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CDM Executive Board Tool for the demonstration and assessment of additionality
(Version 03)
EB 29

DEMONSTARTION AND ASSESSMENT OF ADDITIONALITY FOR THE 35MW
BAGASSE COGENERATION PROJECT BY MUMIAS SUGAR COMPANY LIMITED

This demonstration and assessment is based on the Tool for demonstration and assessment of
additionality; Version 3, EB 29. According to the tool, either investment analysis or barrier
analysis can be used to demonstrate and assess additionality. For this project, barrier analysis has
been used as demonstrated below.

Step 1: Identification of the alternatives to the project activity consistent with current laws
and regulations

Sub-step 1a: Define alternatives to the project activity
For power generation, the realistic and credible alternatives available to the project participants or
similar project developers that provide power outputs comparable with the proposed CDM project
activity include:
P1: The proposed project activity not undertaken as a CDM project activity.
P2: The continuation of power generation in an existing biomass residue fired power plant at the
project site, in the same configuration, without retrofitting and fired with the same type of
biomass residues as (co-)fired in the project activity.
P3: The generation of power in the existing plant, on-site or nearby the project site, using
only fossil fuels. Under this alternative, there are no nearby facilities that could generate
the power using fossil fuel. Only on site generation is possible.
P4: The generation of power in the grid.
P5: The installation of a new biomass residue fired power plant, fired with the same type and with
the same annual amount of biomass residues as the project activity, but with a lower
efficiency of electricity generation (e.g. an efficiency that is common practice in the relevant
industry sector) than the project plant and therefore with a lower power output than in the
project case.
P6 The installation of a new biomass residue fired power plant that is fired with the same type
but with a higher annual amount of biomass residues as the project activity and that has a
lower efficiency of electricity generation (e.g. an efficiency that is common practice in the
relevant industry sector) than the project activity. Therefore, the power output is the same as
in the project case. This alternative is not feasible since the necessary increased amount of
bagasse would not be available.
P7 The retrofitting of an existing biomass residue fired power, fired with the same type and
with the same annual amount of biomass residues as the project activity, but with a lower
efficiency of electricity generation (e.g. an efficiency that is common practice in the relevant
industry sector) than the project plant and therefore with a lower power output than in the
project case.
P8 The retrofitting of an existing biomass residue fired power that is fired with the same type
but with a higher annual amount of biomass residues as the project activity and that has a
lower efficiency of electricity generation (e.g. an efficiency that is common practice in the
relevant industry sector) than the project activity. This alternative is not feasible since the
necessary increased amount of bagasse would not be available.

The proposed project activity is the cogeneration of power and heat, so the most plausible
baseline scenario for the generation of heat must be defined. For heat generation, the realistic and
credible alternatives available to the project participants or similar project developers that provide
heat outputs comparable with the proposed CDM project activity include:
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CDM Executive Board Tool for the demonstration and assessment of additionality
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H1: The proposed project activity not undertaken as a CDM project activity
H2: The proposed project activity (installation of a cogeneration power plant), fired with the
same type of biomass but with a different efficiency of heat generation. (e.g. an
efficiency that is common practice in the relevant industry sector).
H3: The generation of heat in an existing cogeneration plant, using only fossil fuels.
H4: The generation of heat in boilers using the same type of biomass residues.
H5: The continuation of heat generation in an existing biomass residue fired cogeneration plant at
the project site, in the same configuration, without retrofitting and fired with the same type of
biomass residues as in the project activity.
H6: The generation of heat in boilers using fossil fuels.
H7: The use of heat from external sources, such as district heat (No district heating available).
H8: Other heat generation technologies (e.g. heat pumps or solar energy). (Such technologies
not available/applied in the location of project).

