Project Feasibility Study VGP Sanitary Landfill Biogas Emission Reduction and Energy Generation Project City of San

Jose del Monte, Bulacan

Submitted as partial fulfillment of academic requirements in PA 143: Program and Project Development and Managament

Calibara, Jan Arianne Estrera, Martin Eugenio, Paul Indunan, Norbert Peter Velasquez, Rein

Asst. Prof. Ebinezer R. Florano, Ph. D. October 18, 2013

Project Summary

Project title

VGP Sanitary Landfill Biogas Emission Reduction and Energy Generation Project

Location

Minuyan Proper, City of San Jose del Monte, Bulacan

Operation Period Estimated Project Cost Annex I Country Partner Main Sources of Income

: : : :

2022-2031 (10 years) Php 253,331,195 New Zealand Feed-in Tariff Rate (FIT) and sale of Certified Emission Reduction Units (CERs)

Net Present Value Internal Rate of Return Benefit - Cost Ratio Cash Payback Period Sensitivity Indicators: Ownership Structure

: : : : : :

Php 113,053,628 (at 4.51% Inflation Rate) 11.75% 1.1710 6 years FIT, CERs, Exchange Rate

Private-sector led project, with either the landfill operator or a local / foreign investor investing through equity. The Annex I country partner, New Zealand, will purchase the projects CERs for conversion to New Zealand Units (NZUs) to be traded in the countrys Emissions Trading Scheme.

Table of Contents Project Summary Chapter 1 - Introduction 1.1 Information About the Study 1.2 Project Location Chapter 2 - Market Analysis 2.1 Demand 2.1.1 Certified Emissions Reductions 2.1.2 Electricity 2.2 Supply 2.2.1 Population 2.2.2 Electricity in the Luzon Grid 2.3 Addressing the Demand-Supply Balance Chapter 3 - Technical Analysis 3.1 Scope and Methodology Used 3.2. Computation of the Baseline Emissions and Ex-Ante Emission Reductions 3.3 Computation of the Emission Factor and the Electricity Supplied to Grid Chapter 4 - Financial Analysis 4.1 Assumptions 4.1.1 Financial Assumptions 4.1.2 Technical Assumptions 4.2 Costs Estimation 4.2.1 Investment Costs 4.2.2 Operational Costs 19 19 20 21 21 22 15 2 6 7 8 9 9 9 10 10 10 10 11 12 12 12

4.2.3 Depreciation 4.3 Income Statement 4.3.1 Income with CER Revenue 4.3.2 Income without CER Revenue 4.4 Cash Flow Statement 4.5. Profit Margins 4.5.1 Net Profit Margin 4.5.2 Operating Profit Margin 4.5.3 Gross Profit Margin 4.6 Sources of Funding Chapter 5 - Socio-Economic Analysis 5.1 Assessments 5.1.1 Benefits 5.1.2 Costs 5.2 Measurement Tools 5.2.1 Net Present Value 5.2.2 Internal Rate of Return 5.2.3 Benefit-Cost Ratio 5.2.4 Cash Payback Period Chapter 6 - Sensitivity Analysis 6.1 Possible Scenarios Chapter 7 - Environmental Impact Analysis 7.1 General Assessment 7.2 Compliance with national environmental laws

22 23 23 25 25 26 27 27 28 28 29 29 29 30 30 31 32 33 34 36 36 38 38 38

Chapter 8 - Institutional Analysis 8.1 Legal considerations in support of the project 8.2 Project Organization and Management 8.2.1 Ownership set-up 8.2.2 Public sector participation Chapter 9 - Risks and Opportunities Analysis 9.1 Political and institutional risks 9.2 Economic and technical risks 9.3 Social and behavioral risks 9.4 Geographical and environmental risks Annexes 1 Population Projections 2 Waste Generation Projectiona 3 Waste Collection Projections 4 Computation of Methane Emissions 5 Computation of Methane Reductions 6 Key Assumptions 7 Operational Cost Assumptions 8 Investment Cost Assumptions 9 Depreciation Assumptions 10 Set-up of Scenarios for Sensitivity Analysis - NPV 11 Set-up of Scenarios for Sensitivity Analysis - IRR

40 40 41 41 42 44 45 45 45 46

47 48 49 50 51 52 53 53 53 54 55

Chapter 1 Introduction The issues of energy security and climate change go hand in hand. Both are national and global concerns that is currently being addressed by governments here and abroad. Conventional non-renewable energy sources, such as coal, oil and natural gas has a significant contribution to greenhouse gas (GHG) emissions which fuel climate change in the planet.1 Renewable energy technologies, such as wind, hydro-electric, geothermal, solar, biogas, biofuel and tidal energy is being introduced to replace these usual sources in the long run. Also, there is a pressing concern in addressing the issue of waste management and disposal, as the country continues to develop economically. Population growth, establishment of new communities and opening of businesses and industries will entail problems in managing waste people create - how they will be collected and disposed of. In connection to the greenhouse gas problem, methane, a by-product of waste degrading in landfills, is considered to be 21 times more harmful than usual carbon dioxide emissions.2 If not addressed, this will be emitted to the atmosphere, aggravating damage to the Earths climate. In 1991, several developed and developing countries signed an agreement called the Kyoto Protocol which provides a framework in addressing the issue of climate change. One of the key measures of the document is the Clean Development Mechanism (CDM), in which selected developed countries (Annex I countries) may opt of off-set their emissions by investing in environmentally-responsible projects that address greenhouse gas emissions. These projects are to be established in developing countries such as the Philippines, which will benefit not just from revenue from the CDM but in terms of managing their own emissions, additional forms of investment and technological transfer.

