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Implementation Completion Report (ICR) Review - Yixing Pumped Storage Project


  
1. Project Data:   
ICR Review Date Posted:
06/10/2013   
Country:
China
PROJ ID:
P068058
Appraisal
Actual
Project Name:
Yixing Pumped Storage Project
Project Costs(US $M)
 582.74  516.31
L/C Number:
L4686
Loan/Credit (US $M)
 145.0  126.7
Sector Board:
Energy and Mining
Cofinancing (US $M)
   
Cofinanciers:
Board Approval Date
  03/20/2003
 
 
Closing Date
12/31/2009 12/31/2010
Sector(s):
Power (97%), Sub-national government administration (3%)
Theme(s):
Regulation and competition policy (50% - P) Infrastructure services for private sector development (50% - P)
         
Prepared by: Reviewed by: ICR Review Coordinator: Group:
Fernando Manibog
Robert Mark Lacey Soniya Carvalho IEGPS1

2. Project Objectives and Components:

a. Objectives:
According to the Loan Agreement (LA) dated June 5, 2003, the project's objective is "to increase the overall system efficiency of the power sector in Jiangsu Province by expanding pumped storage power generation capacity in Yixing to address the peaking problems of the system and increasing competition in the power sector."

The Project Appraisal Document (PAD) dated February 21, 2003 (page 2) indicates that the project's objective as follows: "To increase the overall efficiency of the power sector in Jiangsu Province in two ways: (a) through the design and implementation of a far-reaching restructuring of the sector to further competition at the generation level and to provide large consumers access to generators (by promoting the transition from a monopoly-monopsony structure to an unbundled competitive structure-wholesale market by end 2005 and eventually retail market by 2012); and (b) through the construction of a pumped storage plant (4 x 250 MW) and associated transmission in Yixing to ease acute peaking problems and improve the generation mix that would create conditions for more flexible dispatch and improved supply reliability, an essential requirement for well-functioning competitive markets,"

This ICR Review is based on the PAD statement of objectives, which is more monitorable.

b. Were the project objectives/key associated outcome targets revised during implementation?
No

c. Components:
Note that the project company is the East China Yixing Pumped Storage Power Company Ltd. (EYPSPC) Its legal restructuring during implementation resulted in successive changes in its major shareholder, from the Jiangsu Province Electric Power Company (JPEPC), then to the East China Grid Company (ECGC), and finally to the State Grid Company (SGC).:

The project included 3 components:

Component 1: Power Sector Restructuring (US$ 6.3 million appraisal cost; US$ 0.5 million actual cost)

This component included: (a) the development of a pricing policy adapted to the competitive industry structure envisaged by the Chinese Government, and the associated transfer of knowledge; (b) a target pricing system and transition strategy for Jiangsu Province based on the new pricing principles to be adopted; (c) studies on the access of eligible customers to generators; (d) preparation of the Jiangsu Provincial Electric Power Company (JPEPC) for changes in its corporate structure and management procedures, including upgrading of the skills of JPEPC managers to operate in a competitive environment.

Component 2: Construction of a Pumped Storage Power Plant in Yixing (US$ 479.91 million appraisal cost; US$ 487.29 million actual cost)

This component included: (a) a new upper reservoir, impounded by a main dam and a subsidiary dam; (b) expansion of an existing lower reservoir; (c) a water conveyance system, including intakes and outlets, headrace and tailrace tunnels, and surge shafts; (d) an underground powerhouse; (e) the implementation of an environment management plan and a resettlement plan; (f) consulting services in engineering, design, procurement, and construction management; and a comprehensive training program to develop the capacity of management and technical staff in both construction and operation.

