................................50
5 CHARACTERISTICS OF INDUSTRIAL BOILERS IN PERU .................. 53
5.1 Introduction .............................................................................................53
5.2 Technology ...............................................................................................54
5.2.1 Power.........................................................................................................54
5.2.2 Burner ........................................................................................................ 55
5.2.3 Controls .....................................................................................................55
5.2.4 Fuel ............................................................................................................ 56
5.2.5 Instruments ................................................................................................56
5.2.6 Blowdowns ................................................................................................ 57
5.2.7 Thermal insulation.....................................................................................57
5.2.8 Age ............................................................................................................57
5.2.9 Brands........................................................................................................58
5.3 Boiler operation ....................................................................................... 58
5.3.1 Operation ...................................................................................................59
5.3.2 Fuel consumption ......................................................................................60
5.3.3 Vapour generation .....................................................................................60
5.3.4 Load factor.................................................................................................60
5.3.5 Sectors .......................................................................................................61
5.3.6 Location.....................................................................................................61
5.3.7 Maintenance ..............................................................................................61
5.3.8 Shutdown and start-up times .....................................................................64
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5.4 Energy efficiency .....................................................................................65
5.4.1 Methodology for the determination of energy efficiency..........................65
5.4.2 Energy efficiency in Peruvian boilers .......................................................67
5.5 Auxiliary services.....................................................................................69
5.5.1 Water treatment .........................................................................................69
5.5.2 Fuel preparation.........................................................................................70
5.6 Vapour distribution and condensate return .........................................70
6 EVALUATION OF TECHNOLOGICAL OPTIONS FOR THE MITIGATION
OF CO2.................................................................................................... 71
6.1 Boiler replacement...................................................................................71
6.2 Options to improve energy efficiency ....................................................72
6.2.1 “Housekeeping” measures.........................................................................72
6.2.2 Investment measures to improve energy efficiency..................................74
7 EMISSION SOURCES AND CDM PROJECT BOUNDARY.................... 81
7.1 Principles for determining the project boundary................................. 81
7.2 Emission sources......................................................................................81
7.3 Direct on-site emissions...........................................................................83
7.4 Direct off-site emissions ..........................................................................83
7.4.1 Emissions in the fuel supply chain............................................................83
7.4.2 Electrical generation..................................................................................84
7.5 Conclusion ................................................................................................ 85
8 CURRENT EMISSIONS OF INDUSTRIAL BOILERS IN PERU .............. 87
8.1 Characteristics of combustion in boilers ............................................... 87
8.2 Methodology............................................................................................. 87
8.2.1 CO2 Emissions...........................................................................................87
8.2.2 SO2, NOX and CO Emissions ....................................................................88
8.3 Fuel consumption in Peru ....................................................................... 89
8.3.1 Peruvian fuel consumption........................................................................89
8.3.2 Peruvian industry fuel consumption.......................................................... 89
8.3.3 Fuel oil demand and GDP .........................................................................90
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8.3.4 Fuel demand trends....................................................................................90
8.4 Fuel consumption of industrial boilers in Peru ....................................92
8.4.1 Results of the National Boiler Survey.......................................................92
8.4.2 Projection of fuel consumption and number of boilers .............................93
8.5 Emission factors.......................................................................................99
8.5.1 Carbon dioxide emission factors .............................................................101
8.5.2 Carbon monoxide emission factors .........................................................102
8.5.3 Sulphur dioxide emission factors ............................................................103
8.5.4 Nitrogen oxides emission factors ............................................................103
8.6 Emission estimates................................................................................. 104
9 BASELINE METHODOLOGY................................................................ 105
9.1 General approach ..................................................................................105
9.2 Disaggregation of baseline into activity level and emission factor....105
9.2.1 Activity level ...........................................................................................106
9.2.2 Emission factor........................................................................................107
9.3 A dynamic baseline approach...............................................................109
9.4 Bundling many boilers into one CDM project....................................110
9.5 Baseline aggregation level.....................................................................111
9.6 Methodological Approaches in the Marrakech Accord..................... 112
9.7 Options for baseline energy efficiency.................................................113
9.7.1 Option 1: actual energy efficiency ..........................................................113
9.7.2 Option 2: Decreasing energy efficiency..................................................114
9.7.3 Option 3: Energy efficiency of a reference technology...........................115
9.7.4 Selection of baseline approach................................................................116
9.8 Impact of the Camisea gas project on baseline and project emissions
.................................................................................................................117
9.9 Additionality ..........................................................................................118
9.9.1 Treatment of good housekeeping activities............................................. 119
9.9.2 Windfall effects in bundled projects........................................................120
9.9.3 Eligibility criteria for participation..........................................................121
9.10 Crediting period.....................................................................................122
9.10.1 Classification of energy efficiency improvement measures....................122
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9.10.2 Rules for the determination of boiler-specific crediting periods.............124
9.10.3 Overall project crediting period ..............................................................126
9.11 Leakage effects.......................................................................................127
10 MONITORING PLAN ............................................................................. 129
10.1 Multi-project monitoring and verification..........................................129
10.2 Methodological Approach.....................................................................131
10.3 Energy Efficiency...................................................................................132
10.3.1 Technical standards .................................................................................132
10.3.2 Energy balance method and input-output method...................................133
10.3.3 Influence of load factor and maintenance activities on energy efficiency136
10.3.4 Two-track approach in the case of Peruvian boilers ...............................137
10.3.5 Special case: Monitoring of energy efficiency enhancement from measures
related to boiler blowdown and boiler insulation....................................138
10.3.6 Uncertainty in the determination of energy efficiency............................139
10.4 Fuel consumption...................................................................................140
10.5 Fuel type ................................................................................................. 141
10.6 Execution of measurements .................................................................. 141
10.7 Calculation of emission reductions ......................................................143
10.7.1 Project emissions.....................................................................................143
10.7.2 Baseline emissions...................................................................................143
10.7.3 Emission reductions.................................................................................144
10.8 Quality assurance and quality control procedures.............................145
10.8.1 Energy efficiency.....................................................................................145
10.8.2 Fuel consumption and fuel type ..............................................................145
10.9 Leakage effects.......................................................................................146
10.10 Overview of the process of boiler baseline determination, monitoring
and certification .................................................................................... 146
11 POTENTIAL AND ABATEMENT COSTS OF THE CDM PROJECT .... 149
11.1 Methodological approach .....................................................................149
11.1.1 Assessment of energy efficiency improvement options..........................149
11.1.2 Calculation of marginal CO2 mitigation costs.........................................150
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11.2 Key economic factors of influence........................................................151
11.2.1 Fuel prices ...............................................................................................151
11.2.2 Capital costs.............................................................................................153
11.2.3