1 2

US EPA Global Emissions Gas Emissions Data (http://www.epa.gov/climatechange/ghgemissions/global.html Overview of greenhouse gases - Methane emissions (http://epa.gov/climatechange/ghgemissions/gases/ch4.html)

1.1 Information about the study This project feasibility study is patterned after the Pangea Green Energy project in Payatas, Quezon City, the first solid waste management project in the country to qualify under the CDM.3 The project, started in 2008 uses biogas-to-energy technology in which methane from the landfill is extracted, flared and transformed into renewable energy. The plant is designed to emit zero emissions and capture methane gas that normally releases to the atmosphere as greenhouse gas. The projects main sources of revenue will be the income from the Feed-in Tariff (FIT) for renewable energy projects and Certified Emission Reductions (CERs), a unit of greenhouse gas reduction created under the Kyoto Protocol. These CERs are to be sold to an Annex I country, countries mandated to reduce emissions as identified under the treaty, chosen as New Zealand for purposes of this document. This Project Feasibility Study is designed using data and techniques from the UN Framework Convention on Climate Change4, the Pangea Green Energy Project5, and the Rosales, Pangasinan BERP Feasibility Study6. Using a conservative approach on measuring revenues and costs, the project is deemed feasible, though conditions starting from the writing of this document to project operation may change and may lead to better or dismal performance. This document, in general, is written to provide the local government, interested investors, academics and other stakeholders information they may need in assessing the viability of the project, or CDM-qualified projects in general. More than assessing financial viability, it also evaluates the project using other quantitative and quantitative values, measuring its economic, social and political impact.

Quezon City Controlled Disposal Facility Biogas Emission Reduction Project (http://pgephil.com/links/projects.html) 4 Methodology: ACM0001 Consolidated baseline methodology for landfill gas project activities (http://uvle.up.edu.ph/mod/resource/view.php?id=34707) 5 Pangea (2007) Quezon City Controlled Disposal Facility Biogas Emission Reduction: CDM Project (http://uvle.up.edu.ph/mod/resource/view.php?id=3152) 6 Project Feasibility Report - Rosales, Pangasinan (http://uvle.up.edu.ph/mod/resource/view.php?id=36956)

1.2 Project location The project will be located in the VGP Sanitary Landfill, a privately-owned and operated landfill in Brgy. Minuyan Proper, City of San Jose del Monte, Bulacan. The landfill serves as the main disposal site for the city, in addition to 5 local government units (LGUs) in the province. San Jose del Monte is located

immediately North of Metro Manila, bordered by the cities of Caloocan and Quezon City. Established as a town in 1752 as part of the Spanish reduccion, SJDM became a city in 2000, the first city in the province. In the latest Census, more than 450,000 people currently live in the city. The city has an area of 105.53 square kilometers, with the western portion more developed compared to the east, which has a more mountainous and forested terrain. It is currently divided into 59 barangays, with most of the population concentrated in Tungkong Mangga, Muzon and Sapang Palay areas. More than being a sleeper town hosting private subdivisions and government relocation sites, the city has experienced growth due to expansion of the service sector as the population grows, in part due to its proximity from Metro Manila. Major real estate developers have entered the city, as well as variety of industrial and commercial developments, such as the proposed MRT-7 Project and North Luzon East Expressway, Altaraza Town Center, Colinas Verdes, and the ABS-CBN Sound Stage.

Chapter 2 Market Analysis Market Analysis is primarily focused on assessing demand or supply of a certain product or service. This is considered to be the most essential part of project feasibility, as the results of such analysis determines the projects ultimate viability. It seeks to determine the size of the demand, supply situation, how it is currently addressed, potentials for growth, price of products, and the appropriate plan in bringing supply to those who need them.

2.1 Demand 2.1.1 Certified Emission Reductions (CERs) The total projected demand by 2020 is 3.14 billion CERs.7 Currently, the termination of the Kyoto Protocol on December 31, 2012 has caused significant impact to the demand for CERs. However, it it still expected that demand for CERs will be maintained due to negotiations for a second commitment period under the Kyoto Protocol, to be decided by the Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol (AWG-KP), in addition to the introduction of local emission trading markets in several countries. The New Zealand government has introduced its own Emissions Trading Scheme (ETS) in 2008 in order to fulfill its greenhouse gas obligations.8 For purposes of trade, the New Zealand Unit (NZU) is created parallel to the CER scheme. Several industries are given set quotas for their greenhouse gas emissions, to which they may purchase or sell NZUs to address this. The scheme also allows importation of CERs from outside of New Zealand for conversion to local units.

Bloomberg Energy Finance Carbon Market Update (http://www.iea.org/media/workshops/2012/ghg/1_Turner_IETAEPRI_Paris2012.pdf) 8 New Zealand Emissions Trading Scheme Basics. (http://www.climatechange.govt.nz/emissions-tradingscheme/about/basics.html)

2.1.2 Electricity Based on the Philippine Energy Plan 2012 - 2030, the Luzon Grid is expected to require to up to 10,500 MW of additional electricity as the economy and population grows. By 2015, there is significant risk that the grid may experience shortfalls in electricity due to the lack of generating capacity.

2.2 Supply 2.2.1 Certified Emission Reductions - Population and Waste Generation The City of San Jose del Monte currently has a population of 454,553 based on data from the National Statistical Coordination Board (NSCB). Based on the citys 2011 Waste Analysis and Characterization Study, each resident generated about 433.01 grams of waste per day, 42% is set for disposal to sanitary landfills.9 On its own however, the citys current solid waste generation will not be enough to sustain possible supply of methane gas to which the project will be ultimately dependent into. Details of this is written in Part 2.3.

2.2.2 Electricity in the Luzon Grid There is currently 12,578.8 MW of electricity capacity installed in the Luzon Grid.10 Most of these sources are depended on conventional fuels such as oil, coal and natural gas. It is to be noted that the grid is highly dependent on the Malampaya natural gas field, supplying around 40% of the grids electricity supply. Most of these sources are privately-owned as reforms in the Electric Power Industry Reform Act (EPIRA) was implemented in 2001. San Miguel Corporation, Aboitiz Power and First Gen are the dominant suppliers in the grid, though more and more players are starting to introduce both renewable and non-renewable power plants in the grid such as Ayala Corporation, KEPCO, GT Power and MERALCO.

