Ghana’s CDM proposal for the energy-efficiency standard for air

conditioners

A.K. Ofosu-Ahenkorah

Energy Foundation

COP-11/MOP-1 2005

Project Objectives• Make Room Air Conditioner Standard

mandatory and enforceable in Ghana by building a modern testing Laboratory at the Ghana Standards Board.

• The removal of the least efficient air conditioners on the Ghanaian market will save significant amounts of energy

• Reduce growing dependence on imported energy

• Reduce cost of electricity for consumers

Potential Energy Savings from Standards in Ghana – 1998

Survey

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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Ener

gy S

avin

gs (m

ill k

Wh) Room Air Conditioners

RefrigeratorsResidential Lighting

Why Would Standards be a CDM Project?

• EE standards face a number of barriers -- enforcement, testing labs, public awareness, etc.  Major upfront analysis as well.

• These all have costs that need to be paid for• CERs are a good way to attract investors for

upfront costs, such as a testing lab.• CERs are a good way to pay for monitoring

and enforcement, which can also be expensive.

• In the case of Ghana, without CERs, there is no way this standard can be implemented.

From the CDM Perspective

• This is a unique kind of project – a government policy itself being the CDM project

• Energy Foundation and QualityTonnes submitted this project as NM0072 to the Meth Panel. MP requested guidance from CDM EB.

• CDM EB could not agree on whether mandatory government policies can count for CDM

• Methodology on hold until MOP decides

The Proposed Standard• Require that the minimum air conditioner have an

“Energy Efficiency Ratio” or EER of 2.8 or higher. • The EER is the amount of electricity required per unit

of “cooling,” expressed as watt/watt or Btu/hr/watt. Cooling Capacity is the maximum amount of “cooling” that a unit can provide, expressed as Btu/hr or kW.

• Any AC units below this standard cannot be sold in the Ghanaian market.

• A testing lab would be required to enforce the standard.

• The goal is to stop the “dumping” in Ghana of inefficient units that cannot be sold in the West

National Energy Savings

Standard High Benefits Low Benefits2.8 EER up to 2010 1453 GWh 1200 GWh

up to 2020 8522 GWh 6764 GWh

up to 2030 19497 GWh 15109 GWh3.0 EER up to 2010 2555 GWh 2121 GWh

up to 2020 15430 GWh 12222 GWhup to 2030 38296 GWh 29554 GWh

3.2 EER up to 2010 3520 GWh 2931 GWh

up to 2020 21174 GWh 16713 GWhup to 2030 53841 GWh 41292 GWh

National Energy Savings - High Benefits

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National Energy Savings - Low Benefits

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Net Present Value

High Benefits (savings to consumers)

Low Benefits

2.8 EER $245.10 million $116.64 million

3.0 EER $436.65 million $199.57 million

3.2 EER $569.7 million $247.23 million

Carbon Emissions Savings

High Benefits Low Benefits2.8 EER up to 2010 0.2 mt of CO2 0.16 mt of CO2

up to 2020 1.2 mt of CO2 0.9 mt of CO2

up to 2030 2.8 mt of CO2 2.1 mt of CO23.0 EER up to 2010 0.34 mt of CO2 0.3 mt of CO2

up to 2020 2.1 mt of CO2 1.7 mt of CO2up to 2030 5.5 mt of CO2 4.2 mt of CO2

3.2 EER up to 2010 0.5 mt of CO2 0.4 mt of CO2

up to 2020 2.9 mt of CO2 2.3 mt of CO2up to 2030 7.8 mt of CO2 5.9 mt of CO2

It’s Not Easy! Major Steps in Analyzing and Setting Standards

Document Data, Methods and Results

Gather Data

Categorize Product Classes

Analyze Consumer, Industry,

National and Environment

al Impacts

Analyze Using a Statistical Approach

Analyze Using an Engineering/ Economic Approach

Involve Stakeholders

Issues as a CDM Project• Ownership of CERs – who owns the credits for

such a dispersed project? Proposal in this case: Ghana Standards Board

• Additionality – need to show that the policy itself could not be implemented without CDM. This is possible in the case of Ghana but may be tricky in other cases. May require an additional level of proof by the project developer beyond the current additionality test tool.

Issues (con’t)

• Double-Counting – in the case of this project, no one should be able to claim credit from buying a new AC unit – whether its retailers, distributors or individuals. Ghana DNA can enforce through approval process.

• Monitoring: Methodology requires sampling of key variables (hours of use, etc.). Method proposes sampling to a margin of error of less than 5% -- then discounting ERs by the margin of error to be conservative. Sampling is allowed in CDM.

