Understanding CDM Methodologies - SuSanA

Rejections
due to Lack of
Additionality
Lack of
Specification of
Parameters for
Investment Test
Prohibitiveness
of Barriers not
shown
Registration
Practice of EB
Wind Project
rejected due to
Description of its
Attractiveness in
Company Report
Wind Project
registered despite
very high IRR
3.2 Checking additionality determination through reviews
of projects
Projects failing to accurately demonstrate their project’s additionality have
been subject to requests for review by the EB and a sizeable share of
rejections of projects is due to problems with additionality determination,
affecting a number of different project types. Challenges abound in all steps
of the additionality test.
Regarding the calculation of financial parameters for the investment analysis,
often not all investment cost and revenue parameters, discount rate and time
horizon are specified that are required to derive the IRR transparently for
all relevant alternatives. If the benchmark test is used, an internal company
hurdle rate often is not adequately documented.
Regarding the barrier test, project developers often list a host of barriers in
very general form and do not provide an explanation why the barriers listed
are prohibitive.
With respect of the common practice test, developers sometimes use a very
narrow definition for assessment of similar projects.
The EBs approach to implementation of additionality determination has
evolved over time, as the board has sought to establish a clear standard for
valistion of key requirements. The Board has not always recognised potential
review questions, and when it has done so it has struggled to in cases to
establish and apply an evidential burden with regard to financial calculations
has not been applied consistently in all cases.
Regarding projects using ACM 0002, two wind power projects (UNFCCC
no. 0221 and 0224) were rejected by the Board, probably on the basis of
contradictory external statements. The project developer’s annual report
described the projects as follows: “The project is extremely beneficial on a
standalone basis and has a payback period of three years with an internal
rate of return in excess of 28 per cent. In addition to hedging Bajaj Auto’s
power costs, this investment also provides sales tax incentives and an
income tax shield.” CDM or carbon credits were not mentioned in the
report. Nevertheless a large number of wind projects arguably with similar
characteristics have been registered perhaps without a similar level of scrutiny
(see box 7).
Box 7: Registration of wind power projects despite high IRR
A 125 MW wind project in the Indian state of Karnataka (UNFCCC no. 0315)
applied the benchmark test and argued that its IRR was 7.3%. The project was
registered, though there are reasons to suggest that IRR calculation did not
take into account that such as wind energy investments attract accelerated
depreciation of 80% in the first year and get a 10 year income tax holiday IRR in
PDD. An independent observer has calculated that IRR with these tax benefits and
realistic investment costs could be in the region of 22%.
Regarding energy efficiency, two projects using AMS II.D were rejected due
to a failure of applying the barrier test (UNFCCC no. 0311 and 0317). Waste
heat recovery projects using ACM 0004 have generally been registered even
though some projects exhibit features that put their additionality in doubt
(see Box 8).
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