9 10

CSJDM Socio-Economic and Physical Profile - Solid Waste Management (http://www.csjdm.gov.ph/sep.html) DOE List of Power Plants - Luzon Grid, 2012

10

2.3 Addressing the demand-supply balance While it is assured that the city will experience increase in population and will require increased energy demand, in itself it is not enough to sustain the project based on current methodology. This was based on a list of standards used for the Pangea project, specifically: There must be at least 1,000,000 tons of waste already disposed in the plant for the past 10 years in order to sustain at least 1 mW of generating capacity, and At least 100,000 tons of waste should be disposed in the landfill every year for at least 5 years immediately after the landfill reached the 1,000,000 mark. Upon consultation from the operator of the VGP Landfill, it was disclosed that the landfill currently accepts 200 tons of waste a day even if it could accept up to 2,000 tons. These waste comes from 6 LGUs: San Jose del Monte, Santa Maria, Bocaue, Meycauwayan, Baliuag and San Rafael. These 6 municipalities can generate only around 200,000 tons of waste a year, with only a portion expected to be disposed to the landfill. To address this, the proponents estimated the total waste generation for the whole province of Bulacan. Assuming that the landfill will accept the whole provinces waste, it could hit the 1 million mark the earliest by 2016 and could have the project feasible for operation in 2022. This can be achieved by increasing the volume of waste disposed to the site from 200 tons to a minimum of 750 tons/day. Details of these estimates are included in the attached annexes.

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Chapter 3 Technical Analysis Technical Analysis provides an idea on how the demand for a certain product could be fulfilled. It examines the extent of production, materials and technologies to be used, how it must be processed, and the resulting products of such process.

3.1 Scope and Methodology Used The proponents proposes a biogas emission reduction project be installed similar to the Pangea project. It will involve both flaring and production of energy to displace Luzon grid electricity produced from conventional sources. The methodology used for the Project Feasibility Study is similar to the methodologies used by Pangea, the ACM0001 Consolidated Baseline Methodology for Landfill Gas Project Activities.11 The baseline scenario is the expected total atmospheric release of biogas from the solid waste disposal site if the biogas emission reduction project is absent.

3.2 Computation of the Baseline Emissions and Ex-Ante Emission Reductions The baseline emission scenario is the amount of biogas emissions that would have been released to the environment if the project activity will not be realized. The baseline emission for year y (BEy) in tCO2e/yr can be calculated using the following equation:

Where:

11

ACM0001: Consolidated baseline and monitoring methodology for landfill gas project activities - Version 11.0 (http://cdm.unfccc.int/methodologies/DB/203B03KT6N8QCC0R1C56DFOF9OYO2T)

12

The BECH4,SWDS,y was calculated using a formula identical with the formula found in the IGES ERs Calculation Sheet which is:

Where:

The following values were used to calculate the BEy, mainly based on the 2011 WACS of the city. Several assumptions for the proposed biogas emission reduction plant were also used, mainly based from those used from Pangea.

13

After calculating the values of BEy, the proponents recognized that the said amounts are sufficient enough to produce CERs and electricity that would yield a positive net income. Using the default values, the above data from the Bulacan landfill and assumptions for the proposed biogas emission reduction plant, the expected baseline emissions were computed for every year y. Details of this data are available in the attached annexes.

The BEy can then be used for the calculation of the baseline emission reductions in tCO2eq of the project activity for a year y. The estimate ER in tCO2eq for a year y was calculated using the formula:

Where:

PEy was computed using the formula:

14

Where:

Using the values of BEy and PEy from year 2012 to 2021 , the total amount of emission reductions for the project is summarized in the table below:

3.3 Computation of the Emission Factor and the Electricity Supplied to Grid The proponents then proceeded to calculate for the baseline emission factor EFy to get the EGBL,y (MWh) or the net electricity supplied to the Luzon grid as a result of

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the implementation of the CDM project for a year y. EFy is the amount of emissions in tCO2e for every MWh of electricity that was supplied to the grid as a result of the implementation of the project. The EFy was computed using the formula:

Where:

The EFOM,y has the formula:

Where:

The tables below show the data and computation for EFOM,y. The values for Fi,j,y and GENj,y were derived from the Philippine Power Statistics 2012 DOE.

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The EFBM,y is computed the same way as EFOM,y, the only difference is that the variable m is used instead of j, where m are the five most recentlybuilt power units in the country. However, the proponents preferred to use computations from the National Grid Emission Factor provided by the Department of Energy.12 Using the values obtained for EFOM and EFBM, EFy can now be obtained. The table below shows the computation for EFy. The proponents used the simple average method in computing the EFy.

12

DOE National Grid Emission Factor, 2009-2011 (http://www.doe.gov.ph/power-and-electrification/national-gridemission-factor-ngef)

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Lastly, using the values obtained above, ERy and EGBL can now be computed. The table below shows the values obtained for ERy and EGBL.

EFy is calculated as overall expected greenhouse gas reductions, computed as: ERy = BEy - PEy - LEy Where: BEy = Net Annual Methane Emissions (in metric tons) x 21 (the Greenhouse Gas Potential of Methane) PEy = Projected project emissions (in this study, estimated to be 10% of BEy) LEy = Emissions due to leakage (assumed to be zero since the plant is not expected to be moved on relocated in its entire project life) EGBl, on the other hand, is computed to be the product of ERy and the EFy as computed above.
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Chapter 4 Financial Analysis Financial analysis is fundamental especially to investors in determining projects sustainability, profitability, stability, solvency and liquidity. Moreover, it is a way to see if the project is able to use its resources efficiently. To analyze the projects financial viability, the proponents prepare necessary documents such as income statement and cash flows, as well as tools to measure profitability such as profit margin, operating margin and gross margin.