Issues (con’t)

• Free Riders: Could be a problem with other types of programmatic CDM (eg: a voluntary EE program). The mandatory standards avoids that problem by making only one entity – the government standards agency – the sole holder of CERs.

• Leakage: No additional leakage should occur in this case but again, could be an issue in other types of policy-CDM programs.

Key Benefit from a CDM and Ghanaian Perspective

• One can really scale up CER output if large-scale program/policy CDM is allowed.

• Can be a major push to implement policies that may be too difficult to implement in many developing countries.

• This project will save Ghanaian consumers millions of dollars in lower energy bills and free up electricity for Ghana’s strained grid.

• GDP grew at an average annual rate of 4.7% from 1995-1997, but drought-induced power shortages in 1998 hampered industrial and service sector outputs and limited GDP growth to 2.0%, with rolling blackouts into 2000.

• Economy is back on growth path. GDP Growth in 2002 -5.2%, 2003 – 5.8%, 2004-5.8%, projected to cross the 6% mark in 2006.

• Air conditioning use is rising rapidly as more homes and businesses purchase room units.

Potential Energy & Cost Savings• The RAC Standard will save Ghanaian consumers an average of

$64 million annually in energy bills. • Payback on the initial incremental investment in efficiency by

consumers is less than 9 months. • The average price of RAC may go up by about 3% for the

proposed standard, however, the new RACs will use about 9% less energy, paying off the investment very quickly.

• Carbon dioxide emissions will be reduced by about 2.8 million tons over 30 years (104,890 tons per year).

• A 2003 compliance with the standard would have immediately freed up 13 megawatts of generating capacity and by 2014 will be saving the equivalent of a 150MW generating plant. By 2020, this standard alone will be saving about 950GWh per year, freeing up nearly 250MW of generating capacity at net negative cost to the economy.

• In contrast, the 200MW Bui hydropower plant is being constructed at a cost of nearly US$600 million.

The Standards Process

Approach: National Impact Model

• Model does accounting of appliance sales, energy use, costs, and savings.

• Like many accounting applications, model is formulated in a spreadsheet

• The increase in appliance sales is assumed to be driven by population, income growth, gradually decreasing price, and replacements.

• Benefits are decreasing energy bills, costs are higher appliance prices compared to no-standards case.

National Energy Savings and Net Present Value

• National energy savings calculated as difference between base case (without new standards) and standards case

• National net present value calculated as difference between present value of operating cost savings and present value of increased equipment costs

• Shipments forecasts required for each case Dependent on Housing Starts and Lifetime of equipment

• Forecast of unit annual energy use required Dependent on unit efficiency

Room Air Conditioner Survey2001 & Analysis

• Objectives of Survey: To establish the basis for a proposed

minimum energy efficiency standard for Room Air Conditioners (RAC)

Methodology

• Survey of 100 RAC Units• Nameplate data collection• Determination of Energy Efficiency Level• Supplier price data• CEPS data• Data Analysis

Definitions and Assumptions

• 4 Categories of Cooling Capacity• <12,000 Btu/hr• 12,000 to <18,000 Btu/hr• 18,000 to <24,000 Btu/hr• >24,000 Btu/hr

• “Installed Cost” (IC) is the cost of purchasing and installing the unit.

Definitions and Assumptions(con’td)

• “Annual Operating Cost” (AOC) is the annual cost of energy (and maintenance) to run the unit

• “Life Cycle Cost” (LCC) = IC+AOC*useful life

• Typical useful life per unit is 15 years at 3,000 hours per year (45,000 hours)

Economic Analysis: Payback Period and Life-Cycle Cost Calculations

• Payback Period expressed in years• Payback of 3 years means that the increased purchase

price is equal to 3 times the value of reduced operating expenses in the year of purchase

• Life-Cycle Cost

Payback Purchase Price (includes installation) Operating Cost (includes maintenance)

LCC Installed Cost (PWF Operating Cost)PWF 1

r[ 1 1

(1 r)N]

Findings

• Purchase price increases w/ cooling capacity

• Wide range of prices within capacity categories

• Prices may not increase with efficiency• Wide range of efficiency within capacity

categories• Most expensive not necessarily most

efficient!

All UnitsPurchase Price vs. Capacity

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All UnitsEfficiency vs. Capacity

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All UnitsPurchase Price vs. Efficiency

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US$ RAC Units

LCC Analysis of Two RACsCompare two 18,000 Btu/hr models:• Make 1(model #53QN189LCD3+7LCD3)

• EER = 2.37• PP = $1350

• Make 2(model #M18CX5E)• EER = 2.94• PP = $1401

LCC Analysis

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Make 1 Make 2 Savings

Life Cycle Cost

Purchase Price

Annual OperatingCostLCC

Life Cycle Cost Analysis

Payback on the purchase of the more efficient unit:

• Incremental Cost = $51• Annual Operating Cost Savings = $77• Payback is less than 8 months!

