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1 TÜV SÜD Industrie Service GmbH Munich Germany DAP-PL DAP-IS DAP-PL DAP-PL-2722 DAP-IS DPT-ZE ZLS-ZE-219/99 ZLS-ZE-246/99 Your reference/letter of Our reference/name Tel. extension/ Fax extension Date/Document Page IS-CMS-MUC/ of 6 Paula Auer Paula.auer@tuev-sued.de Request for Review Dear Sirs, Please find below the response to the review formulated for the CDM project with the registration number In case you have any further inquiries please let us know as we kindly assist you. Yours sincerely, Javier Castro Carbon Management Service Headquarters: Munich Trade Register: Munich HRB Supervisory Board: Dr.-Ing. Axel Stepken (Chairman) Board of Management: Dr. Peter Langer (Spokesman) Dipl.-Ing. (FH) Ferdinand Neuwieser Telefon: Telefax: TÜV SÜD Industrie Service GmbH Niederlassung München Umwelt Service Westendstrasse Munich Germany

2 Page 2 of 6 Response to the CDM Executive Board Issue 1 The DOE should be requested to validate the input values to the IRR calculation in line with para. 54 (c) of EB 38 and confirm how it has validated that the project is additional based on the results of the investment analysis. Issue 2 AND Since parts of the sensitivity analysis on the IRR shows an increase of the IRR close to or beyond the proposed benchmark, the DOE should validate - accoring to para. 16 of annex 35 to the EB 39 report - the likelyhood of an annual electricity supply increase by 10% or more. In conjuction with this and while the project has already started operation, the DOE should also assess the combined impact on the IRR of a possible increase of annual electricity supply and possible changes in the final investment costs, which is relevant while the sensitivity analysis shows an increase of IRR with decreased investment costs. Issue 3 AND The DOE should be requested to confirm that the project start date is in line with the definition in the CDM Glossary of Terms.. Issue 4 AND An economic comparison of the proposed baseline and the project activity without CDM, being the alternatives that do not face prohibitive barriers, must be conducted to determine the baseline scenario. Referring to Issue 1 All the input values of IRR are from the Feasibility Study Repot (FSR), which has been approved by authorities. The design institute of the FSR is Luoyang heavy industry mine machinery engineering design institute which has good experience for similar projects in China (Qualification rank: sy). The FSR was finalized in October 2006, when the incentive of CDM was considered to proceed with the project. The FSR is the basis of the decision to proceed the project. This meets the requirement of EB 38 paragraph 54 (c).

3 Page 3 of 6 The input values have been carefully checked and are all based on a third party assessment (The Feasibility Study Report issued by Luoyang heavy industry mine machinery engineering design institute). To provide additional certainty that the figures used for the IRR calculation are applicable we are comparing the main parameters with other CDM projects of the same type, in the same industry. For the Yuhe Tongli WHR project the specific investment per MW is 6.96 Mio. RMB / MW and the specific operational costs per year are 1.10 Mio. RMB / MW. The average specific investment per MW in China (based on the evaluation of 56 waste recovery projects in the Cement Sector in China that applied or are applying for CDM) is 7.93 Mio. RMB / MW (see figure below); the average specific operational costs are 0,99 Mio. RMB / MW. For the operational hours the average is 6451 h whereas Yuhe Tongli is calculated with 6215 h, the tariff for purchase power from grid is RMB / kwh compared to 0.354RMB / kwh as the Chinese average. Hence, it can be confirmed that the Yuhe Tongli project does not apply unreasonable assumptions. The DOE has checked and verified the price for purchase of electricity from grid through invoices. The actual price is actually slightly lower, than the price assumed in the IRR calculation. Hence the calculation can be considered as appropriate and conservative. The DOE has checked and verified the actual investment costs via The contract on construction of grid access system, dated on 30 August 2007 (IRL32) and The General Contract Project Management agreement, dated on November 2006 (IRL33). The costs are actually higher than assumed in the investment analysis. Hence the investment analysis is conservative. Specific Investment of Waste Heat Recovery Projects in China (Source: UNFCCC/TÜV SÜD) The national benchmark for Cement projects in China is 12% calculated on equity IRR. (The third edition of Project Economic Evaluation Methods and Parameters, 2006). Based on these national standards projects are implemented in the Cement sector. A project, that lies below the benchmark will not be financial attractive and would under normal situation not be implemented.

4 Page 4 of 6 Without the additional money from CDM the Yuhe Tongli project clearly falls under the benchmark. It is not financial attractive and hence would not have been implemented. Based on that, the project is additional. Referring to issue 2 The annual operation hours for the project are 7600 hours in the FSR, which is designed by the design institute according to the average operation time of similar projects in China and the operation hours of the cement production line. The document of operation hours of the cement production line in Henan Yuhe Tongli Cement Co., Ltd. in 2006 has been provided to DOE, which shows that the operation time of the cement plant is 7141hours. If the annual electricity supply increases 10 %, the project is close to the benchmark. However, such an increase requires an annual operational time of 8360 hours, which means that both the cement production line and WHR power plant operate 348 days annually, which is unlikely. Furthermore, from the operation records in the past months, the 1# WHR power station was commissioned in October 2007 and 2# WHR power station was commissioned in December 2007 and the two power stations have been in normal operation since February From February to May 2008, the largest monthly quantity of electricity supply of 1# station is 3,268,112 kwh and of 2# station is 5,317,360 kwh, with the total of 8,585MkWh, which is less than the monthly power supply of 10133MWh (121600MWh/12) in the IRR calculation in the submitted PDD. The total investment for the proposed project mainly includes the investment on Project Construction (including the equipments purchase and installation) and the grid access system construction. The cost for project construction is million and that for the grid access system construction is 2.56 million RMB. The final total investment is million RMB, which is higher than the estimated total investment in the IRR calculation. Thus there is no possibility that the total investment will decrease 10% or more. The answer to DOE s request of why there is investment regarding the grid access system construction while the electricity produced will be used in house is: In the FSR, the Yuhe WHR captive power station has been designed to connect to the grid first and then download the equivalent amount of the net electricity production for in house use. The reason why the captive power station has to connect to grid is that the isolated small-scaled power plant like Yuhe WHR captive power station can not operate steadily and will bring many troubles to the electricity user and the captive power station, and connecting to grid will solve the above problems and provide stable electricity to the users, thus the captive power stations of small scale in China are usually connected to the grid first before using it in house. The benchmark of 12% will be reached or nearly reached in three scenarios. Decrease of investment costs: The DOE has checked and verified the actual investment costs via The contract on construction of grid access system, dated on 30 August 2007 (IRL32) and The General Contract Project Management agreement, dated on November 2006 (IRL33). The costs are actually higher than assumed in the investment analysis. A decrease of these costs is not possible. Electricity generation increase of 8,8%:.

