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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 8 Abhishek Goyal Abhishek.Goyal@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, Abhishek Goyal 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 8 Response to the CDM Executive Board Issue 1 The DOE is requested to explain how it has validated that the input values in the investment analysis were considered appropriate in the context of: (a) EB 38 paragraph 54 (c) guidance; b) the assumption that the tariff and O&M costs will be fixed throughout the 20-year period of analysis. Response by Project Participant (a) EB 38 paragraph 54 (c) guidance All data for the IRR calculation of the project source from the approved Final Feasibility Study Report (Final FSR). The Final FSR was completed in October 2005 by the Yunnan Lingyu Water Resource and Hydropower Investigation and Design Institute before investment decision (the input values from the Final FSR are valid and applicable at the time of the investment decision, the earliest starting date of the project is October 18, 2005, which is the date of equipment purchasing contract). This institute is an independent organization which is qualified to compile design reports for hydropower projects (it has obtained a grade C in water conservancy industry, electricity industry and a grade C in engineering investigation industry, all issued by the Construction Bureau of Yunnan Province). Additionally, the Final FSR has been approved by the local DRC. As the Final FSR has been completed by an independent and certified institute and approved by the local DRC, the Final FSR can be considered as an independent and realistic assessment of the proposed project activity, including the parameters listed and used as input values in the IRR calculation of the PDD for requesting registration. Because the project started commissioning in May 2008, in order to prove the conservative of the input values based on the Final FSR, the important input values from FSR can be cross checked using the actual data Table 1 the Designed Data in Final FSR and Actual Values Value in Final FSR Actual Value Comment The annual utilization hours from Final Annual utilization hours 4,635h [1] 3,995h [2] FSR used in IRR calculation is more conservative. Tariff Yuan Yuan The price from Final FSR used in IRR [1] The Annual utilization hours in FSR is calculated based on water resource data of 17 years, so dramatically change of electricity generation of the project in the whole crediting period will rarely happen. [ 2 ] The project started commissioning on May 26, Based on the settlement sheets, the actual total power generation is 18,313,927kWh from 26 May to 25 August. Based on the power generation monthly (which calculated based on the waster resource every month) in the FSR, the designed total power generation is 21,250,000kWh from 26 May to 25 August. And then, based on the proportion of the above two values and the power generation monthly in FSR, the actual power generation can be estimated as 50,339,599kWh annually. Therefore, the actual utilization hours can be estimated as 3,995h.

3 Page 3 of 8 RMB/kWh with VAT RMB/kWh with VAT [3][4] calculation is reasonable. Total investment 48,523,400 Yuan RMB The actual investment is 63,066,472 Yuan RMB [5] The actual investment is far higher than the deigned investment in Final FSR, and lower total investment of 48,523,400Yuan RMB from Final FSR used in IRR calculation is more conservative. Annual O&M cost 1,701,200 Yuan RMB 2,568,100 Yuan RMB [6] The annual O&M cost from Final FSR used in IRR calculation of PDD is more conservative. Therefore, based on the above cross-check, the important input values used in the financial analysis is more conservative than the actual values. In conclusion, the input values from the Final FSR employed in the investment analysis are appropriate and valid at the time of the investment decision which is consistent with the EB 38 guidance, paragraph 54. b) The assumption that the tariff and O&M costs will be fixed throughout the 20-year period of analysis As mentioned above, the input values in the investment analysis are sourced from the Final FSR. The financial analysis of the report was completed by the institute based on the No [1995]186 documents: Revision of Economic Evaluation Code for Small Hydropower Project (SL16-95). According to the No [1995]186 documents, the input values in the investment analysis should use the current fixed data. The current means the time of the investment decision. [7] Among the input values in financial assessment, the key ones ---tariff and O&M cost--- are the most possible to affect the IRR throughout the 20-year period of IRR analysis. Hence, they will be analyzed further in the below context. Tariff [3] Document published by the grid company pointed that the tariff of the project during the operation period is 0.153Yuan RMB/kWh. Please see the details below for the tariff in the response to the Question b) [4] Based on the settlement sheets published by the grid company from 26 May to 25 August (the flood seasons), the actual average tariff of the project is 0.11 Yuan RMB/kWh with VAT during the three months, and during the dry seasons, the tariff maybe a little higher, but the annual expected average tariff is Yuan RMB/kWh for the project. [ 5 ] Investment Estimation Report, completed by Yunnan Bangke Real Estate Appraisal Co., Ltd [6] Please see the details below for the O&M costs in the response to the Question b) [7] Hydropower No [1995]186 documents: Revision of Economic Evaluation Code for Small Hydropower Project (SL16-95) released by the Ministry of Water Resources of the People s Republic of China. According to the hydropower No [2002]07 documents, Currently Effective Hydrotechnics Standards Announcement, by the Ministry of Water Resources of the People s Republic of China, the hydropower No [1995]186 document is still effective and enforceable.

