Santa Elisa will sell energy to the Companhia Paulista de For? a e Luz (CPFL). CPFL is an electric distribution company serving 234 municipalities in the State of Sao Paulo. The company has had an annual growth of 4.8 per cent on average between 1989 and 1998. The peak demand of CPFL was approximately 5000 MW in 2001. CPFL’s self generation amounted to only 2.7 per cent of its total energy sales in 1995, and came mainly from hydro plants: 112 MW of hydro and 36 MW of diesel oil-fueled installed capacity[22] (e. g. Carioba). CPFL’s main supplier is CESP (Companhia Eletrica de Sao Paulo), from which CPFL purchases 95 per cent of the power, essentially all hydroelectric. CPFL must also buy 600 MW from Itaipu hydro station. In addition, CPFL has been planning a new gas-fired combined-cycle plant of 350-400 MW near Campinas next to the natural gas pipeline.

The existing installed capacity of CPFL (self-generation plus purchases under bilateral contracts) was able to meet the demand in 2001 due to the energy rationing imposed by the federal government. Specialists estimate that the energy rationing in 2001 shrank the energy market by approximately 6 per cent. In conditions of demand growth of 3.5 per cent, however, CPFL would have had to purchase energy in the spot market to meet its demand already in 2001 as the company did not have the required energy negotiated under bilateral contracts to meet the whole demand.

Since 85 per cent of the distributors’ purchases in the free market must come from bilateral contracts, and assuming that some sales are diverted away from the distribution utilities by direct sales to customers, we can assume that a somewhat smaller share (80 per cent approximately) of total generation is sold in the free market through bilateral contracts. The remaining 15-20 per cent would be nego­tiated in the spot market. The spot market sales are estimated to be the company’s total generation in an average hydrological year, minus the sales to initial contracts and bilateral contracts.

In the spot market, all the so-called South/Southeast system loads are intended to be met with the least-cost combination of available resources, comparing the value of water in an average hydrological year with the variable cost (fuel plus O&M) of the marginal thermal plant. The marginal plant is gas-fired. Between 2001 and 2003, 5.4 GW of new gas-fired capacity were added only to the S/SE and Midwest regions of Brazil[23]. Thus, the marginal plant for the Santa Elisa project baseline is gas-fired.

As a consequence of the rationing and nonliquidation of the spot market in 2001, the CPFL did increase the use of its old (1953) diesel oil-fueled thermal plant, Carioba, with 36 MW of installed capacity. One could argue that the fuel replaced in the first year of operation of the Santa Elisa project should be diesel oil, as used in Carioba, with low net efficiency. However, the project participants decided to be conservative and estimate the CERs originated by the project based on the marginal energy sources available at the spot market, where CPFL would have purchased energy otherwise. A calculation of emission intensity based on gas at the margin is an adequate baseline benchmark for small generation projects that do not cause changes to the generation expansion plan.

Changes to the generation expansion plan would make the marginal source more difficult to identify for the purpose of calculating emission changes. This is because the resulting emission change might be savings from a hydroelectric plant or a fossil-fired plant that would be deferred or completely displaced from the future generation mix, and that would not resemble the average or the marginal resource at all. Thus, defining a credible baseline case entails analyzing the existing expansion plan, for the entire national grid, to determine the generating resources that would be replaced by the CDM project, in this case Santa Elisa, and the emissions from these electricity-supply resources.

Thus, to establish the benchmark, we examine the new capacity additions called for in the recent versions of the national expansion plan. The objective is to characterize the potential new sources that could be deferred or replaced by the Santa Elisa project. Based on this approach, we can estimate the emissions of the incremental capacity displaced by Santa Elisa using its carbon emission intensity, weighted according to generation from the project.