Component 3: Construction of a Transmission Line (US$ 4.35 million appraisal cost; US$ 0.0 million actual cost)

This was to include a 6.3-km double circuit 500 kV transmission line to connect the Yixing pumped storage plant to the East China 500 kV network.

d. Comments on Project Cost, Financing, Borrower Contribution, and Dates
The total project cost at appraisal was US$582.74 million, including interest during construction and the IBRD Front-end Fee. The actual cost was US$516.31 million, or about 89% of the appraisal estimate. The Bank's financing was appraised at US$145 million , of which US$126.72 was actually disbursed. The balance was financed either by domestic borrowing or internal cash/equity contribution, for which the actual amounts were US$267.81 million and US$121.78 million, respectively. The East China Grid Company financed the construction of 6.3-km, double circuit, 500-kV transmission line (Component 3), which has been in commercial operation. No IBRD loan funds were used for the transmission line. However, a cost figure for this transmission line was not provided by the ICR, although it was an integral part of the project as appraised, even if it was actually financed by another source in the end. The project closing date was extended for one year from December 31. 2009 to December 31, 2010.


3. Relevance of Objectives & Design:

a. Relevance of Objectives:
Objectives: Substantial
The project's relevance to the current Country Partnership Strategy (CPS) is substantial. According to the latest CPS Progress Report (2006-2010): “The WBG is expanding activities in support of China’s efforts to reduce the energy intensity of the economy, air pollution emissions, and the carbon intensity of energy production. Bank Group activities are organized around four themes, building on a long partnership with China in the energy
sector: (a) Renewable & Clean Energy; (b) Demand-Side Energy Efficiency; (c) Power Supply Efficiency; and (d) Urban Heating and Buildings.” Specifically on power supply efficiency: “Building on long collaboration in the power sector, the Bank is helping China to improve power markets, introduce clean coal technologies, and rehabilitate and close inefficient plants” (Page 6).

The project objective was also relevant to the needs of the country's power sector. With the increase in total grid capacity, especially the increase in intermittent renewable energy (such as wind power generation), the need for pumped storage plants to store energy becomes even more critical. Power sector reforms envisaged under the project were thus consistent with the reform agenda being implemented by the government.

b. Relevance of Design:
Design: Modest
The relevance of project design was modest. Although at face value, the Results Framework (PAD, Annex 1) presented a clear and logical link between inputs, outputs, intermediate/final outcomes, and the achievement of the stated objectives, the project blended investments in increasing capacity (both in generation through pumped storage, and transmission) while at the same time carrying out a highly challenging reform agenda. The ICR (page 12) correctly assessed that: "The Bank could have been more cautious about including an ambitious sector reform agenda…and anchoring in a provincial project-specific investment operation." The reform actions at the sector level sought to achieve more efficient pricing, an integrated wholesale market, and full competition.