For the use of biomass residues, the realistic and credible alternatives available to the project
participants or similar project developers that provide power and heat outputs comparable with
the proposed CDM project activity include:
:
B1: The biomass residues are dumped or left to decay under mainly aerobic conditions. This
applies, for example, to dumping and decay of biomass residues on fields.
B2: The biomass residues are dumped or left to decay under clearly anaerobic conditions. This
applies, for example, to deep landfills with more than 5 meters. This does not apply to
biomass residues that are stock-piled or left to decay on fields.
B3: The biomass residues are burnt in an uncontrolled manner without utilizing it for energy
purposes.
B4: The biomass residues are used for heat and/or electricity generation at the project site
B5: The biomass residues are used for power generation, including cogeneration, in other existing
or new grid-connected power plants
B6: The biomass residues are used for heat generation in other existing or new boilers at other
sites
B7 The biomass residues are used for other energy purposes, such as the generation of biofuels.
(Not applicable in the locality of the project as such application have not been considered)
B8 The biomass residues are used for non-energy purposes, e.g. as fertilizer or as feedstock in
processes (e.g. in the pulp and paper industry). (Not applicable as no such industries exist or
are being considered in the locality of the project)

Sub-step 1b: Consistency with mandatory laws and regulations

The alternatives mentioned in Sub-step 1a are in accordance with legal and regulatory
requirements under which MSC operates and are therefore all applicable from a legal or
regulatory perspective. There are no legal requirements for the disposal of bagasse or other
agricultural residues nor are there penalties for dumping the bagasse other than the cost of
transportation to the dumpsites. It is therefore a general practice to dump the bagasse in fields or
excavated sites as evidenced by the pictures below (Plates 1 to 8).

Other than P6, P8, H7, H8, B7 and B8, which are not feasible for reasons given above, all the
other alternatives (defined under 1a) to the project activity are realistic and credible, and are in
compliance with mandatory legislation and regulations taking into account the enforcement in the
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East African Region, and Kenya, in particular and EB decisions on national and/or sectoral
policies and regulations.


Plate 1 Plate 2


Plate 3 Plate 4


Plate 5 Plate 6
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Plate 7 Plate 8

Step 2: Investment analysis
For this project, barrier analysis has been opted for. This step will therefore be ignored as allowed
by The Tool for the demonstration and assessment of additionality, version 03; EB 29.

Step 3: Barriers analysis
The realistic and credible alternatives to the project activity(s) that can be (part of) the baseline
scenario are defined through the following sub-steps:

Sub-step 3a: Identify barriers that would prevent the implementation of the proposed CDM
project activity

The proposed cogeneration project faces the following barriers:

3a-1: Investment barrier:

This project is to be implemented in an industry that is still to a large extent being controlled by
the government and therefore perceived as inefficient in terms of management (Ref attached
documents Cogen and LCD Discussion Draft and Kenya Sugar Industry 2005). In addition,
most of the sugar companies have been making losses successively over the years and only
started making some profits in 2003 after the new political dispensation (Kenya Sugar Board
Report 2005). Currently two out of the seven sugar companies are actually under receivership
because they cannot pay their debts.

The industry relies on rainfall quantity and patterns for cane growth. Both rainfall factors have
been unreliable and erratic and Mumias Sugar profits and share value in the Nairobi Stock Market
dropped significantly in early 2007 as a result of poor rainfall experienced in 2006 (Reference
http://nse.co.ke and Information and Analysis on Mumias Sugar Co Limited on
http://www.stockskenya.com./stkprofiler.aspx?stkId=36. Poor rainfall would therefore affect
bagasse availability as well, a risk which potential financiers are also aware of.

Mumias Sugar Company, like all other Kenyan sugar millers, faces the challenge of losing the
temporary protection offered to Kenyan sugar firms by the Common Market for Eastern and
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Southern Africa (Comesa) which is to expire in February 2008. Kenyan firms will then have to
abide by the terms of the free trade agreements that Kenya has signed, namely, duty and quota-
free entry of sugar from member states into the domestic market.

Kenyas lack of competitiveness in domestic and international markets has been attributed to high
costs of production and this will be exacerbated by the drop in sugar prices when the European
Union stops giving preferential treatment to former colonies among the African, Pacific and
Caribbean countries (Kenya is one of them) in line with the World Trade Organisations (WTO)
ruling on unfair trade practices.

