Environmental Reviews and Impacts

for the

China GEF Energy Conservation Project, Phase II

Project Management OfficeSETC/WB/GEF EMC China Energy Conservation Project

April, 2002

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Contents

1. Introduction ............................................. 1

2. Environmental Benefits from the Project ............................................. 6

3. Procedures for Environmental Review and Clearances ............................................. 8

Annexes:

Annex A: Relevant Laws, Regulations and Standards for Reference (on file) .14

Annex B: List of Enterprises not Eligible for 15EMC Loan Guarantee Program Support(Negative List) .15

Annex C: Environmental Review Checklist for Proposed Subprojects .16

Annex D: Typical EMC Project Lines and Related Environmental Issues .18

1. Introduction

Overview: China State's Economic and Trade Commission (SETC) and its Project ManagementOffice (PMO) has developed a system for assessing and reporting on potential and actualenvironmental impacts resulting from investments supported under the EMC Loan GuaranteeProgram under the China Energy Conservation Phase II Project, supported by the GlobalEnvironment Facility (GEF) through the World Bank As energy efficiency projects, thesubprojects will focus on technical renovations in existing enterprises. The subprojectssupported by the Loan Guarantee Program will have major positive environmental benefits, as allsubprojects will be projects aimed to improve energy efficiency. (To qualify for support underthe Loan Guarantee Program, over one-half of the financial benefits of the project must bederived from reductions in host enterprise energy use.) In addition to reducing greenhouse gasemissions, many of these subprojects also will reduce use of other raw materials, and reducevarious emissions and waste. In a few cases, however, there may be a potential for somenegative environmental side effects, such as the generation of other wastes or increases in certainother emissions. Therefore, some project proposals may needed to be reviewed in details toensure that any potential negative environmental impacts are properly mitigated.

All subprojects that apply for financial support from the EMC Loan Guarantee Program mustmeet all local environmental regulations. Should any potential negative environmental impactsbe determined, proper certifications and clearances of mitigation plans must be obtained,according to national and local regulations.

Loan guarantee subproject proposals will be prepared throughout the period of projectimplementation, and hence are not known prior to project implementation. Therefore, the PMOhas established a procedure for screening the projects for any potentially adverse environmentalimpacts, followed by further review and clearance of mitigation plans for any projects wherepotential negative impacts have been identified. This procedure is described in the subsequentsections (especially Section 3). It is necessary to disseminate key screening criteria to the newand potential energy management companies (EMCs) who will be applying for support from theGuarantee Program before the project launch, so that EMCs understand the environmentalguidelines and give due consideration to these concerns when discussing potential renovationswith their host enterprise customers.

Summary of Experiencesfrom the Phase I Project. Phase I of the China Energy ConservationProject included support for the development of energy conservation subprojects by three majornew EMCs. A large amount of data has been collected about these projects, and many of thesubprojects in Phase II are expected to be similar to these Phase I projects. The types of EMCprojects likely to be conducted under Phase 2, types of enterprises, and major environmentalimpacts.

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The results of the demonstration EMCs in Beijing, Liaoning and Shandong supported under thefirst phase of the China Energy Conservation Project have been very closely monitored from thebeginning. The World Bank and SETC have conducted in-depth, formal reviews together withthe three EMCs at least twice per year since the EMCs were founded in 1997, as part of theproject supervision process. The reviews include evaluation of each EMC's project portfolio,financial results, energy savings and carbon reduction results, management and institutionalbuilding efforts, project procurement, business plans for the future, and outstanding issues andoptions for their resolution. Findings are reported in PMO and EMC biannual reports, and thebiannual Bank project supervision mission reports. A major Project Mid-term Review wasconducted by the Bank, SETC and Ministry of Finance (MOF) in November 2000, in accordancewith original plans, and the mid-term review Aide Memoire report is available in the project file.The PMO commissioned an outside, independent review of the status and work of the three EMCin 2000, which was completed by the China Energy Conservation Investment Corporation's-consulting department, and used as an input for the project mid-term review. GEF Secretariatstaff also conducted independent site investigations of this project in 2000, and this and otherinformation was utilized by the Secretariat's consultants in their preparation of a 2000/2001review of the results of GEF-supported projects involving ESCOs.

Overall progress has been quite satisfactory, with each of the three pilot EMCs developing theirrespective businesses. Given that their business is entirely new in the Chinese market, theprogress of the three EMCs has been exceptionally good by international standards. As of March2002, the three EMCs have entered into 208 energy performance contracts with aggregateinvestment of US$45.2 million (RMB 374 million). As of March 2002, EMC investmentsdelivering an aggregate energy savings of about 750 thousand tons of coal equivalent (tce) andassociated carbon dioxide emission reductions of about 400 thousand tons of carbon (t-c). Thethree pilot EMCs plan to enter into some 83 new performance contracts in 2002 with a totalestimated investment of RMB 214 million ($25.8 million).

Initial business experiences among the three EMCs, allowed each EMC to test a range oftechnologies and applications and identify markets to replicate successful project lines. While allthree EMCs continue to offer a number of similar project lines, their project portfolios andmarkets have begun to develop along distinctive paths based on differences among each of theEMCs' service territories and company expertise: Beijing, which has a lighter industrial base,has focused more on heating and cooling systems in hotels and office and residential buildings(electric heaters, heat pumps); Liaoning has a high concentration of industry, particularlyiron/steel and chemical plants, and has found boiler and kiln/furnace renovations to offer highmarketability; Shandong has been able to replicate motor system improvements in a diverserange of host enterprises and found a few large, creditworthy enterprises in which to develop apipeline of different technical renovations. While these individual EMC markets have shown

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their differences,. the collective market of these three EMCs can be viewed to be morerepresentative of the larger Chinese market.