4.1 Assumptions To estimate potential revenues and costs of the project, several values are established to give an idea of the possible conditions once the plant is commissioned. These values are enumerated below:

4.1.1 Financial Assumptions a) Certified Emissions Reduction (CER) Value This is identified to be around NZ$ 5.00, the current long-term price of New Zealand Units (NZUs) in the New Zealand Emissions Trading Scheme.13 Under its current regulations, participants may import CERs from other countries for conversion to local New Zealand Units to offset their emissions. b) Feed-in Tariff Rates Under current regulations, FIT rates for biogas power plants are set around Php 6.63 / kWh.14 This is set to be reduced by 0.5% every year starting from the 3rd year of the project. c) Royalty This is a set payment for the owners/developers of the technology to be used for the
13 14

Commtrade Carbon Market Prices (https://www.commtrade.co.nz/) DOE Circular 2013-05-0095 Guidelines for the selection process of renewable energy projects under the Feed-in Tariff system and the award of certificiate of Feed-in Tariff eligibility

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plant, based on the number of emissions expected to be offset. For the purpose of this document, this is set around 15% of yearly revenue. d) Contingencies and Insurance Cost This is set as 10% of yearly revenue. e) Share of Proceeds Under current UNFCCC rules, up to 2% of the projects income should be given to the host country and the CDM Executive Board, respectively.15 f) Depreciation The proponents used a straight-line method, offsetting 10% of total investment in each year of operation. g) Taxes It is assumed that the project will qualify under current incentives for renewable energy projects. A 10% flat tax on income will be levied starting from the 8th year of operation in lieu of all national and local taxes.16 h) Exchange Rates This is set under current Bangko Sentral ng Pilipinas (BSP) rates as of October 18, 2013. Assuming stable exchange rates, these values could be similar by the time of project commissioning.17 i) Price Index A price index was used to estimate possible inflation scenarios until such time that the project is commissioned. Using the 5-year average from the National Statistical Coordination Board (NSCB), the proponents expect an average annual increase in prices by 4.51% from 2012 to 2021, the years before the plant is expected to go online.

15

UNFCCC Adaptation Fund (http://unfccc.int/cooperation_and_support/financial_mechanism/adaptation_fund/items/3659.php) 16 2012 Philippine Investment Priorities Plan (http://www.gov.ph/2012/06/13/investment-priorities-plan-2012/) 17 BSP Exchange Rates (http://www.bsp.gov.ph/statistics/sdds/ExchRate.htm)

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4.1.2 Technical Assumptions Based on the Pangea project, the proponents assumed a possible construction of a 1.4 mWh plant similar in technology to Pangea. The plant is also assumed to operate up to 7,500 hours/year. Deducting internal energy consumption, the plant can generate up to 9.9 million kWh of electricity. Provided a monthly household electricity consumption of 100 kwH/month, the plant can serve the demand of up to 8,250 households.

4.2 Costs Estimation To come up with the total project costs, operation and investment costs are summed up. This will reflect on the financial statement of the project. The basis of these costs is discussed in order to justify the expenses.

4.2.1 Investment Costs The VGP Sanitary Landfill is about 45-50 hectares, twice the size of the Payatas Landfill. Considering this ratio, purchasing costs of the materials in Pangea are doubled in VGP. Expenses for drilled wells, HDPE pipes, well heads, substations, connection to three phase grid and combustion plant with 200 kW engine are doubled and adjusted to price inflation using the assumed inflation rate. Other expenses such as civil works, office building, roofing, portable analysis instruments, shipment and logistics, traveling costs and superintendence are also adjusted. These costs are primarily based on the Pangea project, except for fencing and security, which are omitted with the assumption that the landfill operator will shoulder it in behalf of the plant. For Phase 2, the new engine is the only investment. In Payatas, the engine has a capacity of 700 kW. For the VGP project, this capacity is doubled to 1.4 mW. The price of this investment is also adjusted similar to what has been done to the other variables.

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4.2.2 Operational Costs The projects operational

costs are also adjusted and estimated based on the size of the plant. Only ten employees are intended for the plant because is mainly operated by machines, more so that the plant can opt to outsource some of it operations to current workers in the landfill if the need arises. The plant is estimated to have four laborers, two engineers, one finance officer, one consultant, one office personnel and one utility personnel. Regarding the salary of employees, the average wage is taken from the NWPC Region 3 rate, adjusted for inflation and increased by 33% to assume higher wages for professional staff, such as engineers, more so provide contingency should there be a need for more labor. Extraction and engine service costs are estimated based on the Pangea project at around Php 1,250,000 per year. Engine Service Cost, on the other hand, is valued at Php 1.25 per kWh. The proponents decided not to adjust this value for inflation in the assumption that technological advances will reduce or maintain this costs in the long run. Finally, travel expenses including gas and travel allowances for official business trips are estimated at Php 25,000 every month while a spending of Php 100,000/year is set for utilities, such as water and communications.

4.2.3 Depreciation Depreciation of assets such as equipment is accounted as expenses in the future to account for possible reduction in value once it is retired. To compute for depreciation, the straight-line method is used, dividing the total investment from the number of years the equipment from such investment is expected to be used.
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The total investment from Phase 1 is divided equally to ten periods while for Phase 2, the total investment is divided into 8 periods, given that the equipment is used starting on year 3. Hence, depreciation per year in Phase 1 is worth Php 18,078,503 and in Phase 2, Php 27,146,744.

4.3 Income Statement Income statement measures the financial performance of the project as it reflects the summary of expenses and revenues of the project. The income statement is presented annually in order to monitor the progress of the projects financial situation. It is vital to observe the results of these statement because it will guide the management of the project regarding the projects viability.

