Climate Change

Guidelines and Sample Incremental Cost Analysis

The GEF supports the "full incremental costs" that are agreed to be required to equalize the costs of a project having global environmental benefits with those of a project designed to achieve the same developmental benefits but without the global environmental benefits. They are not to be equilibrated with the costs required to achieve benefits linked to economic developmental or local environmental benefits. The bulk of the incremental costs will be those that pertain to removing the barriers that prevent the renewable energy initiatives from being implemented on their own, due to purely market forces. Hence, most of the projects justify the request for GEF resources on the basis of the need to remove barriers to make the market for that globally-beneficial technology or practice both sustainable and replicable.

With the broad development goals of the project - and its global environmental objective - as a basis, an incremental cost (IC) analysis can be made by examining the expected project outcomes. The analysis refers to a baseline scenario (business-as-usual) and a GEF project alternative. Based on these two scenarios the GEF increment is then calculated. Other aspects such as system boundaries, additional benefits, and global benefits (such as CO 2 reductions) should also be discussed in the context of the IC analysis. GEF Methodology on CO 2 Reduction Calculations, available at http://gef.undp.org/index.pl/climate_change_key_documents

The following example provides an overview of how an IC analysis can look like:

Development objective:

The development objective is exploitation of indigenously available renewable energy resources integrated with environmentally sustainable development and poverty reduction in rural areas. Under the GEF-supported alternative scenario, the value added resulting from a productive use of energy (PURE) program will contribute to sustainable development in rural areas, seeking to bring employment and other economic as well as social benefits to the rural population. The project will seek increased local benefits through two separate energy-related approaches:

Shared benefits of locally produced and nationally sold (grid connected) renewable energy. For the private sector, first estimates indicate an internal rate of return close to 12% of implemented grid-connected small hydro projects;
Extension of the local production chain of processed export products/commodities, including organic coffee, cardamom and timber products, which are processed locally through drying, dehydrating, sawing and packing, using renewable energy as process input, with consequential added value to the local economy. T he sustainable use of locally available water and energy resources for processing creates value added to local products and has the potential to provide communities with better sources of income and higher living standards.

Global environment objective:

The global environment objective is to reduce greenhouse gas emissions generated by thermal power generation in the national grid system and by diesel-based generators and village min-grids in isolated areas. The goal of the PURE initiative is to install and operate up to X MW of grid-connected RET (small hydropower) and X MW of off-grid RET applications (mini/micro hydropower, solar thermal and solar PV) during the project lifetime, thus reducing X tons of CO 2 . This is expected to stimulate the development of at least X MW of grid connected and X MW of off grid RETs over the next 10 years, thus reducing an additional X million tons of CO 2 .

Baseline:

In the baseline scenario, the renewable energy potential in rural XX will continue to be underdeveloped, with substantial implications for local communities, the national government, and the global environment. Grid extension will continue to be the standard electrification approach of the government, at a large taxpayer cost and low coverage at the rural level. Development in off-grid and renewable energy in rural areas will remain very limited. Therefore, in the baseline scenario, the energy situation in rural XX will continue to be characterized by:

Rural development programs and rural electrification programmes will continue to be developed and implemented independently. This will prevent the integration of energy issues into productive development activities, thus passing up on a substantial market niche for renewable energy.
Local communities will have no access to financial resources to develop their locally available renewable energy (RE) sources. Potential added-value activities stemming from access to energy will not be examined or fully understood, thus limiting the return on investment in renewable energy. In this way, the inadequate access to affordable modern energy supply will continue to constrain productivity and hinder the improvement of living conditions.
Families will remain dependent on the use of inefficient technology (such as candles and batteries for lighting) as energy sources in rural communities or adopt fossil fuel based technologies (such as diesel generators).
Few government resources will be directed to RE investment, and the majority of available resources will be dedicated to grid extension. Private investment in renewable energy will not occur because (a) isolated RE systems are not perceived as an attractive investment, and (b) the regulatory and institutional arrangements allowing grid connected RE to be distributed are not in place.
The focus on grid coverage extension and diesel generators for off-grid electrification will delay investment in other forms of energy production, thus contribute to increasing greenhouse gas emissions from the energy sector.