Since the companies began, the three EMCs have received World Bank/PMO approval for about214 performance contracts in about 14 different technical project lines. Key product linessupported have included boiler renovations (layered combustion systems, boiler replacements,FBC), kilns/furnaces (cement and ceramic kilns, electric arc furnaces, glass furnaces), waste heat(waste heat recovery, ground source heat pumps, condense water recovery, fuel switching),cogeneration, steam hammer renovations, motor drive systems, power supply (electricaldistribution systems, transformers), automatic control systems and lighting systems (CFLs,ballasts). A distribution of the total EMC investments by technical project line is shown in Chart1.

Buildings ery*/jl Boilers290/o

Recovery ofwaste

Steam pipenetwork

Steamlairhammer

/ \ A \ ' ' ' ' ' ' ' ' ' ','> Motorsystem

I4Ins and / \ \ \' 2> Lighting andfurnaces power

diqtrib.itinn

Figure 1: EMC Project Line Breakdown

In terms of host enterprises, industrial projects clearly have been the largest market for the threeEMCs and will likely continue to be a major market for new EMC projects. Within the industrialsector, major subsectors have included iron and steel, chemical, rubber, and textile, althoughmany of the technical renovations (e.g., kilns, boilers, motors) are not industry specific. Thethree EMCs have also found a strong market for energy efficiency projects with utilities (power,heat and water) and, given their much stronger financial positions, have developed project linesfor their operations. Each of the pilot EMCs has also sought to balance their portfolios withsome non-industrial projects, such as heating and cooling renovations in government/commercial

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buildings, lighting projects in hotels/tourist resorts, and projects in shopping centers, hospitals,and farms. Chart 2 contains a full breakdown of EMC customers.

Hotelsl

Residenfial R oBldg

Office/Comm 4% /Bldga Other5% >L 1I2%

Ublio es16%

ndusty

Figure 2: EMC Host Enterprises

While project lines have not changed vastly from initial plans, each EMC has found elements ofcompetition from equipment suppliers as project lines are developed and actively marketed.Once newer technologies have been demonstrated and simpler renovations implemented, theability for the EMCs to market these project lines while requiring high returns has steadilydiminished over time. Thus a key aspect of the EMC business has been to maintain a step aheadof the market and build upon simpler renovations to improve a project line's business life. As thelarger EMC industry develops in the future, it is certain that the market will continue to evolveand, as competition increases, EMC projects will grow in their levels of sophistication anddiversity.

Typical Sub-Project Environmental Benefits: As previously noted, the Phase II Project willgenerally support technical renovations for energy efficiency. As such, the investment portfoliosupported under the EMC Loan Guarantee Program will have substantially more positiveenvironmental impacts than negative impacts. These positive benefits will primarily consist ofenergy and fuel savings and carbon emission reductions. (As noted previous, as of March 2002,the Phase 1 Project has delivered an aggregate energy savings of about 750 thousand tons of coalequivalent (tce) and associated carbon dioxide emission reductions of about 400 thousand tons ofcarbon (t-c) over its four years.) These projects have also significantly reduced other emissionsand particulates (e.g., SOx, NOx, TSP, etc.), reduced water consumption, lowered other plantemissions (flue gas), decreased solid waste disposal (e.g., improved combustion of coal), reducedraw material inputs, and decreased other wastes.

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Typical Possible Sub-Project Environmental Concerns: Generally, renovations of technicalsystems as planned for support under the Phase II Project do not have significant environmentalissues. However, there are some types of energy conservation investments that may raiseenvironmental concerns which should be considered. Table 1 below provides a few examples ofthe types of potential negative environmental impacts which may arise in energy conservationprojects, and some possible measures which may be adopted to mitigate these impacts, based onexperience gained in the Phase I Project. These represent some of the typical environmentalissues that would be reviewed under the Phase 2 Project.

Table 1. Typical Possible Subproject Environmental Concerns

Type of Subproject Some Potential Negative Some Possible MitigationEnvironmental Impacts Measures

1. Circulating fluidized (1) Increasing TSP (1) Equipping with properbed (CFB) boiler emission type and size dustsubprojects (2) Increased fly ash catcher, to meet the

wastes requiring emission standarddisposal (2) Development of a fly-

ash brick productionline, or delivery tocement plants toproduce cement

2. Industry kiln and Probable NO, emission (1) Inproving the controlfurnace combustion increase, due to system to controlsystem or thermal temperature increases in furnace temperature, toinsulation renovation the furnace chamber ensure NO, emissions

remain below emissionstandard levels.

(2) Addition of filteringequipment, ifnecessary.

3. Shallow geothermal Possible fall in local Re-injection of groundwater sourcing for heat groundwater levels. water from closed looppump air conditioning systems (allowing nosystems contamination), through

construction of re-injectionwells to match extractionwell capacity.

4. Renovation of old Possible pollution due to Adoption of measure tocooling system which the leakage of CFC during prevent the leakage ofuse CFCs as construction CFCs during construction.refrigerants.

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2. Environmental Benefits from the Project

The objective of the subprojects of both the three pilot EMCs in Phase I and the new EMCs inPhase II of WB/GEF China Energy Conservation Project are to improve energy efficiency andreduce pollution and greenhouse gas emission. The experience of the three pilot EMCs in Phase Ito date proves that the said objective can be achieved.

The environmental benefits derived from energy savings have been carefully tracked by thePMO during the Phase I Project. A Contract Signature Notification (CSN) sheet is required forall projects financed under Phase I by any of the EMCs, and the CSNs are reported to both thePMO and the World Bank. These sheets provide data on the energy savings, by fuel type,expected under the project, and the number of years of energy savings expected from theequipment installed. The data is considered quite accurate, as payment on the energyperformance contracts executed between the EMCs and their host enterprises is dependent uponthe energy savings achieved.