4. Achievement of Objectives (Efficacy) :

The degree of achievement of the project’s objective – “to increase the overall efficiency of the power sector in Jiangsu Province in two ways: (a) through the design and implementation of a far-reaching restructuring of the sector to further competition at the generation level and to provide large consumers access to generators (by promoting the transition from a monopoly-monopsony structure to an unbundled competitive structure-wholesale market by end 2005 and eventually retail market by 2012); and (b) through the construction of a pumped storage plant (4 x 250 MW) and associated transmission in Yixing to ease acute peaking problems and improve the generation mix that would create conditions for more flexible dispatch and improved supply reliability, an essential requirement for well-functioning competitive markets” – is assessed as substantial, although the fact that reforms, that were to further contribute to efficiency, took place outside the project framework (as recognized by the project team) is a moderate shortcoming.
Outputs
  • All 4 units of the Yixing pumped storage power station were commissioned nearly on schedule, and have been in stable operation since October 2008, with all design parameters being met.
  • However, the design and implementation of a competitive power market to further competition as set out in the statement of objectives fell short of appraisal expectations. Soon after project approval, China suffered acute power shortages that made it impossible to introduce real competition within the framework of an integrated power market, a situation which was exacerbated by the concurrent piloting of a regional-level power market. Only US$0.5 million out of a planned US$6.3 million for supporting reforms were spent. Major reform sub-components of the project were cancelled, the establishment of a multilateral wholesale electricity market did not occur, and a full-pledged integrated power market is not expected any time soon. According to the ICR (page 6), reform actions that were implemented included the separation of generation from transmission and distribution, more efficient pricing, spin-off of non-core businesses, and the strengthening of institutional capacity, although the extent to which these were supported under the project was not fully clear from the ICR.
Outcomes
  • Electricity sales per employee rose from 4,903 MWh in 2008 to 6,298 MWh in 2010.
  • Coal consumption decreased. Successful generator and pump starting ratio are at or above 99 %. Loss of load probability (days with unserved loads/days of the year) was brought to zero. Both system frequency control and grid voltage control are at 100 %.
  • Customer satisfaction has also improved, indicating enhanced reliability although the ICR provides no direct evidence of the latter.
  • The separation of generation from transmission enabled competition between power producers, which benefited the whole industry and the end users, though there is no quantification of these benefits.
  • However, electricity supplies are not based on a market mechanism, and the wholesale price in real terms was not established. Moreover, large consumers are still unable to negotiate prices directly with suppliers. Electricity supplies are still monopolized by the State Grid Company and the South China Grid, with no competition between the two.
  • The ICR reports that the management capacity and operational skills of JPEPC did increase as a result of the project. However, this did not take in the context of a competitive environment.
  • The project team subsequently informed IEG that the intention of supporting a competitive wholesale market environment in Jiangsu province was rendered less relevant since, in 2003, the State Electricity Regulatory Commission was introduced at the national level and power generation assets of the provincial level were separated from the power transmission companies. The increased competitiveness of regional supply of power was thus achieved through this enterprise unbundling. The main cause of the reforms were, therefore, national level decisions, external to the framework of the project.

5. Efficiency:

Efficiency is rated substantial. At appraisal, the Economic Internal Rate of Return (EIRR) was estimated at 13.5 % , based on the consumer willingness-to-pay for the alternative of gas-fired power generation, which cost RMB0.9/KWh. This is superior to the assumed opportunity cost of capital. At project completion, with gas-fired power being reduced to RMB0.54/KWh, a lower EIRR of 7.8 % resulted. If benefits from expected reductions on CO2 emissions are taken into account, the EIRR at completion increases to 9 %. In the absence of a true market mechanism, there is a serious distortion between the price of coal (as another alternative fuel, and the main primary fuel for power generation in China) and the electricity price. Coal prices are market-based, but electricity tariffs are government-controlled. The ICR indicates that the current low price of gas-fired power generation does not cover the economic cost of gas and is not sustainable. Using a proxy cost-recovery tariff of RMB0.8/KWh, the EIRR at completion would be 14.6 %, which is slightly higher than the appraisal estimate.

There were no major cost overruns as far as the physical components were concerned. However, the project had to be extended by one year “to ensure that the power station could operate with the designed technical efficiency and reliability.” (ICR, page 4).

a. If available, enter the Economic Rate of Return (ERR)/Financial Rate of Return at appraisal and the re-estimated value at evaluation:


Rate Available?
Point Value
Coverage/Scope*
Appraisal:
Yes
13.6%
95%
ICR estimate:
Yes
14.6%
95%

* Refers to percent of total project cost for which ERR/FRR was calculated

6. Outcome:

The relevance of the project's objectives is substantial, and the relevance of its design is modest. The objectives were consistent with the country's current macroeconomic priorities, as well as with the Bank strategy. While the project did achieve efficiency gains in the power sector, the reforms occurred as a result of factors to the project, implying a moderate shortcoming in efficacy. Efficiency is substantial.

a. Outcome Rating: Moderately Satisfactory

7. Rationale for Risk to Development Outcome Rating:

The project company has the adequate staff and institutional capacity to operate and manage the project facilities. The revenue arrangements internally between the project company and the State Grid Company are sufficient to ensure financial viability at the entity level. However, the delays in bringing energy sector reforms to full implementation could detract from efforts to improve efficiencies at the sector level.

a. Risk to Development Outcome Rating: Moderate

8. Assessment of Bank Performance:

a. Quality at entry:

The analytical and technical aspects of project preparation, which were informed and endorsed by an independent Panel of Experts, were fully satisfactory. Lessons of earlier Bank operations in China's electricity sector were taken into account. The Bank employed the necessary skills mix for the project's technical, financial, economic, institutional, safeguards, procurement, and fiduciary safeguard requirements. The working relationship with the Borrower and the project company were consistently good and well-coordinated during preparation and appraisal.