Viewed against this background, most investors or financiers would be reluctant to invest or
extend credit facilities to such a project because of the perceived higher risk associated with the
issues outlined above.

Furthermore, most of the local investors and financial institutions do not have any experience in
financing this kind of a project as none exists in the country at the moment and therefore the
banks do not have all the tools and information to critically analyze the viability of such a project
to warrant them extend a loan facility to the project. If this project is to be considered for funding
in any case, getting guarantors would be very difficult because of the risk and huge capital outlay
required. Equally, the interest rate charged would be higher than the prevailing interest rate to
factor in the risk element.

There is also a barrier arising from the fact that still the government does not have a
comprehensive policy on price that KPLC is to pay on power from cogeneration sources and this
has made it difficult to have strict and precise projection on sales revenue and profits, this fact can
also deter investors and financiers. The pricing aspect, has made cogeneration projects not to be
pursued by most sugar companies in the country as KPLC tends to offer a lower price for
cogenerated power than from fossil fuel sources on the assumption that production costs are low.
Todate, Mumias Sugar Company has not been able to sign a Power Purchase Agreement with
KPLC majorly due to a disagreement on the price. Recently, the Government ordered Kenya
Electricity Generating Company not to charge KPLC the earlier agreed rates as it was felt this
would destabilise KPLC commercial recovery (Refer the Electricity Regulatory Board website,
http://www.erb.go.ke/downloads and attached document donor_statement_energy).

3a-2: Investment barrier:

Technological barriers represent a very important issue for increasing bagasse cogeneration in
Kenya. Despite the fact that Rankine-cycle is a well known technology and the technology is very
advanced elsewhere, in Kenya and within the East African Region, cogeneration units operate at
low pressures (20 bar) and low efficiency and have not competitive comparing to other generation
options. This is mainly because most sugar companies in the region were installed in the 1960s
and 1970s and the objective of the design was to burn as much bagasse as possible to avoid
dumping costs. Also the region has been slow in liberalising the energy sector and selling power
by independent generators has not been facilitated.

In this way, there is a tricky issue about technology and economic value for such technology.
Although this technology is well developed, the economic value for its application has not been
present for projects on the scale similar to the sugar mills in Kenya.
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Studies reveal that the great majority of the sugar mills in Kenya still rely on inefficient
technology, such as on 21 bar pressure boilers. Moreover, when there is a necessity to change
equipments it is usual not to consider purchasing high efficiency boilers due to conservativeness,
lack of knowledge or even lack of interest to generate surplus steam for electricity sales purposes.
There is no sugar company in Kenya that generates steam at more than 21barg today and other
than Mumias Sugar Company which occasionally has been able to export 2 MW of electricity, all
the other companies are net power importers.

It has been difficult to convince the KPLC (the sole local power distributor) that the energy to be
acquired, which is generated during the harvest season, is sufficiently reliable to be accounted in
the distributors planning.

This is a new technology in the local sugar industry and therefore initially there would be
inadequate trained manpower to operate it and Mumias Sugar Company will have to spend some
time and resources to train personnel with right skills to operate the technology. It would also be
difficult to find repair and maintenance services for the machines and even spare parts would
have to be sourced from abroad at least for the first years of operation. The project manager has
been sourced from India as no local expertise was available.

3a-3: Institutional and political barrier:

From the sugar mill point of view, the great majority of sugar mills do not consider investment in
cogeneration (for electricity sale) as a priority. The sector even in the new political context, does
not seem to have motivation to invest in a process that it sees with mistrust and no guarantees that
the product will have a safe market in the future. Moreover, the sugar mills are essentially
managed by the government, which hurdles the association with external financial agents that
would allow the sector to be more competitive and diversifying its investment. From the point of
view of the economic agents, the excessive level of guarantees required to finance the projects is
a common barrier to achieving a financial feasibility stage.

While the new energy bill provides for independent power generators at the legislative and
regulatory level, there has been very slow progress on the development of detailed
implementation framework. This has provided a considerable barrier to signing of Power
Purchase Agreements which can only be signed with KPLC, the only authorised power distributor
in the country.