Based on Chinese existing energy conservation potential and the practice of the three pilotEMCs, possible product lines for EMCs can be included in following 8 aspects: 1) industrialboiler renovation; 2) steam pipe net renovation; 3) industrial kiln and furnace renovation; 4)steam hammer renovation; 5) building energy conservation renovation; 6) recovery of industrialwaste energy; 7) motor system renovation; and 8) lighting and power distribution systemrenovation. The following types of environmental benefits can be achieved by implementingthese subprojects:

(1) Reduction of greenhouse gas emission:The primary greenhouse emission is CO2 deriving from burning of coal and oil.The above project lines 1)-5) result in reductions in the direct burning of coaland/or oil, resulting in high CO2 emission reduction effects per unit investment.Recovery of waste energy enables use of the previously wasted energy to partiallysubstitute for fuel consumption, also yielding a good CO2 emission reductionbenefit. Savings of electrical energy, e.g., through motor system, lighting andpower distribution system renovation, yields reductions in fossil fuel used togenerate electricity (accounting for some 80% of China's electricity production),and associated CO2 emission reduction. The reduction of carbon dioxide per unit ofinvestment in electricity conservation projects, however, is somewhat less than theother types of projects, based on the experience to date.

(2) Local environmental benefits:Besides large-scale emission of C0 2, burning of coal and oil may generate other airpollutant (such as S02, NOx, and TSP), as well as wastewater pollution, which

bring negative impacts on the local environment. The energy efficiency subprojectsof the EMCs have substantial local environmental benefit, by reducing air and waterpollution from the burning of fossil fuels, especially projects involving renovationof boilers, steam pipe networks renovations, steam hammers replacement, andrecovery of waste heat. Subprojects which yield some, but less, localenvironmental benefit include most kiln and furnace renovations, and electricityconservation subprojects, such as renovation of motor and lighting systems.

(3) Natural resource conservation benefits:Of the 8 project lines, the majority involve coal savings, while the minority savepetroleum in cooling system, kiln and furnace, and building renovations. Waterconservation is important in some subprojects, such as renovations of boilers, ofsteam pipe networks, of steam/air hammers, of kilns and furnaces, and of buildings. -

(4) Other benefits:Other, additional environmental benefits exists in some specific cases, dependingupon the technology and local applications.

An example of the types and nature of the environmental benefits of a typical EMCenergy efficiency subproject is provided below:

One of the, pilot EMCs has replaced 4 old chain boilers (30t/h) and 1 oil-burned boiler (65t/h) with 2 CFB boilers (75t/h) for a host enterprise, torealize cogeneration of heat and power. New electrostatic precipitators werealso installed in accordance with requirements stipulated by localenvironmental protection authorities. Environmental benefit of this subprojectis as follows:

() 5417tc of CO2 emission are estimated to be reduced each year, withattendant mitigation of global climate change impacts, due to directreductions in fuel consumption;

(2) 175t of SO2 emission are estimated to be eliminated per year due todesulfurization of exhaust gases with CaCO3 inside boiler body. Due tothe installation of the precipitators, following benefits were alsorealized: reduction of particulate concentration to 150mg/m3 , reducingTSP output by 136t per year,. This allowed the enterprise to meetnational and local TSP and S02 emission standards, and contributed tothe improvement of the local atmosphere environment;

d The heating efficiency of the new CFB boiler is comparatively high,enabling production of an extra 23 million Kwh from steam generation,

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consequently saving 9665 tce of energy and recycling 986,000 tons ofwater annually;

( Waste fly-ash is being re-utilized as a raw material to produce brick.

3. Procedures for Environmental Review and Clearances

All subprojects proposed by all EMCs for support from the China GEF Energy ConservationProject Phase II Project's EMC Loan Guarantee Program must pass through the environmentalreview and clearance procedure described below, and summarized in Chart 1. The purpose ofthis procedure is to (i) ensure that any potential negative environmental impacts are reviewed andmitigated as required by Chinese central and local government environmental regulations, and(ii) ensure that subprojects are not supported in certain types of enterprises which are engaged incertain potentially environmentally damaging businesses (see Annex C). In addition, theprocedure also requires systematic reporting of the contracted energy savings benefits (withattendant environmental benefits) for all energy efficiency subprojects supported by the EMCLoan Guarantee Program, for centralized compilation, analysis and reporting to the World Bankand GEF, as described in the final section below.

As shown in Chart 1, the environmental review and clearance procedure required for allsubprojects includes the following steps and aspects:

(X Environmental Screening of Subprojects. Working together with their host enterprises,the EMCs will screen all subprojects for which they are requesting support under theGuarantee Program. As energy conservation projects, the project are classified in theChinese system as technology renovation projects. All subprojects, by definition, willhave substantial positive environmental impacts through reductions in energy use. Few, ifany, negative environmental impacts are expected in most of these technology renovationprojects, as they involve replacement of older, inefficient equipment orrenovation/modernization of backward technical processes. Often these projects alsoprovide other positive environmental impacts, in addition to impacts associated withenergy savings. A description of nature and certain environmental aspects of the eightmain subproject lines developed and implemented during Phase I of the project, whichalso are expected to be the main types of projects supported under the Guarantee Programof Phase II, is provided in Annex D.

In the screening process, the EMCs must (a) determine if there are any potential negativeenvironmental impacts associated with the proposed subproject; and (b) eliminate anysubprojects with enterprises on the "negative list" (Annex B) from further consideration.

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Chart 1

Flow Chart for Environmental Clearance of Subprojects

EMC's screen proposed subprojects using the Environment Review Checklist,rejecting subprojects with enterprises on the negative list, and deterrnining if

negative environment impacts exist. Negative impacts?