4.3.1 Income with CER Revenue

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From the technical analysis part, calculated electricity and CER generation comprises the revenues of the project which is shown in the income statement. If the production of electricity is fixed, it is expected that the project has fixed revenue given that FIT rates are constant. However, in practice, this revenue might fluctuate due to higher or lower production of electricity. In the VGP proposal, it is assumed that electricity generated is constant and that there will be no significant changes to FIT rates, resulting to revenues that are generally constant for the duration of the project. The same situation is expected with CER revenues. In practice, CERs sold every year may vary and revenues might increase or decrease as well depending on these changes. Moreover, price of CERs in the open market may go up and down, influencing revenue. For the VGP project, a fixed price was assumed to simplify analysis. When revenues from the electricity and CERs are added, total revenues from the project is projected to be increasing. However, revenues measure only the amount of money that the project receives in a particular time. It is still subject to deductions of costs, taxes, and other fees such as contingencies ad insurance costs. Another component of income statement is the net income where calculated revenues are subtracted with the costs and other expenses such as depreciation and taxes. Considering the current revenue and costs projections, the income statement shows that the project will yield net income for all 10 years of the project.

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4.3.2 Income Statement without CER Revenue

The proponents also analyzed the income viability of the project with the absene of revenue from CERs. Though the trend for revenue is still increasing from the third year to tenth year, it is observed that the first two years of the project does not have any revenues at all. Without CER revenue, the project is expected to have negative net income given that the costs are the same.

4.4 Cash Flow Statement The Cash Flow Statement demonstrates the changes in the amount of cash of an organization. It is essential to solvency and the entitys survival especially whenever there are debts or expenses that are needed to be paid. Hence, it is advisable to monitor cash flows during the projects life as it can be used as an indicator of the organizations financial strength.

In the VGP project, cash inflows come from income from the sale of electricity
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and CERs. Conversely, cash outflows are comprised of the investment costs. On the first two years of the project, even though it does not yet receive revenues from electricity, it already has a positive net income, but net cash flow is negative. These negative cash flows last until its fifth year though the project already receives revenue from the sales of electricity generated on the third year. It is on the sixth year of the project when net cash flows become positive, meaning that the accumulated cash inflow from the projects first year until sixth year is enough to cover the cash outflows for the investment. The succeeding years show that net cash flows are already positive.

Meanwhile, cash flow statement without CER revenues has a negative net cash flow for the whole period of operation. Hence, it means that revenue from electricity sales alone cannot compensate the cash flow on investment costs of the project.

4.5 Profit Margins The Net Profit Margin, Operating Margin and Gross Margin are some of the measures to verify the financial performance and efficiency through testing the projects profitability. The following tables summarizes of margins for both cases: (a) with CER revenue and (b) without CERs. (a) With CERs

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(b) Without CERs

4.5.1 Net Profit Margin Net Profit Margin is the ratio between net income and revenues. This explains how much from the revenues are translated into profits and usually expressed in percentage. A higher Net Profit Margin indicates that the project is highly profitable. The formula used is: Net Profit Margin (%) = Net Profit/Total Revenue If the project has CER revenues, certainly, it has positive net profit margins compared to if the project does not have CER revenues, in which the project will result to a negative net profit margin in ten years. Hence, it means that if the project does not sell CERs, it will not be profitable at all.

4.5.2 Operating Profit Margin Operating Profit Margin measure the companys pricing strategy and efficiency. Moreover, it is a measurement of the part of the revenue that is left after paying variable costs such as salary, raw materials, etc. A positive operating margin means that the company is still able to pay its fixed costs, such as debts and interest expenses. It is calculated as: Operating Profit Margin (%) = Operating income (EBIT) / Net Sales (Revenues) The calculated operating margins from the projects income statement with CER revenues are positive within the ten year period. However, in the projects income statement without CER revenues, calculated operating margins are all negative, interpreted that the project can pay its fixed costs if it has CER revenues.

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4.5.3 Gross Profit Margin Gross Profit Margin is the percentage of the total sales revenue that the company retains after incurring direct costs of producing the goods or services sold by the company. The higher the percentage, the higher the value retains to the company to use it in other costs or obligations. To calculate the formula used is: Gross Profit Margin (%) = Total Revenue - Total Costs of Goods Sold/Total Revenue Unlike the first two margins, both cases gain positive gross margins in ten years. However, gross margins without CER revenues are lower compared to when the project earns from CER revenues. It means that the project has more savings to be allocated on other projects administrative or emergency expenses when the project has CER revenues.

4.6 Source of Funding For investment costs, the proponents assume that these will be financed through equity. Interested local and foreign investors will receive economic interest in the project in exchange for their investment in the project. Financing through debt was not assumed as it is seen to significantly affect the projects cash flow. Revenues are expected to come from the sale of electricity (as translated into FIT rates) and CERs. The electricity generated by the plant will be sold either in arrangement with the local electricity distributor (for SJDM, MERALCO) or to the Wholesale Electricity Stock Market. For CERs, it is assumed that the Annex I country will directly purchase these for re-sale to the New Zealand Emissions Trading Scheme.

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Chapter 5 Socioeconomic Analysis Socioeconomic analysis is a process of determining the feasibility projects desirability equated to its net contribution to social and economic welfare. Socioeconomic analysis plays an important role in the feasibility study as it helps in evaluating the costs and benefits of the project. It presents a calculation of how the projects may affect stakeholders, may it be positive or negative, favorable or unfavorable. Furthermore, this type of analysis serves as a tool to search for best measures that will give us net contribution of economic and social benefits considering the basic assumptions of employment, taxes, supply of commodities and demand for materials. The quantifiable indicators in this analysis includes the net present value, internal rate of return, benefit-cost ratio and cash payback period.