However, the strategic and policy aspects of project preparation proved to be deficient, by saddling a standard investment operation with an extensive reform agenda that included the separation of generation and transmission, creation of separate accounts, tariff and pricing reforms, mandatory efficiency standards, decommissioning of small generation units, spin-off of non-core businesses, and the creation and full operation of a wholesale competitive market characterized by a spot market and access to power generators by large consumers through negotiated contracts. This extensive reform agenda proved to be unrealistic.

Quality-at-Entry Rating: Moderately Unsatisfactory

b. Quality of supervision:

The Bank supervision teams had the necessary skills mix. Sufficient budgets were provided, and the project was supervised adequately. There was continuity in the task team, both for the task Team Leader and other key sector specialists. Aide-memoirs alerted the Government and the Project Management Office on project issues and provided guidance on solutions in a timely manner. The team also monitored compliance with safeguards and fiduciary aspects.

However, the Implementation Status Reports (ISRs) were not realistic in rating project performance, specifically with respect to the achievement of development objectives. There was a lack of candor in supervision reporting. Although key aspects of the ambitious reform program were not being implemented, notably the creation of a wholesale power market, the project's DO rating was "Satisfactory" for all ISRs throughout project implementation.

Quality of Supervision Rating: Moderately Satisfactory

Overall Bank Performance Rating: Moderately Satisfactory

9. Assessment of Borrower Performance:

a. Government Performance:

The current series of electricity reforms started in 2000. In April 2002, the State Council issued the Master Power Sector Reform Plan, or Decree No. 5. The Central Government believed that the oversupply of electricity in China at that time presented a good opportunity to implement further reforms. From 2003 onward, however, China started a decade of rapid GDP growth (at or above 10 %), with electricity demand growing at the same pace. The grid companies expressed strong resistance to electricity sector reform. Thus, the project’s reform objectives became even more urgent, but were only partially implemented. The establishment and operation of a wholesale competitive market was not carried out.

On other aspects, relevant ministries exercised systematic consultation and coordination. Counterpart funds were provided in a timely manner. The provincial and local governments also supported the project, participating actively in the preparation of the Resettlement Action Plan and Environmental Management Plan.

Government Performance Rating: Moderately Unsatisfactory

b. Implementing Agency Performance:

The Project Management Office satisfactorily implemented all aspects of project management, including financial management, procurement, implementation of the Environmental Management Plan and Resettlement Plan, and regular project reporting. All required quarterly and annual reports were submitted on time. All civil engineering works qualified fully for acceptance, and the project's quality of work received national recognition through the China 2010 National Superior Project Award.

Implementing Agency Performance Rating: Satisfactory

Overall Borrower Performance Rating: Moderately Satisfactory

10. M&E Design, Implementation, & Utilization:

a. M&E Design:

Appropriate performance indicators were developed by the project company EYPSPC to monitor the operation of the pumped storage power plant at Yixing and the efficiency of the power sector in Jiangsu. Indicators related to the reform component were to be monitored in accordance with an action plan (see Annex 2, page 18 of the ICR).

b. M&E Implementation:

The project company’s Project Management Office had the adequate capacity to collect data on actual performance vis-a-vis the agreed indicators and targets. Data was monitored closely and collected regularly. Reporting was timely for physical components, but the ICR provided little information on the monitoring of the reform component.

a. M&E Utilization:

The timely quarterly and annual reports, which included reporting on the status of performance indicators, facilitated the project monitoring work by the Government and Bank task team, although the extent of policy use of the data was not fully clear from the ICR.