YES EMC asks host enterprseto request Local

Environmental ProtectionBureau to review proposal

mitigation plan

NO _

EMC provides own certificationand proceeds with loan guarantee

applicationLocal EPB conducts reviewand deteprmines clearance

NO ~ ~ ~ ~ ~ ~ ~~N

YES

EMC and local bank submit loan guarantee application to IA with its owncertification or EPB clearance. IA ensures that proper paperwork is provided

NOYES

'7

IA reviews and approval determined

NO YES

Subproject terninated I Subproject is implemented

Randomly sampled post-project reviews conducted by PMO. World Bankmay request or further reviews, during supervision missions, as required

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In its review, the EMC should assess: (i) the general situation and current environmentalstatus of the potential subproject; (ii) the original pollutant emission and estimated statusof the potential subproject from the processes concerned; (iii) the types and amounts ofpollution, or other negative environmental impacts, which might be caused by thepotential subproject; (iv) the types of processes and product output of the subprojectenterprise, and whether or not any of those are on the "negative list."

In undertaking its screening work, the EMC should complete an Environmental ReviewChecklist for Proposed Subprojects form for each subproject.( see Annex C) Completedforms will be required in subsequent subproject processing. The purpose of the checklistis to remind the EMC project managers of the various generic environmental issues toconsider. In addition, the EMCs should consult various technical guidance on the typesof environmental issues common in the various subprojects, prepared by the PMO, based-on Phase I experience, and incorporating emerging experience from Phase II, as theproject progresses (an initial summary is provided in Annex D). The EMCs will beprovided with further guidance and training on the EMC environmental screening process(as part of training on guarantee application procedures), during project launching workand EMC training work under the project conducted by the PMO, the Guarantee ProgramImplementation Agency, and the EMC Service Association.

If there are potential negative environmental impacts identified during the screening, thenStep 2 and 3 below will be undertaken. If no potential negative environmental impactsare determined through the screening process, than Step 2 will be skipped, and theprocedure moves on to Step 4.

) Review of Environmental Impacts and Mitigation Plans. If the screening process ofthe EMCs determines that there 'are potential negative environmental impacts from aproposed subproject, then the following procedures will be followed:

* The EMC will require that the host enterprise complete an environmental impactsappraisal report, assessing potential negative impacts, and proposing appropriatemitigations measures if need. According to Chinese regulations, the hostenterprise is responsible for completion and processing of the environmentalreview and submission for approvals. The host enterprise is expected to engage aqualified firm to complete this work in most cases. This review and reportprocess must follow the regular environmental protection regulation requirementsof the Government of China. Subprojects are classified according to standingregulations, and reviewed and assessed accordingly. (Of the three major projectenvironmental impact categories, however, no subprojects are expected under the"severe potential environmental impacts" category.)

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* Following consultation with the EMC, if required, the host enterprise will submitthe environmental appraisal report to the local Environmental Protection Bureau(EPB) with appropriate jurisdiction for the case, and request the EPB's reviewand approval.

* The local EPB will examine the submitted report upon receipt, and complete itsreview within the normal stipulated time limits (e.g., 60 days in cases with severepotential negative impacts, 30 days in cases with average potential negativeimpacts, and 15 days in cases with minor potential negative impacts.)

( Approval of Environmental Reviews and Mitigation Plans. In cases where potentialnegative environmental impacts were determined through the initial screening, and anenvironmental appraisal report was submitted to the local EPB (e.g. Step 2 wasfollowed), the EPB will determine if the proposed subproject (including anyenvironmental impact mitigation measures, as appropriate) meets all related regulationsand standards. Based on its assessment, and following any subsequent revisions in thesubproject proposal in consultation with the host enterprise, the EPB will then issueapproval documentation for the subproject to the host enterprise, or reject the project(which it will be excluded from consideration for support under the Guarantee Program).As per Chinese regulations, the host enterprise then assumes legal responsibilities forensuring that any conditions and requirements associated with the EPB approval are met,and that operation of equipment, etc. follows stipulated requirements and that anystipulated emissions requirements are met.

® Guarantee Processing. The EMC, together with its partner bank, provides its applicationfor a loan guarantee under the Guarantee Program to the Guarantee ProgramImplementing Agency (IA), including, for the various subprojects, (a) the completedEnvironmental Review Checklist for Proposed Subprojects and documentation on theconclusion of the EMC's environmental screening of the subprojects, and (b) approvaldocumentation from the local EPB, if steps 2 and 3 above.

® The IA should ensure that the documentation required in Step 4 is in order, and then mayapprove the proposal for loan guarantee support by the EMC and its partner bank, basedon commercial and other criteria.

X Contract Signature Notification Forms. MC may implement projects receiving loanguarantee support, as processed through Steps 1-5. When an EMC signs any energyperformance contracts with host enterprises which receive support under the GuaranteeProgram, it should complete a Contract Signature Notification form (similar to the formsused in Phase 1 of the China Energy conservation Project), which provides data on the

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investments made and energy saving expected. The EMC should submit the CSN to thePMO, through, or copied to, the IA.

0 Monitoring and Evaluation. The PMO will complete an evaluation and monitoringreport at least once per year during the project implementation period, summarizing (a)the findings of random-sample post-reviews of the documentation and processing ofspecific EMC subprojects which have received, and measures taken to address any issuesidentified, (b) analysis and evaluation of the various Environmental Review Checklistscompleted for subprojects receiving Guarantee Program support, and measures taken toaddress any issues identified, and (c) a full compilation and analysis of the energysavings, and associated environmental benefits, achieved through the project to date,based an aggregation of the subproject CSNs.

Monitoring and evaluation of the energy savings and associated environmental benefitsfrom the Guarantee Program will follow the same procedures developed during the ChinaEnergy Conservation Phase I project. Data on all subprojects supported by the EMCLoan Guarantee Program will be reported on subproject CSNs. The CSN data will beentered into a central database by the PMO. Using the database, the PMO can thenprepare a variety of analyses on energy savings results from the Guarantee Program,with breakdowns by types of project, regions, customer classes, time period, etc. Inaddition, the database can be used to conduct analysis of n the environmental benefits ofthe projects, especially concerning greenhouse gas emissions reductions, but alsoconcerning impacts on local pollution, especially emissions of air pollutants.