4 Page 4 of 8 The fixed tariff of 0.153Yuan RMB/kWh with VAT in the IRR calculation of the PDD for requesting registration is sourced from the approved Final FSR completed based on the No [1995]186 documents. Therefore, the fixed tariff is used in the IRR calculation. The Power Purchase Agreement (PPA) for the project has not been and will not be signed, till the Final Accounting Report will be completed, but the expected actual tariff of the project is 0.153Yuan RMB/kWh with VAT based on the document from the local grid company as mentioned in footnote [3]. Based on the Settlement Sheets published by grid company from 26 May to 25 August (the flood seasons), the actual average tariff of the project is about 0.11 Yuan RMB/kWh with VAT during the three months, and during the dry seasons, the tariff maybe a little higher, but the expected average tariff annually will be Yuan RMB/kWh with VAT for the project. In addition, in China, the tariff is strictly regulated by China government and it is established on strict regulation rather than the market mechanism, so it is hard to forecast the future tariff by the project owner. As the tariff is related tightly to the national economy and livelihood of people, the government of China has to make the tariff steady. In the document published by local grid company, the tariff of the project is Yuan RMB/kWh during the operation period. For all subsequent years the tariff Yuan RMB/kWh will most likely to be achieved [8], which can also proved by the tariff of the other hydropower stations near the project. [9] According to the above analysis, the fixed tariff used in the IRR calculation is reasonable during the whole operation period of the project. O&M Costs The O&M costs are calculated according to the data from the approved Final FSR. In order to further demonstrate the fixed input value of O&M cost is appropriate, the fluctuation of O&M costs has been considered. Based on the Final FSR and hydropower No [1995]186 documents, O&M costs mainly include payroll, overhaul cost, welfare fund, employee s insurance, housing provident fund, water charges and other cost. The parameters using to calculate the O&M costs of the project have been analyzed respectively: Based on the above SL16-95 evaluation code, regarding to a hydropower project with an installed capacity greater than 6MW, the minimum employees should be 48 persons, which is fixed and consistent with the IRR calculation of the PDD; Based on the above SL16-95 evaluation code, the average rate of overhaul cost is 1%, which is fixed and consistent with the IRR calculation of the PDD; Based on the above SL16-95 evaluation code, the range of other cost is 12-15Yuan RMB/kW, which is fixed and consistent with the value of 14 Yuan RMB/kW in the IRR calculation of the PDD; Based on the above SL16-95 evaluation code, the welfare fund for employees should be 14% of the total wage, which is fixed and consistent with the IRR calculation of the PDD. Based on the relevant regulations published by China government, the maximum value of the employee s insurance is about 26% of the total wage, which is fixed and consistent with the value of 24.5% in the IRR calculation of the PDD; the range of the housing provident [8] Document published by the local grid company pointed that the gird price of project during the operation period is 0.153Yuan RMB/kWh. [ 9 ] The document from Nujiang Autonomous Prefecture Hydropower Association, based on their research, from 2004 to 2007, the local annual average tariff is about 0.15 Yuan RMB/kWh.

