INCaF Xinglong Hydro

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	556906
Company name	Xinglong
Country	China
Sector	Other (For Non-Investment Projects)
Environmental category	B
Department	Environment & Social Development
Status	Non-Invest Proj

Date SPI disclosed	September 21, 2007
Projected board date	October 22, 2007

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

Xinglong Hydropower Co. Ltd (Xinglong or the company) is a power generation company established in 2003 to develop, implement and operate medium and small-sized hydro power stations in the Guizhou province. In late 2003 the company was awarded the rights to develop the hydropower resources in Kaiyang county, which are estimated at over 100MW.

Since 2004, the company has been engaged in the development and implementation of two run-of-river hydro power generation facilities in the Yuliang river, namely Najiang (21MW) and Zijang (12MW), representing a total investment in the order $26-28 million. Construction of Najiang is nearly completed with expected commercial operations to begin in September 2007. As for Zijang, construction is scheduled to begin in September 2007, and its commercial operation is envisioned to start during the 2nd or 3rd Quarter of 2009.

It is anticipated that these two facilities will be registered under the Clean Development Mechanism (CDM) of the Kyoto Protocol, to generate and sell up to an estimated 95,000 tons/year of Certified Emissions Reductions (CERs) to be granted on the basis of run-of-river hydro generation assets that displace fossil fuel based generation in the southern grid (mostly coal).

Project sponsor and major shareholders of project company

Xinglong is owned by seven shareholders as follows:

- Shanghang Hongyang Mining Project Co.,Ltd (Hongyang) – 52%, a mining company established in 1998 by Mr. Weihua Zhou to carry out the extraction of gold/copper resources, as well as the construction of galleries at Shanghang and Zijinshan in Fujian. Prior to founding Hongyang, Mr. Weihua (who currently owns 95% of the company) worked for over 15 years as a mining engineer for the Geology Team of the Fujian Province. Hongyang Mining has been awarded as a "reliable company" by local business bureau and tax authorities, and is rated as AAA by Agricultural Bank of China.

- Mr. Weifu Zhou – 15%, who has 15 years experience in the development and construction of hydro power projects, including construction of water diversion tunnels and dams.

- Mr .Weijian Zhou – 12%, who before joining Xinglong worked as vice construction team leader of the Water Conservancy & Electric Power Project Department of Nanping city,Fujian province.

- Mr. Dongcai Jiang – 10%, who has over 20 years experience in development and construction of hydro power projects working for several state owned bureaus and private companies in Fujian Province, including Nanyang Xiayang Hydro (43.8MW) and Nanping Zhaokou (60MW).
The remaining 11% is held by three minority shareholders.

Total project cost and amount and nature of IFC's investment

The value of INCaF’s contract or emissions reductions purchase agreement to purchase CERs is expected to be in the range of USD 5.0 – 6.0 million, payable in installments on annual delivery of CERs (generated through to the end of 2012) to the CDM registry account of the Netherlands.

Location of project and description of site

Nanjiang Hydropower Project (Nanjiang) and Zijiang Hydropower Project (Zijiang), the two facilities comprising the project, are located at the main stream of the Yuliang river near Duduzhai village in Kaiyang County in Guizhou province. The nearest large city from the both sites is Guiyang city, the provincial capital, approximately 88 kilometers northwest of the project site.

Nanjiang is located at the Yuliang River between Duduzhai village and Nangong village of Kaiyang county. Nanjiang lies in a valley with steep mountains on both sides. The river channel is narrow and consists mainly of bare rock with more rich vegetation on the mountains.

Zijiang is located near Xiaoshuashan Ziran village. The project area is mountainous and the valley has a U-shape. The area has some vegetation, but rocks are bare and the mountains have steep slopes.

Both sites are suitable for the construction and operation of hydropower projects in terms of both the average water flows and the altitude of the heads provided by the sites.

Anticipated development impact of the project

The project generates power from hydro-electric power plants to improve the sustainability of power generation in Southern China through:

-Reducing reliance on exhaustible fossil fuel based power sources
-Reducing the local power shortage in Kaiyang County
-Reducing local air pollution
-Promoting the local and economic development
-Reducing global emissions of greenhouse gases

The project fits with the Chinese government’s objective to reduce reliance on coal and make the energy sector and the power sector in particular more sustainable.

IFC's expected development contribution

IFC’s goal is to encourage emerging market private sector participation in the carbon market by providing value-added services to support project’s long term sustainability. As a global investor and advisor committed to developing sustainable private sector in emerging markets, IFC is well positioned to assist project sponsors to participate in the carbon market.

IFC’s experience and knowledge in evaluating and financing private sector projects in developing countries is leveraged to structure contracts that minimize the risks associated with the delivery of CERs from projects. The sale of CERs from these hydro plants will allow Xinglong to partially fund its investments in expansion of its renewable energy capacity. This possibility will in turn allow Xinglong to explore new financing sources of reasonable terms to help expand its capacity.

Environmental and social issues - Category B

This is a Category B project according to IFC’s Procedure for Environmental and Social Review of Projects because a limited number of specific environmental and social impacts may result which can be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria. The appraisal of this project included visit to Nanjiang, where construction have already been completed, as well as to the proposed / construction sites for Zijiang.

The following potential environment, health and safety and social aspect of the project (s) were analyzed: environmental, social, and health and safety management systems; public consultation and disclosure; effects from multiple hydroelectric facilities on a river system; company and contractor labor practices; management of pollutants and wastes during construction; dam and community safety; land acquisition; loss of forest land and/or adverse impacts on biodiversity; and effects on fish and other aquatic resources.

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