The PMO's analysis on energy savings and associated environmental benefits should bereported at least once per year to the World Bank, and these reports will be provided alsoto the GEF and used to assess the project's progress on the project's key energy savingsperformance indicators.

® World Bank supervision missions will review the reports of the PMO, and conduct itsown occasional random-sample investigations and more detailed reviews of theimplementation of the above environmental review process.

Institutional Responsibilities

OD EMCs applying for loan guarantee support. EMCs need to (i) perform the screeningfunction, outlined above in Step 1, (ii) provide the screening documentation, and EPBclearance documentation, if required, to the IA; (iii) provide completed CSN forms to thePMO and IA, and (iv) cooperate with post review and evaluations of the PMO and WorldBank.

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Local Environmental Protection Bureaus (EPBs) Local EPBs are responsible for (i)review of environmental appraisal reports submitted by host enterprises, (ii) issuance oftimely clearances, requirements for revisions, or report rejections; and (iiiO enforcementof compliance of government environmental regulations and its own rulings.

( Host Enterprises. Host enterprises are responsible for (i) providing related informationon potential subprojects with EMCs the enable EMCs to complete their environmentalscreening; (ii) completion of environmental appraisals, if potential negativeenvironmental impacts are identified, utilizing qualified experts; (iii) submission of anyrequired environmental appraisal reports to local EPBs for their examination andapproval; and (iv) ensuring operation of subproject installations according toenvironmental requirements established by local EPBs.

O Guarantee Implementing Agency (IA). The IA needs to (i) ensure that requireddocumentation is properly included in guarantee application packages, and (ii) includeenvironmental review procedures and guidelines units information and training on howEMCs can apply for loan guarantees under the Guarantee Program.

d The PMO. The PMO is responsible for (i) providing information and training on theenvironmental review procedures to EMCs (together with the IA); (ii) technical guidanceto EMCs on issues which EMCs should consider in their environmental screening; (iii)monitoring of the overall environment review process, including completion of post-reviewes of randomly selected cases, collection and analysis of Environmental ReviewChecklist forms completed by EMCs, collection and analysis of CSNs and energysavings data, and (iv) preparation of evaluation and monitoring reports at least once ayear.

The World Bank will complete necessary reviews during their biannual project supervisionmissions, including post-reviews of specific cases.

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Annex A: Relevant Laws, Regulations and Standards for Reference (on file)

1. ENVIRONMENTAL PROTECTION LAW OF THE PEOPLE'S REPUBLIC OF

CHINA

2. TEMPORARY MANAGEMENT MEASURES ON CONSTRUCTION PROJECTS

(ISSUED BY CENTRAL GOVERNMENT)

3. LIST OF ENVIRONMENTAL PROTECTION CLASSIFICATION MANAGEMENT

FOR CONSTRUCTION PROJECTS (TRLAL VERSION)

4. PROTECTION AND MITIGATION OF AIR POLLUTANTS OF THE PEOPLE'S

REPUBLIC OF CHINA (REVISED)

5. EMISSION STANDARD OF AIR POLLUTANTS FOR COAL-BURNING OIL-

BURNING GAS-FIRED BOILER (GB13271-2001)

6. EMISSION STANDARD OF AIR POLLUTANTS FOR THERMAL POWER PLANTS

(GB13223-1996)

7. EMISSION STANDARD OF AIR POLLUTANTS FOR INDUSTRIAL KILN AND

FURNACE (GB9078-1996)

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Annex B - List of Enterprises not Eligible forEMC Loan Guarantee Program Support (Negative List)

The project will not finance any subprojects which are in direct violation of the World Bank'senvironmental policies. Similarly, subprojects implemented in violation of China'senvironmental laws, and environmental impact assessment procedures will not be financed. Inspecific, subprojects which involve the following activities will not be financed:

1. Manufacturing of asbestos

2. Nuclear energy related products

3. Manufacturing or companies using ozone-depleting substances be phased out asper the Montreal Protocol

4. Manufacturing or companies using Persistent Organic Pollutants such as:

a. Pesticide: aldrin, chlordane, DDT, dieldrin, endrin, heptachlor, mirex, andtoxaphene

b. Industrial chemicals: hexachlorobenzene (HCBs) and polychlorinatedbiphenyls (PCBs)

c. Unintended byproducts: dioxins and furans

5. Subprojects requiring extensive construction

6. Toxic waste producers

7. Poison/Insecticide facilities

8. Tobacco production, processing, or marketing

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Annex C - Environmental Review Checklist for Proposed Subprojects

Name of Subproject:

Name of Province:

Proposed Date of Start of Work:

Technical Drawing/Specification Seen: Comments YES NO

Brief Description of Subproject:

A) Environmental Effects related to Subproject Location/DesignType of Environmental Resource Predicted Effect/ mpact

Minor Moderate MajorNatural Habitat and Wild LifeErosion and Silt ControlDrainage PatternWater QualityLand Use and SettlementHistorical and Cultural SitesVisual Effects and AestheticsB) Environmental Effects related to Subproject Construction/Operation

Type of Environmental Resource Predicted Effect/ImpactMinor Moderate Major

Natural Vegetation and WildfireLand Use and SettlementHealth and SafetyErosion and Silt ControlNoise and DustHazardous Materials

C) Environmental Effects related to Subproject PollutionType of Pollution Predicted Effect act

Minor Moderate MajorAtmospheric pollutionNoise pollutionHeat pollutionSolid pollutionLiquid wastesOther pollution

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D) Specific QuestionsTypes and quantity of pollutants discharged ?

Will other negative impacts on the environment begenerated ?

Will the type of energy use change?

Will negative impacts on local water sources arise?

Is the host enterprise in the list of "not to be supported"?