5.1 Assessment of Benefits In a nutshell, CDM projects intend to help developed countries to reduce biogas emissions and assist developing countries attain sustainable development. The identified benefits of the project are classified into tangible and intangible benefits. The intangible benefits are the following: Improved local safety. This pertains to the reduction of biogas emissions leading to a safer environment for the people located near the landfill, making them breathe cleaner air and live in a healthier setting. Job creation. Employment generation in the country is of importance for years and this project contributes to help the local people by offering jobs. Capacity building. The local staff in the landfill will be provided proper training and information in order to gain knowledge with the right monitoring equipment and monitored data, all for enhanced general competence. Climate change awareness. The local community will benefit from the stakeholder consultations, wherein the purpose of CDM projects and potential biogas reductions will be discussed and issues on the local situation of the landfill
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will be addressed. The tangible benefits include: Revenues from CER sales. These are the revenues coming from the sale of CERs to the partnered country of the project. Revenues from the annual generated electricity. These refer to the revenues from the sale of the generated electricity to the local power distributor supplying the community. Transfer of technology. Essential equipment and technology that are not available in the country will be imported and be of use and of great value for the project to operate in its best function.

5.1.2 Assessment of Costs CDM projects always come with a price. Mainly, the costs of the project will come from the investment and operation of the plant, involving the use of real resources, classified into capital or investment costs and operating and maintenance expenses. Capital/Investment costs. This refers to the costs for the general development, construction and building of the project, including the purchase of tangible goods such as the plant and the machinery before the project is operational. Operation and maintenance expenses. This include all costs spent to finance the day-to-day operations of the facilitycomprising of administrative costs, wages and salaries, travel payments, security and other monitoring and evaluating costs.

5.2 Measurement Tools 5.2.1 Net Present Value The Net Present Value (NPV) analysis will be used in order to assess the costs and benefits of the project. It considers the time value of money and estimates the net benefit from the project considering the possible risks the financial market might inflict. This is done by converting the value of future costs and benefits to their actual present

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value. To compute for the future value, a discount rate is used. The discount rate to be considered is 4.51%, the value of inflation assumed in the financial analysis. In computing for the NPV, the annual benefits and costs must be identified to be discounted using the discount factor:

Where: df= discount factor r= discount rate (3.6%) n= Number of years over which a future value is being discounted Then, the Present Value (PV) using the formula: PV= FV x df Where: PV= Present Value FV= Future Value df= discount factor Finally, the following formula is used to get the NPV:

Where: B= benefits C= costs df= discount factor

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The NPV of the project is greater than zero, meaning that the discounted value of the future total benefits is greater than the costs or the investment therefore getting a positive yield. The calculation shows that the project is economically feasible.

5.2.2 Internal Rate of Return The Internal Rate of Return (IRR) determines how the investment fares to other possible alternatives. It is the discount rate at which the NPV is equal to zero, which indicate discounted benefits that can equal discounted cost. The project is a good investment if the IRR is greater than the rate of interest if spent in an alternative investment. In the project, the proponents considered the yield granted by the Philippine 20-year Treasury Bond which has a latest coupon rate of 3.625%.18 The proponents used the manual method involving trial and error and the use of the formula:

18

Bureau of the Treasury Daily Rates of OTC Sales of Government Securities (http://www.treasury.gov.ph/govsec/dailyrates.html)

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Where: r+ = biggest discount rate with a positive NPV NPV+ = the NPV at r+ r- = smallest discount rate with a negative NPV NPV- = the NPV at rAfter a series of guesses and estimates, the proponents came up with the r+ and r-, and then computed for the NPV at both discount rates.

Using all the values from the table above and after plugging them into the formula, the calculated IRR for the project resulted better compared to the Treasury Bonds. This means that the project is a reasonably better investment.

5.2.3 Benefit-Cost Ratio The Benefit Cost Ratio (B-C Ratio) aims to determine the evaluation of the extent to which the project may achieve its objectives. It compares the total benefits of a project with its total costs. If the benefits exceed the costs, then the project is economically viable. The variables to be considered are the total discounted benefits or the sum of the product of the annual benefits and the discount factor, and the total discounted costs or the sum of the product of the annual costs and the discount factor.

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After computing for the total discounted costs and benefits, the discounted benefits and costs are summed up and divided.

The B-C Ratio of the project resulted in a value greater than 1. This indicates that the benefits from the project is greater than the costs, hence, it makes the project economically viable.

5.2.4 Cash Payback Period The Cash Payback period provides information as to the length of time an investor must wait to gain the benefits of its investment. Projects with positive cash flows are more likely to have a shorter payback period. The net cash flows for every year were calculated as shown in Part 4.4. The computation for the cash payback period requires the value for the last year with a negative Net Cash Flow (NCF) added to the quotient of the Absolute value of NCF in that year and the total cash flow in the following year. The formula is summarized as follows: Cash Payback Period = (Last Year with a negative NCF) + (Absolute value of NCF in that year) /(Total Cash flow in the following year)

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Year 5 is the last year with a negative NCF. Using the formula, the Cash Payback Period is 6 years.

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Chapter 6 Sensitivity Analysis Sensitivity Analysis is conducted to study and assess possible changes in financial feasibility due to certain factors. It tries to identify key variables that has significant impact in the projects financial situation, and if these may cause positive or negative outlook.

6.1. Possible scenarios The original estimations in Part 4 is established as the baseline for facilitating sensitivity analysis. In addition, the proponents chose 3 key variables that has direct impact in the projects finances: A) Certified Emission Reductions (CERs) It is estimated that demand for CERs will spike starting in 2020, thereby raising market prices. The CER price is established in this scenario to be NZ$ 25, the original set price during the commencement of the New Zealand Emissions Exchange. B) Feed-in Tariff (FIT) The Feed-in Tariff is established with the assumption that investment costs for renewable energy projects will fall down in the long-term. The proponents estimated a reduction of 25% in FIT rates by the start of project commissioning. C) Foreign Exchange Rate Foreign Exchange Rates are vulnerable to global economic situations and fluctuates every day. A 25% increase in NZ$ to PHP exchange rates was assumed for the analysis. Financial statements were created using these scenarios, in addition to estimating the Net Present Value and Internal Rate of Return. These values were then used in computing the Sensitivity Indicators using the following formulas:

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After the computations, the resulting indicators were assessed to conclude which key variable causes higher sensitivity.