M&E Quality Rating: Substantial

11. Other Issues:

a. Safeguards:

The project was rated Category A for environmental safeguards. According to the ICR (page 7 and 11), "the project Environmental Management Plan (EMP) was implemented in a highly satisfactory manner" and "in accordance with the Resettlement Action Plan, all affected households were compensated fully." As required, an external monitoring agency verified the satisfactory conduct of resettlement and the changes in income and livelihood among affected people after the project. The project helped build institutional capacity to apply good practices in environmental management and resettlement. The environmental protection and ecological improvements carried out under the project led the local government to declare the area as a tourist destination. As required under the safeguard policy for dam safety, a Panel of Experts (POE) with 3 international and 4 domestic members was formed to carry out an independent technical review throughout the preparation and implementation phases. The ICR notes that the POE confirmed that the dam design adequately addressed the Panel’s concerns. The project team confirms (by email dated March 19, 2013) that the project complied with the Bank's safeguards policies.

b. Fiduciary Compliance:

According to the ICR (page 7 and 13), "the project complied with fiduciary covenants during implementation." Internal control arrangements were in place. The financial management (FM) system was adequate and provided timely and accurate information to manage and monitor the project's implementation. The funds flow arrangement was also appropriate throughout implementation. Project and entity audit reports were received on time, and no major issues were raised in the audit reports. The ICR (page 7) reports that Bank procurement guidelines were followed and no major issues arose during implementation.

c. Unintended Impacts (positive or negative):

d. Other:



12. Ratings:

ICR
IEG Review
Reason for Disagreement/Comments
Outcome:
Satisfactory
Moderately Satisfactory
The relevance of the project's objectives is substantial, and the relevance of its design is modest. The objectives were consistent with the country's current macroeconomic priorities, as well as with the Bank strategy. While the project did achieve efficiency gains in the power sector, the reforms occurred as a result of factors to the project, implying a moderate shortcoming in efficacy. Efficiency is substantial.  
Risk to Development Outcome:
Moderate
Moderate
 
Bank Performance:
Satisfactory
Moderately Satisfactory
There were significant shortcomings in Quality at Entry (see Section 8a). The Harmonization Criteria lead to an overall Bank performance rating of moderately satisfactory. 
Borrower Performance:
Satisfactory
Moderately Satisfactory
There were significant shortcomings Government (see Section 9a). The Harmonization Criteria lead to an overall Borrower performance rating of moderately satisfactory. 
Quality of ICR:
 
Satisfactory
 
NOTES:
- When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006.
- The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate.

13. Lessons:

The ICR (pages 14 and 15) provides the following lessons, which are reproduced here with some adaptation:

1. The continuity of Borrower and Bank task teams is an important factor in project success. both to promote consistency, depth and follow-up in sector dialogue, as well as to ensure smooth project implementation.


2. An adaptive approach to environmental management during project implementation can help reduce compliance costs while improving environmental outcomes.

3. Hydropower pumped storage has become more relevant in the energy mix by improving the capacity of the grid to accommodate intermittent, renewable energy sources.

14. Assessment Recommended?

No

15. Comments on Quality of ICR:


The ICR is concise and clearly written at 15 pages. It provided a candid and convincing explanation behind the partial implementation of the reform agenda. The risk assessment on page 5, however, appeared to merely repeat the PAD and should have discussed whether the mitigation measures proved to be adequate, especially since the major risks were all related to reforms. There was also no discussion in the M&E Section (page 6) on how the reform component was monitored. Moreover, reference was made to an impact evaluation of the project in 2010 (page 7) but no further information was provided, at least on the main findings. The discussion of the environmental and resettlement safeguards was inadequate. There was no cost figure provide for the transmission pipeline, which was appraised originally as an integral part of the project and its objectives.

a. Quality of ICR Rating: Satisfactory

(ICRR-Rev6INV-Jun-2011)
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