Cleared for Approval by Project Manager YES NO

Name of Project Director:

Signature: Date:

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Annex D: Typical EMC Project Lines and Related Environmental Issues

All the subprojects that implemented by the pilot EMCs or to be implemented by newEMCs are energy conservation technical renovation, which aim to improve energy efficiency,reduce pollution and emission of GHG, S02 and TSP, and also decrease discharge of particulateand wastewater., consequently it mitigates global climate change and improve local environment.On the other aspect, it may bring negative impacts on environment although the expectedenvironmental benefits has been achieved, however, the negative impacts can be mitigated oreven eliminated by means of appropriate technical measures. Following is a description ofpotential environmental benefits from the 8 project lines:

1) Industrial boiler renovationIn order to differentiate it from large power generation boiler, boiler with output under65t/h is regarded as industrial boiler, which is mainly used to supply steam for industrialproduction and heating for buildings. There are more than 500 thousand industrial boilers-in China, with total 1.26 million tons of steam output. In various types of industrialboilers, clockwise chain boilers are of over 60%, and over 70% such kind boiler is usedto supply steam, therefore, the clockwise chain boiler becomes main product needed to beconducted energy conservation renovation in industrial boiler.

* Layer-by-layer coal feeding deviceDifferent sizes of coal are mixed up and burned in chamber. It prevents air fromblowing into the chamber, which influences combustion efficiency. The gravitysieve will allocate coal based on coal size - coal powder is in lower layer whilecoal block is in upper layer in the chamber. This will help to improve combustionefficiency and reduce carbon contained in slag, so that it will achieve 8-20 %energy savings and also mitigate C0 2 , SO2 and TSP emissions. The worse conditionof boiler it is before renovation, the better result it will be obtained. This renovationhas less investment and quick recovery of the investment.

* Combustion system renovationAs for a few of oil-based boiler, it is mainly to replace backward and out-of-dateburner with new one. As for the clockwise chain boiler, besides upper layercombustion in the furnace, it will inject appropriate pulverized coal into boiler atappropriate position from furnace entry. In this case, it will form a floatingcombustion. It may achieve 10-15 % energy savings and relevant environmentalbenefits. But it will control the quantity of pulverized coal, speed and distance ofcoal injection. Otherwise, it will increase thickness of smoke discharged, whichwould bring negative energy savings and environmental benefits.

* Boiler arch renovationThe front and back arch of some boiler does not appropriately match well, whileboiler arch and coal quality sometimes does not match well either, which mayinfluence combustion condition of boiler. According to real situation, toappropriately change the shape and position of boiler arch may improve combustioncondition. Although this phenomenon does not exist in all of boilers, there is still a

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lot of boilers need renovation. Since it could get coal conservation and CO2, SO2and TSP emission reductions, it not only benefits for mitigating global climatechanging, but also for local environment improvement.

Boiler auxiliary equipment renovationAir blower and air draft fan are the main auxiliary equipments for coal-based boiler.The operation status of these equipments has close relation with boiler's efficiency.It will keep boiler operating at a best combustion condition by using ASDtechnology to regulate air quantity according to combustion demands, which maysave coal and power used by fans, moreover it also reduce CO2, SO2 and TSPemission. This renovation gets win-win benefits for both global climate change andlocal environment.

Substitute other layered combustion boilers with CFB, or transform certain types oflayered combustion boilers into CFB

As pulverized coal of CFB is circulating fluidized combustion inside chamber, thethermal efficiency of CFB is 15-20 % point higher than that of layered combustionboiler. It is definitely to save a great quantity of coal and reduce 20 % CO2 emissionmore than the layered combustion boiler, if it is replaced the layered boiler withCFB. It will benefit for global climate warming. Because the desulphurization isoccurred inside chamber with technology of CFB, it can reduce more SO2 emission.Since pulverized coal is mixed up with lime combusted inside chamber, it willincrease quantity of TSP emission. Therefore it will be equipped with proper sizeprecipitator to reach standard TSP emission for CFB.

Control system renovationControl system of industrial boiler is divided into two categories. One is to maintainboiler running at a better condition according to requirements of boiler load toautomatically regulate quantity of coal, water and air, which results in a positiveenvironmental benefit. To alter semi-automatic control into automatic controlsystem, it will achieve about 10 % energy savings for the boiler with greatvariations in load. And also it will obtain environmental benefits correspondently.The other kind of renovation is that it regulates operation parameters of boiler underthe condition of maintaining a appropriate room temperature to reach the objectiveof convenience, energy conservation and environmental protection. If it realizesautomatic control for these boilers, it will enable boiler to save over 20% coal andget relevant reduction benefits for CO2, SO2 and TSP emission.

Generally, after boiler renovation is implemented by means of all the saidtechnologies, it will obtain a lot benefits in greatly reduction of CO2 SO2 , TSPemission, mitigation of global climate warming, and waste water and slagdischarge, hence, it will be beneficial for local environment improvement.

On the other hand, negative environmental impacts from the subproject are causedby CFB application for increase of TSP and pulverized coal generated by

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desulphurization. However, appropriate precipitator can be installed to meet TSPdischarge standard while pulverized coal can be used for brick production.

2) Steam pipe network renovation

There are three tasks to be carried out for steam pipe network renovation: 1) to recoverhigh temperature condense water; 2) to solve the steam trap leakage problem of condensewater separator; 3) to deal with heat insulation for pipe and reduce thermal loss. The firstand second items share about 90 % of total energy loss, while the rest 10 % results frompoor pipe heat insulation and bolw-by.

* Condense water recoveryThere is about 70 % condense water generated by steam pipe network thrown away,while the rest 30 % is recovered through reducing temperature of condense waterdue to gas erosion of pump. However, now the technology and equipment capable-of removing gas erosion and recovering high temperature condense water canrecover 200°C condense water together with the secondary steam, and then it willbe input into boiler or deoxidation device for re-use. This method can reduce 15-30% coal use for boiler, and also save a great deal of soft water. It recovers theinvestment less than one year.

* Avoid loss of steam trap leakageIt will avoid steam leakage by replacement of scattered trap with centralized one.Aimed at current status of steam trap in China, this measure may reduce about 30 %of total steam use for system. It may directly save coal use of boiler and soft water.The investment in this measure can be recovered less than a half year.