5 Page 5 of 8 fund is about 5%-12% of the total wage, which is fixed and consistent with the value of 12% in the IRR calculation of the PDD. According to Inform of Water Charge in Yunnan Province published by local government, the water charge of small scale hydropower station in Yunnan Province should be Yuan RMB/kWh, which is also fixed and consistent with the IRR calculation. Based on the Final FSR, the IRR calculation uses 12,000 Yuan RMB/Person annually. But according to the payroll record of employees of the Lushui Jinman River Hydropower Development Co., Ltd., the actual average payroll of the employees is 24,000 Yuan RMB/Person annually, which is higher than the payroll in Final FSR. Therefore, the actual O&M Cost is higher than the designed value in Final FSR. Most data of O&M Costs are fixed and comparatively stable, but only the salary of the employees has been increased from 12,000 Yuan RMB/Person annually in Final FSR to 24,000 Yuan RMB/Person annually. Thus the actual annual O&M Costs will be increased from 1,701,200 Yuan RMB to 2,568,100 Yuan RMB. It can be concluded that most data of O&M Costs are fixed, and only the salary of the employees may be fluctuated. Moreover, the impact of salary fluctuation on IRR is analyzed as follows: Table 2 Salary Price Indexes Fluctuations (Last Year=100) Item Average of increasing rate Salary % Data source: China Statics Year Book ( From Table 1, the average increasing rate of salary price index is 9.64% from 2002 to 2006 in Yunnan Province. It is obvious that the salary indexes of O&M costs increased during If the O&M costs are assumed to increase by 9.64% during the operation period, the IRR will be lower than that of the PDD obviously. As per conservativeness principle, the fixed input value of O&M costs is reasonable and credible. All the above data come from public official website of local government. (China Statics Year Book ). In conclusion, the fixed input values (Tariffs and O&M costs) throughout the 20-year period of in the IRR analysis are realistic, reasonable and credible. Issue: The DOE is requested to explain how it has validated that the input values in the investment analysis were considered appropriate in the context of: (a) EB 38 paragraph 54 (c) guidance; b) the assumption that the tariff and O&M costs will be fixed throughout the 20-year period of analysis. Response by TÜV SÜD The Board clarified that in cases where project participants rely on values from Feasibility Study Reports (FSR) that are approved by national authorities for proposed project activities, DOEs are required to ensure that:

6 Page 6 of 8 (c) On the basis of its specific local and sectoral expertise, confirmation is provided, by cross-checking or other appropriate manner, that the input values from the FSR are valid and applicable at the time of the investment decision. At first TÜV SÜD can confirm, that the approved FSR was the basis of the decision to proceed with the investment in the project. The final Feasibility study report (IRL 8) was prepared by the Yunnan Lingyu Water Resource and hydropower Investigation and Design Institute before the equipment purchase contract was signed on 18 th October 2005 (IRL, 14). The values used in the PDD and the IRR calculation are fully consistent with the FSR. TÜV SÜD has crosschecked the appropriateness of these input values by applying the following approaches: Comparing the input values of the proposed project with an internal database evaluating the input values of 250 CDM projects (registered or still under validation). Annual operational hours, total investment/capacity, O&M costs/capacity are totally in the range of the statistics. The assumptions taken are even conservative. Average of statistics Proposed project activity Operational hours 3850h 3995h Total investment/capacity 6,7 million RMB/MW 5,0 million RMB/MW O&M costs/capacity 0,19 million RMB/MW 0,2 million RMB/MW The electricity tariff is lower than the average of the statistics. Electricity tariff Average of statistics RMB/kWh (excl. VAT) Proposed project activity RMB/kWh (incl.vat) Furthermore the input values have been crosschecked with actual invoices. Annual operational hours: The project started commissioning on May 26 th Based on the settlement sheets, the actual total power generation is 18,313 MWh from 26 th May to 25 th August. Based on the power generation monthly in the FSR, the designed total power generation monthly in the FSR, the designed total power generation is 21,250 MWh from 26 th may to 25 th August. Based on the proportion of the two values and the power generation monthly in the FSR, the actual power generation can be estimated as 50,339 MWh annually. On this basis the actual operational hours can be estimated as 3995 hours. This value is actually lower than the value assumed in the FSR. Hence the assumption in the FSR can be considered as conservative. Even though the electricity