Other barriers have more to do with the lack of adequate commercial contractual agreements from
the energy buyer, KPLC (i.e. bankable long-term contracts and payment guarantee mechanisms
for non-credit worthy local public-sector and private customers) making it much more difficult to
obtain long-term financing from a commercial bank and/or a development bank. Some other
financing barriers occur simply due to prohibitively high transaction costs, which include the
bureaucracy to secure the environmental license and electricity generation license.

3a-1: Cultural barrier:

Due to the nature of the business in the sugar industry the marketing approach is narrowly
focused on commodity type of transaction. Therefore, the electricity transaction based on long-
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term contract (Power Purchase Agreement) represents a significant breakthrough in their business
model. In this case, the electricity transaction has to represent a safe investment opportunity from
both economical and social environmental perspective for convincing the sugar mills to invest in.

There are also questions regarding the managerial capacity of the companies that comprise the
Kenyan sugarcane industry. Apart from MSC, the companies have in many cases demonstrated
the will to undertake investments in new technologies, but without sufficient financial and
entrepreneurial capacity to complete such projects. There has therefore been the long held view
not only within the government, who own majority shares in most of the sugar companies, but
also within the sugar industry itself that they should concentrate on the core business of sugar
production and sell the by products such as bagasse and molasses to other industries as inputs.

This proposed project is therefore going to be the first of its kind, generating steam at 87 bar, in
Kenya but also in East Africa.

Sub-step 3b: Show that the identified barriers would not prevent the implementation of at
least one of the alternatives (except the proposed project activity):

Sub-step 3b-1: Power generation
The core objective of the company when it was started was to process sugar for the local market.
In the process of achieving its mandate, it was to help increase the economic status of its out
growers and their dependants as well as the countrys economy. This was to be achieved through
buying of sugarcane from the local farmers. Since these sugar factories were located in the sugar
belt zone, sugarcane therefore became the only cash crop for farmers in the area. In addition,
production of sugar from sugarcane was considered the only option for sugarcane use. That is
why; the sugar mill was not designed to produce other additional products like alcohol or
electricity. Therefore, the alternative P2 (The continuation of power generation in an existing
biomass residue fired power plant at the project site, in the same configuration, without retrofitting
and fired with the same type of biomass residues as (co-)fired in the project activity) above if opted
for, would not face any of the above mentioned barriers. Similarly, alternative P4 (The generation
of power in the grid) would not be subjected to the above barriers.

Sub-step 3b-2: Heat generation

Heating in Mumias Sugar is from steam generated in the bagasse-fired boilers only. Alternatives
H3 (The generation of heat in an existing cogeneration plant, using only fossil fuels), H4 (The
generation of heat in boilers using the same type of biomass residues) and particularly H5 (The
continuation of heat generation in an existing biomass residue fired cogeneration plant at the project
site, in the same configuration, without retrofitting and fired with the same type of biomass residues as
in the project activity) are all feasible and realistic options that would not face the above identified
barriers.

Sub-step 3b-3: Biomass use
The agriculture industry is the biggest industry in Kenya, which generates significant amounts of
biomass each year. Similarly, sugarcane farming is the biggest agricultural activity practiced in
the western region of Kenya. Without effective technology and attractive incentives, the bagasse
from sugar production cannot be fully utilized for power production.
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Alternatives B1(The biomass residues are dumped or left to decay under mainly aerobic conditions,
as is partially the case now), B2 (The biomass residues are dumped or left to decay under clearly
anaerobic conditions, which is partially the case now), B3 (The biomass residues are burnt in an
uncontrolled manner without utilizing it for energy purposes, which also happens now), and B4 (The
biomass residues are used for heat and/or electricity generation at the project site) are all credible
options which would not face the above stated barriers.