The following table shows the results of the conducted analysis. It could be seen that the Feed-In Tariff rates contributes the highest possible sensitivity, interpreted to mean that changes in FIT rates will have the highest financial impact to the project. However, it should also be noted that the other variables will cause significant impact as well, as stated by the SI-IRR computation. As all of them showed a result higher than the cut-off rate (i.e. the discount factor used for NPV), it only confirms that these variables are important factors to be considered for the project.

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Chapter 7 Environmental Impact Analysis

7.1 General Assessment In line with the principles of sustainable development, this project ensures a rational balance between socio-economic development and environmental protection for the benefit of present and future generations. Landfills produce gas mainly composed of methane, a type of greenhouse gas that contributes in the damage of the atmosphere. The Biogas Emission Reduction project in San Jose del Monte, Bulacan is expected to collect this from the landfill. The methane collected will be later on combusted and flared. This process results in the reduction of greenhouse gas emissions. It also decreases the contaminants from the landfill and lessens the possibility of on-site fires. The project is also a source of renewable energy and thus gives an alternative to using non-renewable energy like coal and oil that produces additional greenhouse gases. However, the project also produces minor pollution, specifically noise pollution. The noise comes from the construction and operation of the plant. The noise can be controlled by operating at specific hours of the day and locating the plant in an area far from residential areas, thus minimizing the adverse effects.

7.2 Compliance with national environmental laws According to the rules and regulations set by the Department of Environmental and Natural Resources (DENR) through its Administrative Order No.30 Series of 2003, all agencies and instrumentalities of the national government including government owned and controlled corporations as well as private cooperating firms and entities are required to prepare an Environmental Impact Statement (EIS) for every action, project or undertaking, which significantly affects the quality of the environment. Under the said order, the Biogas Emission Reduction project falls under Category C, these are projects intended to directly enhance environmental quality or address existing

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environmental problems. Since category C projects are not covered by the Philippine EIS System, this project is not required to secure an Environmental Compliance Certificate (ECC) from the Environmental Management Bureau. As an alternative, the project needs to secure a Certificate of Non-Coverage from the Environmental Management Bureau (EMB) of Region III.

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Chapter 8 Institutional Analysis Institutional Analysis seeks to assess policies and structures that can influence the stability of the project. It enumerates laws and regulations to which the project must adhere to through-out the course of operation. Also, it aims to examine organizational structures that is key to ensuring smooth project operation.

8.1. Legal Considerations in support of the project In the Philippines, environmental awareness and protection is a concept backed up with legal grounds. In Article 2 Section XVI of the 1987 Philippine Constitution, the state is mandated to protect and advance right of the people to a balanced and healthful ecology in accord with the rhythm and harmony of nature. It is also found under Article II Section 15 of the constitution that the state has the responsibility to protect and promote the right to health of the people and instill health consciousness among them. In the Local Government Code of 1991 (Chapter II Section 17), local government units are responsible in setting up a Solid Waste Management System and an Environmental Management System. The project will help the local government of San Jose del Monte, Bulacan in achieving this mandate. Aside from the Local Government Code of 1991, the Biogas Emission Reduction Project is also in line with three other laws. Under Republic Act 8749, commonly known as the Clean Air Act of 1999, the State shall pursue a policy of balancing development and environmental protection by pursuing the frame work for sustainable development. Under Section 4 of this act, it is stated that citizens have the right to breathe clean air. The project reduces greenhouse gases and helps clean the air, thus giving citizens a cleaner air to breathe. Another law is Republic Act 9003 or the Solid Waste Management Act of 2000. Due to health, environmental and social hazards brought about by public dumpsites, it is the objective of this project to uphold the objectives of RA 9003 by utilizing environmentally-sound methods that maximize the utilization of valuable resources and
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encourage resource conservation and recovery. Republic Act 9729 or the Climate Change Act of 2009 aims to stabilizing greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system which should be achieved within a time frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner. The project is guided by this act since the project involves the extraction, combustion and flaring of methane which is a greenhouse gas. The project is also in accordance with the Philippine Development Plan (Chapter 10) of the Aquino administration that aims to conserve, protect and rehabilitate environmental and natural resources of the country. The administration recognizes that our natural resources are in grave threat. The government plans to address the problem using an integrated and community-based ecosystems approach to environment and natural resources management, precautionary approach to environment and natural resources, sound environmental impact assessment (EIA) and cost-benefit analysis (CBA).

8.2. Project Organization and Management 8.2.1. Ownership set-up The project is intended to be a private-sector effort, to be organized under a corporation. Equities representing economic interest in the created company will then be assigned to investors. Potential investors to the project are listed on the next page, as well as potential setbacks that may hinder their investment.

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Potential Investor Landfill owner / operator (VGP)

Issues that may prevent them from investing May be constrained in capital and would opt to focus on operating the landfill.

Private banks and/or development institutions (LandBank, DBP, World Bank, ADB etc.)

Might be difficult to be invited due to possible risks they have to shoulder or unfamiliarity with the CDM mechanism. There is also lack of financing dedicated to environment-friendly projects in private banks.

Local private company other than VGP

Might not invest due to unfamiliarity with the project. Currently, there are no local energy companies generating power from biogas from landfills.

National Government and/or the Local Government of CSJDM Foreign company (e.g. Pangea)

May opt to use their money for their own projects, especially for social spending. May not invest due to unfamiliarity with the Philippines energy program and investment climate.