* Pipeline heat insulation and solving loss of steam leakageTo use high quality heat insulation materials for network and strengthenmaintaining pipeline that can reduce about 10 % thermal loss.

These three items renovations of steam pipeline network can directly result in the coalsaving and soft water of coal-based boiler. This will greatly reduce CO2 emission, andbenefit to mitigation of global climate changing. It can also reduce SO 2, TSP, waste waterand slag discharge and improve local environment. Implementation of this subproject hasno negative impacts on environment.

3) Motor driving system renovation

This project line is to use appropriate type of ASD device to regulate speed of fan, pumpand other motor driving system so that can meet the demand of load variation. Thefrequency conversion technology and frequency converter are the best technology indifferent motor speed adjustment technologies. It can obtain better effects by using thecontrolled silicon voltage adjustment to regulate motor speed. Although the cost ofmanufacture of the equipment is rather high, the scope of application is still wide. Withthe development of power and electronic technology, the cost of frequency converter will

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be gradually reduced, therefore the application will be further expanded. Since it savespower for this subproject, the energy savings will be varied by changes in load anddegree of changes between 20-40 %. The investment will be recovered in 2-3 years.

The thermal power dominates a leading position in China. The coal accounts for 75 % oftotal fuel for thermal power. Therefore the calculation of environmental benefits ofsubproject will be converted into the coal savings, that is, it can correspondently reduceCO2 , SO2 , and TSP emission. It can mitigate global climate changing and improve localenvironment.

When it chooses speed adjustment equipment, it will make sure that the harmonicinterference will meet the national standard of GB/T14549-93-Public Power NetworkHarmonic of Power Energy Quality.

4) Lighting and power distribution system renovation

* Lighting renovation is to replace the incandescent lamp with the energy conservationone and substitute inductive ballast with electronic ballast, which results in powerconservation.

* Distribution system renovationThis technology can be implemented in power supply sector and power use sector. Itmainly consists of following components:

(a) Upgrade for distribution voltageIt reduces step-down for power supply from two times to one time, which mayreduce transformer and line loss.

(b) Shorten distance of power supplyIt moves transformer nearer to load, which results in increasing high voltagedistribution distance and shortening low voltage distribution distance, thereforeline loss is reduced.

(c) Power factor compensationThis compensation is divided into concentrated and on-site ways, which are toselect appropriate capacity of compensation equipment to compensate powerlessfactor and reduce line loss.

(d) Transformer upgradeIt replaces out-of-date larger capacity transformer with reasonable capacitytransformer. It will reduce loss of transformer itself, and enable transformer torealize economical operation.The effect of this project line is to save power energy. Because coal-based powergeneration plays significant role in China, power saved is just directly to savecoal. This will reflect a certain benefits of the global and local environment.Implementation of this project line has no negative impacts on environment.

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5) Industrial furnace and kiln renovation

Industrial kiln and furnace renovation consists of fuel renovation, combustion systemrenovation, furnace and kiln structure renovation, furnace and kiln body renovation, heatinsulation of furnace body renovation, control system renovation, and replacement ofprimitive small furnace and kiln with large advanced one.

* Heat source renovation

The working frequency power source of power-fuelled furnace and kiln will be changedinto lower frequency one. It will change AC into DC, and renovate the short distantpower network. These options are used to reduce power consumption. For saving fuel, itcan replace oil-based furnace with gas- or power-based one.

* Combustion system renovation

Under this technology, it is to use new type of energy saving burner to substitutebackward and old one. It generally achieves a good energy saving and environmentalbenefits.

* Furnace and kiln structure renovation

The renovation of furnace and kiln structure varies from industrial sectors and technicalprocess to industrial sectors and technical process. With scientific and technicaldevelopment, the structure of these furnaces and kilns in different sectors will also in theprocess of progress. The structure of renovation will achieve energy saving andenvironment benefits. At the same time, it can improve products quality and production,esp. in replacing small furnace and kiln with larger advanced one, which shows aremarkable effect.

* Furnace and kiln body heat insulation renovation

Most of various industrial furnace and kiln runs in the condition over 1000°C. The statusof heat insulation has a close relation with energy use of them. If it uses new heatinsulation technology and materials to improve heat preservation condition of the furnaceand kiln, it can directly reduce fuel consumption and improve environment.

* Control system renovation

It will achieve a better benefit for energy saving and environment, if it is to changemanual-control or semi-control into automatic control. This will generally regulate fuelfeeding, heating supply, air and materials outlet. It will enable the furnace and kiln to runat the best conditions. Coal is a major fuel used in Chinese industrial furnace and kiln,besides oil, power and industrial discharged gas. Implementation of these subprojects can

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save coal and oil, therefore, it reduces C02, S02, NOx and TSP emission, mitigatesglobal climate changing and improves local environment.

It must pay attention to controlling two negative impacts on environment whenimplement this project line. One is that it will care increase in total energy consumptionwhen the project of using large furnace and kiln to replace the small one. It should accordwith the principle of the energy saving benefit that exceeds 50 % of total benefits. Theother is that NOx emission will be satisfied with the standard.

6) Steam hammer renovation

The energy efficiency of steam hammer is quite low less than 10 %. It can get over 80 %energy saving with electronic-hydraulic hammer to substitute steam hammer.Implementation of these subprojects can save coal and oil, therefore, it reduces C02,S02, NOx and TSP emission, mitigates global climate changing and improves local-environment.

7) Recovery of industrial waste energy

There are many types and great quantity of industrial waste energy recovery. Ingenerally, it can be divided into three categories: the recovery of discharged gases, highquality waste heat recovery and low quality waste heat recovery.