5 Page 5 of 6 The total installed capacity is 18 MW. To include the the uncertainty in heat supply from the cement production line, the actual power generation is calculated on the basis of 16 MW operation capacity for 317 day (7600h). These assumptions are based on the evaluation of the Designe Institute. This can be considered as very appropriate given the sectoral experiance oft he audit team. An increase of electricity generation by 8.8 % makes the IRR equal to 12 %., which means that the project should be operational 344 days a year. That leaves 21 days a year for maintanance work and unaspected shut downs, which is very unrealisticfor this kind of project in the cement industry. The monthly power generation data was deliverd tot he audit team and the above mentioned values can be confirmed by the DOE. Decrease of O&M costs: The costs for Operation an Maintanace are continouisly rising. A decrease is of these costs is unrealistic. Referring to issue 3 In the PDD the start date of project is 20 Dec 2006, when the construction started. The General Contract on Project Construction (including terms on the equipments purchase and installation) was signed in Nov, And the loan agreement was signed on 12 November According to the EB guidance The starting date of a CDM project activity is the earliest of the three: implementation, construction or real action of a project activity begins. In the revised PDD, the project start date has been updated to 1 Nov 2006, which is General Contract on Project Construction signing date. Evidence of serious CDM consideration was dated prior to this project start date. The starting date of a CDM project activity is the date on which the implementation or construction or real action of a project activity begins. The General Contract Project Management Agreement was issued in November 2006, identifying main equipments and prices. This can be considered as the first action, when the project was not reversible anymore and constructions started on 20 th November Earlier 20 th December 2006 was stated to be the project stating date in the PDD. The PDD has been corrected adapting 1 st November 2007 as the starting date. The consideration of CDM before construction has been confirmed by the agreement of CDM development which was signed by Yuhe Tongli Cement Co., ltd and Shanghai Chuanji Investment Management Co., Ltd. on 08/09/2006 which is before the starting date (01/11/2006) of the proposed project. Referring to issue 4 In the Section B.4 of the PDD, it has been discussed that alternatives 3, 4 and 5 face the barriers of laws and regulations, resources insufficiency, technology and finance. Thus these alternatives are excluded when identifying the baseline scenario. Alternative 1 and 2 are the only

6 Page 6 of 6 two possible baseline scenarios that cannot be eliminated due to prohibitive barriers. These two scenarios thus have to be compared with an economic comparison in order to determine the appropriate baseline scenario. In accordance with the investment comparison analysis (Option II), alternative 1 (the project activity) is considered financially less attractive than alternative 2 (Equivalent electricity import from the grid) if the NPV of alternative 1 is more negative than alternative 2.. As can be seen from the submitted excel file, the NPV of alternative 1 is minus RMB million Yuan and the NPV for alternative 2 is minus RMB million Yuan. Thus, in line with the methodology, it can be concluded by this economic analysis that scenario 2 is the most plausible baseline scenario. The baseline scenario has been identified as alternative 2 continuation of equivalent import of electricity from Central China Power Grid. In the Section B.4 within the PDD, alternatives 3, 4 and 5 face the barriers of laws and regulations, resources insufficiency, technology and finance. They have been discussed already. The alternatives 1 and 2 comply with all legal and regulatory requirements. As the baseline scenario of alternative 2, there is no specific comparable method for choosing the most financially attractive alternative. According to Tool for the demonstration and assessment of additionality /Version 03, benchmark analysis was used for the investment analysis of this project. As far as alternatives 1, the equity IRR without CDM revenues is 7.84% only, which is lower than the benchmark value (12%). It is concluded the project is not attractive from a financial point of view. It has been discussed in details in Section B.5 within the PDD. On the contrary, alternative 2 is the continued situation of the present state. It needs no additional investment and faces no prohibitive barrier and is also most economically attractive, so it is considered as the baseline scenario. To further prove the unprofitability of the project an investment comparison analysis in accordance with Option II of the additionality tool was conducted. Alternative 1 (the project activity) is considered financially less attractive than alternative 2 (Equivalent electricity import from the grid) if the NPV is negative. As can be seen from the submitted excel file, the NPV is minus The NPV for the electricity import is minus 213. Thus, in line with the methodology, it can be concluded by this economic analysis that scenario 2 is the most plausible baseline scenario. The baseline scenario has been identified as alternative 2 continuation of equivalent import of electricity from Central China Power Grid.