In conclusion, the project is therefore additional since it faces various barriers (inadequate policy
framework, poor pricing, inadequate funding, inadequate technical knowledge, experience and
skills) that limit the access of independent power producers (IPPs) to the electricity utilities
market, there has been no incentive for sugar companies to operate in a more energy efficient way
and the focus has been to maintain inefficient boilers so as to burn (dispose of) as much bagasse
as possible in order to minimise bagasse dumping which is costly in terms of transportation to
dumping sites. Further, due to the policy framework, pricing, statutory requirements that allow
only KPLC to buy and distribute power from IPPs and other limitations on the sale of electricity,
sugar factories in Kenya have been unable to exploit all the bagasse produced during sugarcane
processing to produce sugar. These constraints continue to negatively impact bagasse based
cogeneration of electricity in Kenya. (Refer attached document Cogeneration and LCP
Discussion Draft).

On the other hand, there are various alternatives which would not face similar barriers, the most
notable one being continuing the same way.

Step 4: Common practice analysis

Sub-step 4a. Analyze other activities similar to the proposed project activity:

All sugar factories in the country were constructed in the sixties, seventies and eighties when the
technology used was not as advanced like today. They were equipped with designs to generate
steam at not more than 21 bar pressure and electricity for internal use only. Others rely
significantly on power from the national grid and steam is only used for process operation.
Mumias Sugar Company is the only sugar miller in the East African Region that is self sufficient
in electricity and often exports up to 2 MW to the grid.

Despite Kenya having the potential to exporting close to 200 MW of electricity through
cogeneration from the sugar millers, only 2 MW are exported for not more than 18hours a day
from the industry. Most of the electricity is from hydro, geothermal and fossil fuel based thermal
plants. No other similar projects have been implemented in the region, even as CDM projects. A
full discussion of the cogeneration potential of the sugar industry, the Kenya electric power sector
and related data are in the attached document Cogen and LCPD Discussion Draft.

The prevailing practice in the sugar sector is sugar processing and the surplus bagasse generated
is ferried and dumped in the nucleus estates where it is either burned or left to decompose.
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Sub-step 4b. Discuss any similar options that are occurring

A similar option to cogeneration for electricity generation in Kenya is geothermal power which
has also suffered a similar fate as cogeneration. Kenya started looking at geothermal exploitation
in the early eighties but to date only about 125 MW (19.3% of total eclectic power) is produced
from geothermal sources with 121 MW coming from Kengen, the recently privatized national
energy generating company. The only private geothermal generator Orrpower generates only 13
MW. There is no other private investor in geothermal generation in Kenya. This proves the
argument that investing in the energy sector in Kenya has not been attractive despite the fact that
Kenya is a net energy deficient country.

Sub-step 4b. Discuss any similar options that are occurring:

This project activity type is not considered a widely spread activity in Kenya because it is a new
venture in all existing sugar mills in the country. Mumias Sugar Company is the first and only
sugar mill in the country producing electricity for sale to the national grid. This is because the
installed capacity of the boilers and turbines is able to produce 5.5 MW over what the factory
needs for internal use, even though it can only export 2.2 MW over 18 hours each day due to
transformer constraints. There are no other similar activities being developed as CDM project in
the country.

Step 5. Impact of CDM registration

The approval and registration of the MSCP-CDM will go along way overcoming some of the
barriers mentioned above i.e. technological, economic, institutional and political, common
practice, cultural, and investment barriers. However, economic barriers will form the backbone as
it will bring in additional revenues for the company. The revenues generated will be used by the
company in achieving its financial obligation, thereby making it more profitable. This will give
farmers a motivation to increase cane production. This way, the company will have sufficient
bagasse to generate electricity.

The project will prevent bagasse dumping in the nucleus estates. This alone will prevent large
quantities of methane and carbon dioxide from being emitted into the atmosphere, leading to
reduction of impacts of climate change.

Smooth implementation and operation of the project will act as a case study/pilot project in the
country. This way, more people who have been misjudging the Kyoto protocol and the Clean
Development Mechanism will start to get involved and implement renewable energy projects in
the country. This will enable financial institutions which had over estimated the risk will
understand the sector and start financing CDM projects in the country without charging high
interest rates for the loans advanced.