GEF Project Alternative:

The fundamental concept is to promote renewable energy in communities where the value of local goods will be enhanced through productive uses. The project will link local producers with national and global markets. This will secure additional income, thus alleviating poverty in these areas and providing financial resources to ensure the sustainability of the renewable energy initiatives. This is an innovative approach compared to the more traditional one where the main focus was on meeting basic energy needs. Energy becomes a fundamental input of an operational framework that catalyzes an added-value productive chain.

Existing barriers for the dissemination of productive uses (PURE ) of energy generated by renewable energy technologies (RET) will be addressed by fostering a multi-stakeholder dialogue that steers inter-institutional cooperation to respond to demand-driven community needs for PURE . The executing agency will catalyze and coordinate agreements to materialize commitments to income generation activities that mitigate GHG emissions through renewable energy technologies. Also, the project will provide a set of tools for decision making, planning, implementation, and monitoring, to promote the sustainability of innovative options for natural resources management through targeted capacity building and stakeholder strengthening.

The project's strategy therefore integrates various dimensions: (i) mitigation of GHG emissions through promotion of renewable energy technologies (RET) that are linked to (ii) income generation and productivity enhancement through productive uses of energy, being made sustainable through the incorporation of (iii) adaptation to climate change considerations that consider vulnerability and natural resource management practices that are relevant to sustainable livelihoods at the community level, and (iv) by providing the necessary support to relevant policy making and regulations and to a national and local multi-stakeholder dialogue and long-term collaboration, that are required for successful replication of the project in the national context.

The alternative scenario to be achieved through the implementation of this project is characterized by:

Increased use of and knowledge about RE for productive uses in rural areas with a sufficient level of technical services and financial support to warrant a sustainable operation;
Rural development programmes that integrate the energy dimension, thus developing the country's vast RE potential to stimulate rural productivity;
Well-functioning markets that generate increased local income for productive uses of RE, including adequate market information and access as well as accessible financing mechanisms both for RE users, vendors and other market actors.
An enabling environment for RE for isolated and grid connected generation projects, with mechanisms that guarantee the evolution of policies to respond to new developments.

System boundary:

The geographical boundary of the proposed full-sized project is the national territory of XX.
Project activities will focus on the "poverty belt" in the western highlands of XX, where an anticipated 9 MW of small hydropower capacity will be installed over the period 2005-2009 as well as about 1 MW of off-grid RET applications for productive uses.

As designed, scope of the project has two main components. On one hand, productive uses of renewable energy are proposed as a mechanism to ensure the feasibility and sustainability of both on grid and off grid RE investments. Therefore, the objective of the productive use component is to generate sufficient local levels of income to cover, at least, the O&M costs of off grid RE investments, and to create local benefits for communities to support private investment in RE (in particular, for the on grid investments).

On the other hand, the watershed management component of the project also targets system sustainability. All activities conducted under this component aim to generate a sustainable use of watersheds that values the use of water as an energy resource. This effort focuses on two components; a) reducing the vulnerability of the actual hydroelectric facilities to climate variation through adequate design, and b) ensuring that social and institutional arrangements are in place for sustainable watershed management.

Additional benefits:

Small-scale RET projects contribute to increased foreign investment, mobilize commercial bank participation in the renewable energy arena, reduce dependence on imported fossil fuels (oil); improve the country's energy balance/mix and contribute to economic development activities in often remote areas and lastly they generate employment benefits at the local level (productive uses of energy) and the national level (local assembly and partial manufacturing of hydropower equipment).

Costs:

The total cost of the proposed initiative is US$30,325,000, which can be divided in two categories:

Cost of implementing PURE project activities (technical assistance to remove barriers hampering the development of on-grid and off-grid RETs, at USD 14,325,000
Private sector funding for investment in small-scale hydropower, leveraged by PURE, and estimated at US$16,000,000.

The total incremental cost of the GEF alternative is US$2.65 million. The co-financing consists of cash contributions of US$11,350 million, coming from two Government entities XX and XX, municipalities, the private sector association XX, and XX as well as in-kind contributions valued at US$325,000, coming from the Government entities and private sector players.

Global benefits:

The installation of 10 MW of renewable energy (hydro and solar) will results in a reduction of approximately 630,000 tons of CO 2 -equivalent over the lifetime of the RET installations (20 years) as a direct impact of the proposed PURE initiative. A conservative estimate of the indirect impact of this project, from expanded RET on-grid and off-grid developments that are triggered by the proposed barrier removal activities, results in at least 3.15 million tons of CO 2 reductions.