Analyzed Scenarios

• High Benefits Case: High growth, high electricity prices & low interest rates.

• Low Benefits Case: Low growth, low electricity prices, & high interest rates

• Standard Levels Analyzed: 2.8 EER, 3.0 EER, and 3.2 EER.

Life-Cycle Cost Results

High Benefits Low Benefits

Base Case $4213.62 $2996.77

2.8 EER $3945.72 $2841.86

3.0 EER $3817.38 $2787.11

3.2 EER $3750.32 $2784.44

Cost and Saving of New Room Air Conditioners

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Energy Saving

Price Change

Net Saving

What are the possible direct effects (e.g., employment creation, capital

required, foreign exchange effects)?• Because much of Ghana’s marginal electricity load is

generated by fuel oil, and perhaps gas with the WAGP completed, saving the equivalent of 150 MW of capacity by 2014 will substantially reduce Ghana’s import of fossil fuels, keeping more money inside the country.

• Better standards will make Ghana much less vulnerable to price shocks in the oil and gas markets. All of this can be achieved for a very modest investment.

• Better Standards will attract investments in Appliance manufacture into Ghana since appliances manufactured for the Ghanaian market can also be exported into countries where standard regimes are operational. This will create jobs, increase export earnings.

What are the possible other effects?

• A modern testing facility requires state-of-the-art testing technology, a well-maintained calorimeter chamber and well-trained staff. Such capacity and technology does not exist anywhere in West Africa and would thus provide very good technology transfer benefits. The training of the staff would have to be done in Europe or the U.S., and the equipment will have to be imported. The provision of carbon finance will ensure the proper maintenance and staff training do take place.

• Finally, the Ghana Standards Board already agreed in principle to joint standards development with Nigeria. The Nigerian Standards Bureau provided input for the passage of the Ghana AC standard. Ghana intends to collaborate with other ECOWAS countries on future standards through the Ghana Standards Board. Ghana and Nigeria alone account for an estimated 65% of all trade in West Africa and therefore have the potential of providing leadership and market-pull for other countries in the region. If Ghana adopts the mandatory standard and has the testing facility available, Nigeria might also adopt the standard, having the potential for significant replication.

Additionality• The Ghana air conditioner standard depends on the

construction of a modern testing laboratory. • These are expensive, difficult to maintain and require a

trained staff. Few developing countries have government-run testing labs, because of these barriers.

• There are no plans to build a testing lab in Ghana, and thus according to the policy of the Government, the standard will only be voluntary without the testing lab, the primary means of enforcement and monitoring. As such, the standard will most likely be worthless in terms of getting the least efficient models dropped from the market.

• Only with carbon investment is the testing lab likely to get built and the standard – with all of its benefits – likely to be implemented.

Investment Requirements and Sources

• Development Cost = US$0 (much of analysis has been completed)

• Installed cost of equipment = US$1.4million• Other Costs =US$0.625million ($25k one time

investment for Staff training, staff cost per year=US$60k/yr for 10 years=$625k)

• Total Cost =US$2.025million• Ghana Govt contribution=US$684,110• Carbon Finance= US$1,240,890 over 10 years• Indicative CER/VER unit price=US$5/tonne CO2.

Project Risks

• the economy has a severe recession or political instability disrupts economic growth. In that case, fewer room air conditioner units would be sold. However, given Ghana’s political stability over the years, this seems like a modest risk. The monitoring of the CO2 reductions will provide a challenge as sales numbers (important here will be import data which is publicly available), surveys on use of air conditioners and other data will need to be performed as much as every year or two. The monitoring costs of the project will be higher than single-site projects and will depend on high-quality, statistically significant survey data. This risk is mitigated somewhat by the amounts of technical assistance provided to Ghana already from USAID and the UN Foundation. This work has already led to voluminous amounts of data and built capacity.

The Next Steps, as agreed 02/02/02 meeting with Parliamentary Select Committees

• Legislative Instrument enforcing standards to be passed by Parliament, under Act 541, – by June 2002.. Now by Dec 9th 2005

• Voluntary Labelling Regime by January 2003… Now January 2006

• Testing Facility to be built – completed by Dec. 2004… Now expected in December 2006

• Testing and Full enforcement by January 2005…Now January 2007

• Refrigerator, Lighting and Electric Motor Standards to be developed beginning May 2002… Now January 2006

Appliance Standards Worldwide

*as of 1999

*