Similar to Pangea, the proponents prefer a foreign investor to take majority interest in the project, more so desired if the investor comes from the partner Annex I country, New Zealand. This set-up will accelerate partnership with the Annex I partner, especially for the take-up of produced CERs. However, no matter who will be the investor in the project, the Annex I country is expected to be the ultimate beneficiary of the CERs. These will bought by the New Zealand government for conversion as New Zealand Units (NZUs) to be traded in the New Zealand Emissions Trading Scheme.

8.2.2 Public Sector Participation The City Environment and Natural Resources Office (CENRO) is in charge of the implementation of Solid Waste Management (SWM) programs and other environmental laws. It also monitors the daily operations of the personnel handling the wastes of the city. The Solid Waste Management Board of the city monitors and evaluates solid waste management plans and programs and adopts viable revenue generating strategies
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to sustain their continuity. The Solid Waste Technical Working Group assists the board by providing technical assistance in the formulation of plans, data, documentation, monitoring and evaluation. A representative from the CENRO shall represent the local government of San Jose Del Monte in the operations of the project. The representative will coordinate with the project supervisor regarding environmental compliance and regulatory requirements. In addition, key environmental indicators from the project, such as the volume of emissions captured, shall be certified by the CENRO and transmitted to the DENR-Environmental Management Bureau, the national agency in charge of monitoring CDM projects.

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Chapter 9 Risks and Opportunities Analysis This chapter enumerates potential issues that may assist or hamper the commencement of the project according to political, economic, social and environmental factors.

9.1. Political and institutional risks Local governments in the Philippines are current elected every 3 years as mandated by the Local Government Code of 1991. Knowing this situation, there is a chance that the elected city government may withdraw support for the project, if not be against the project at all. Since most aspects of the project is ultimately dependent upon the host community, the project may not push through without the local governments cooperation. A major factor considered for this study is the disclosure of the landfill operator (VGP) that they were restrained by the city government to accept waste from Metro Manila due to environmental and health concerns. Knowing this situation, several targets, including the target waste generation rates to which the project is ultimately dependent may not be fulfilled. This may be considered as lost opportunity with the fact that the Payatas landfill in Quezon City is set to be closed in 2013, in addition to expected population growth in that region. In addition, national policies regarding environment and energy may change, which may cause an adverse environment for CDM projects. Extreme situations such as a military takeover (coup d etat) may cause adverse effects to the economy and to the project. But currently, with the country as signatory to the Kyoto Protocol and with national government bodies in charge, the risk of failure in this aspect is low. In the possibility that the CDM mechanism is scrapped due to a new climate change treaty, the project will suffer significant loss in revenue. However, assuming that the New Zealand Emissions Trading Scheme operates even without the Kyoto Protocol, this risk may be considered non-existent. A potential introduction of a local emissions market may also help in offsetting such risk.
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9.2 Economic and technological risks The country is currently experiencing high economic growth rates of around 6-7% due to strong macro-economic fundamentals. However, a potential economic crisis similar to the 1998 Asian Crisis or the 2009 Global Economic Crisis may slow down the economy, if not trigger a recession. This may affect investor outlook in the country and will make the search for investors to the project difficult. In addition, several costs such as taxes, wage rates and fiscal incentives may change which will cause lower income for the project. High inflation rates or an extreme fluctuation in foreign exchange rates will also have significant impact in revenue sources. Potential corruption may slow down project commencement, if not put an end to it unless properly addressed. A significant over-supply in either renewable energy projects or CDM projects in general may cause lower FIT and CER rates, leading to lower revenue. However, current trends point to expected significant increase demand in the future, thereby raising prices for both FIT and CERs. Technological advances in renewable energy should also be considered, which may bring more efficiency and lower expected investment in the production of expected products. To the contrary, such advances may cause the projects methodology to be obsolete, causing significant costs in equipment maintenance.

9.3 Social and behavioral risks The opening of the VGP Sanitary Landfill has encountered opposition from residents and other stakeholders due to perceived health and environmental damage.19 However, as documented in the Pangea project, the construction of the biogas reduction project may cause this opposition to die down, provided there is significant and effective stakeholder engagement. Also, current consumption behaviors may be considered in estimating potential source of waste. As more and more Filipinos become environmentally-conscious, their
19

Envi groups appeal for closure of Bulacan and QC Dumpsites (http://ecowastecoalition.blogspot.com/2011/03/envi-groups-appeal-for-closure-of_25.html)

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consumption patterns may change which can cause lower waste generation or an alteration in waste components, either to more biodegradable waste or to the contrary, as more wastes are recycled. Potential methane emissions will be therefore dependent on such patterns.

9.4. Geographical and environmental risk In Chapter 2 of this document, it is recommended that the VGP Landfill should be assigned as the sole operating landfill for the whole of Bulacan in order to make the project feasible. However, not all municipalities and cities in the province are directly accessible from SJDM and vice versa and might prefer operating landfills on their own or bring their solid waste elsewhere. Currently, 2 similar landfills are also existing in the municipalities of Norzagaray and Obando. San Jose del Montes high elevation makes the city safe when it comes to floods caused by typhoons. However, due to its hilly terrain, potential landslides may occur, including in the location of the VGP landfill. Earthquakes should also be considered in order to protect the plant from possible damage.

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Annex 1 Population Projections

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Annex 2 Waste Generation Projections

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Annex 3 Projections - Waste Going to Landfill

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Annex 4 Computation of Methane Emissions

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Annex 5 Computation of Methane Reduction

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Annex 6 Key Assumptions

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Annex 7 Operational Cost Assumptions

Annex 8 Investment Assumptions

Annex 9 Depreciation Assumptions

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Annex 10 Set-up of Scenarios for Sensitivity Analysis - NPV

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Annex 11 Set-up of Scenarios for Sensitivity Analysis - IRR

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