7 Page 7 of 8 generation from an episode of the year 2008 might be not representative for the whole crediting period, the electricity generation assumptions in the FSR are based on 17 years of hydrological data. Hence the values in the FSR are plausible and reasonable. Tariff rate: The tariff assumed in the FSR is Yuan RMB/kWh including VAT. This value is based on an average calculation. The electricity tariff varies according to the season of the year (flood season, dry season and medium season), and the time of the day. The average value over the time and the season is calculated as Yuan RMB/kWh. The value has been cross checked with publications of the grid company, Nujiang Autonomous Grid Company (please refer to footnote 3 and 9). The values are consistent. Even though the applied tariff is lower than the average, TÜV SÜD is convinced that the PP is applying the appropriate value, which was applicable in the time of the decision making and still is valid. Total investment: The total investment has been cross-checked with the Investment Estimation Report, completed by Yunnan Bangke Real Estate Appraisal Co., Ltd. The assumed value in the FSR is lower than the actual total investment. Hence the calculation can be considered conservative. Annual O&M costs: The O&M costs have been calculated according to the guidelines of the SL benchmark document. The values have been cross-checked with the Inform of Water Charge in Yunnan province published by local government. The applied values in the FSR (0.004 Yuan RMB/kWh) are consistent with the documentation. Furthermore payrolls of the employees have been crosschecked. The salaries of the employees have increase since the assumptions of the FSR. The actual average salary is RMB/Person annually instead of 12000RMB/Person. Due to that reason the total O&M costs have increased. Hence the assumptions in the FSR have been conservative, plausible and reasonable. TÜV SÜD is strongly convinced that applying fixed input values (tariffs and O&M costs) in the IRR calculation is appropriate in the context of the project activity. There are a number of reasons which helps to these conclusions, described here for case Further Reasons are: The project applies the benchmark SL-16-95, economic Evaluation code for small hydropower, P.R China Industry Standard, Standard no.sl (IRL, 10). According to this document, it is clearly described that the parameters used in the calculation should be constant throughout the assessment period. In order to comply with the benchmark criteria In the financial evaluation, when calculating input and output, the current price shall be used In CDM assessment, TÜV SÜD has reviewed dozens of feasibility study reports renewable energy projects in China. It can be confirmed that the above guideline is consistently applied as common practice in China; all feasibility studies make use of fixed input parameters for O&M and tariff.

8 Page 8 of 8 Further reasons are: Among the input values in financial assessments, Tariff and O&M can affect the IRR throughout the 20-years of the IRR analysis. Tariff The Chinease electricity market was liberated in Since then electricity tariff is regulated by the national authorities and it is established on strict regulation rather than th e market mechanism, so it is quite difficult to predict the future tariff by the project owner. As tariff is related to the economy of the country and livelihood of the people, so Chinease government has to make it steady. As mentioned above, in the document published by local grid company, the tariff of the project is Yuan RMB/kWh during the operation period. For all subsequent years the tariff Yuan RMB/kWh will most likely to be achieved which can also proved by the tariff of the other hydropower stations near the project. It is thus by TÜV SÜD that there is no indicator to consider a change in the grid tariff in the financial assessment. O&M Costs From the calculation above, we can conclude, that fluctuating salaries have a high impact on the O&M costs. Following the statistical data from Chinese government, the average increasing year of salary price index is 9.64% from 2002~2006. If the O&M costs are assumed to increase by 9.64%, the IRR will be much lower than the one submitted for registration. Hence the approach to calculate with fixed O&M costs can be considered as conservative and reasonable.