* Recovery of discharged gases

The discharged gases mainly include waste gas, BF gas, BOF gas, coal gas andgasoline volatile gas. When these gases are recovered, it is usually used as fuel fordirectly burning. Therefore, it presents good environmental benefits. Among them thetough gas is recovered to use as fuel in production, transportation and living. Therecovered BF gas and BOF gas can be used as fuel in different furnace and kiln.Although the gasoline volatile gas is dispersedly located and in relatively low quality,it can save resource if it is recovered. Since equipment used to recover gas is quitesimple, it is economically reasonable.

* Recovery of high quality heat

Over 500°C gases including waste heat from sintering and clinker are valuable energyresources. And now it usually uses boiler to change waste heat into steam and powerfor production and living use, and also replace primary energy - coal and oil.

* Recovery of low quality heat

The modem technology can collect heat from different cooling water, tail water ofgeothermal or other low quality thermal source under 400C, and increase temperatureof the collected waste heat, and change them into hot water for heating supply and

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living. Since energy efficiency parameter of the system reaches or exceeds 4, it iseconomically feasible.

Waste energy recovery is to recover discarded energy, so it saves the same quantity ofnew energy and have the best environmental benefit among all the subprojects. Withthe same investment, this project line achieves more C02, S02 and TSP emissionreductions than other project lines. Therefore it should encourage EMC to carry outmore such kind of projects. It will not bring negative impacts on environment forimplementing this subproject.

8) Building energy saving renovation

The building energy saving renovation involves in many fields with wide scope. Thereexists a great potential of environmental benefits.

* To improve building envelope

The energy use of residential building space heating in China is about 3 times overthat in developed countries. One of reasons is that thermal insulation buildingenvelope performances not well. An improvement method is to put thermal insulationlayer to clay brick outside building or inside building. It will change steel framedsingle layer glass window into single or double layer glass plastic steel and aluminumplastic window. The surface of wall in the room will coat a layer of thermalinsulation. Implementation of this project can get about 20 % energy saving andrelevant positive environmental benefits.

* Energy saving renovation of space heating source-seeing "industrial boiler energysaving"

* New thermal sources for heating supply

(a) Ground temperature heat pump for air conditioning system

The heat source of this system is not from coal or oil, but ground temperature. It usuallyuses surface underground well water as well as water from lake, river and sea. It usesheat pump to collect heat from water. Because energy efficiency parameter of the heatpump can reach or exceed 4 and it does not consume other energy, it has goodenvironmental benefits. Since this system can be used for cooling supply in the summerand supplying hot water for living, it brings a better benefits for energy saving andenvironment.

b) Space heating with regenerative electric power boiler

It will replace coal-based boiler with regenerative electric power boiler. The thermalefficiency of electric boiler is about 20 % higher than that of coal-based boiler.Moreover, if it chooses an appropriate regenerative device, it can enable boiler to run athigh efficiency condition. So this kind of space heating will benefit the environment.

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c) Regenerative electric heater

Replacing coal stove with space heating greatly improve the comfortable, clean andsafety of living environment and get a better energy saving and environmental benefits,because efficiency of electric power converting into heat is much higher than that of thestove burning briquette coal. It will result in the coal saved, if it replaces coal-basedspace heating with this method. This can reduce C0 2, SO2 , and TSP emission as well asslag and waste water discharged. It not only mitigates global climate changing, but alsoimprove local environment.

* Heating supply system (pipeline network) energy renovation

The design and construction of cities, towns and residential districts in China areall not completed in a single time. Most of them are expanded gradually, and so-does heating supply system. It is natural that it produces the unbalance of heatingsupply. This trend becomes seriously in some districts and units. In order tomaintain the minimum temperature of heating supply, the heating system has tobe operated at low temperature differential with great flow. This wastes a greatenergy. Through adopting technical measure of installation of balance valve bydistrict and by block, it can not only save huge coal, but can save the circulatingwater and power consumed by the water pump. It is remarkable to achieve theglobal and local environmental benefits.

* Cooling supply system energy saving renovation

The district cooling supply is mainly used in office building, hotel, shoppingcenter, and gymnasium. In most conditions, the cooling is supplied by coolingmachine with huge energy consumption. The measures of energy savingrenovation are included in the following:

(a) Cooling storage air conditioner system

It will add appropriate capacity of cooling device to the original conventionalair conditioner system. At same time, it will appropriately reduce the capacityof cooling unit. In this way, it will make the cooling unit running at highefficiency with full load. The cooling will be supplied by both the coolingmachine and cooling storage device. This can achieve the benefits of energysaving and environment.

(b) Cooling storage air conditioner system of low temperature air supplying withlarge temperature differential

It selects the coiled ice storage device with a certain cooling capacity. Thiscan guarantee the temperature of the cooling supplying at 1-3 'C. And then itchooses the appropriate capacity of cooling unit. The system makes the

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cooling storage in the night. It supplies the cooling together with ice storagedevice at other time. This system can supply the air at low temperature of 5-7°C. In this system, the cooling unit can usually be kept at high efficiencyoperation with full load. The energy consumption of the system operationreduces due to the capacity reduction of cooling auxiliary machine. This typeof air conditioner system can obtain the better environmental benefits thanthat of above-mentioned.

(c) Replacement of energy intensive direct burning cooling water unit withefficiency cooling unit

(d) Replacement of oil-burning cooling water unit with heat pump system byusing ground temperature of underground water (The system is built for thepurpose of building space heating)

After implemented the above-mentioned energy saving measure, it mayachieve the benefits of CO2 emission mitigation to a certain degree. It willbenefits to alleviate the global climate warming, and reduce SO2 and TSPemission as well as improve the local environment.

It will prevent two kinds of negative influence from impacting on theenvironment, if this project line is implemented: one is that it will refill allfetched water into the ground in order to prevent the surface of ground fromsinking, when it is to implement the heat pump air conditioner system withlow temperature. The other is that it will adopt the sound measures to preventCFC leaking, when the energy saving renovation of the cooling supply systemproject is to carry out.

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