IFC signs clean energy deal with Chinese firm

WASHINGTON, Aug 2 (Reuters) The International Finance Corp., the World Bank's private-sector lender, on Wednesday signed an equity and loan deal with Chinese gas distributor Xinao Group to convert coal into a clean energy fuel.

The project will help meet China's huge energy demands and uses the country's vast coal reserves to produce clean-burning dimethyl ether (DME), a colorless, nontoxic gas used for cooking and heating or as a substitute for diesel fuel.

''This project will help develop new sources to meet China's energy demand and will do so in an environmentally friendly way,'' Lars Thunell, IFC executive vice president, said.

''This is a landmark project for DME production,'' he said, adding that over 1 billion people in China heat and cook with coal and wood which produce harmful emissions.

DME is produced by turning coal into methanol which is converted into dimethyl ether. IFC officials said the burning of DME from coal reduces carbon dioxide emissions by about 40 percent compared with directly burning coal.

The IFC investment includes a million equity stake in a Xinao unit and million in loans from IFC resources. In addition, 0 million has been raised through banks.

The Xinao project will produce 400,000 tons a year of DME starting in 2008, using about 1.3 million tonnes of coal supplied from existing mines. About 2 million households are expected to benefit from the project, most of them in lesser developed regions in the interior of the country.

IFC officials said the project would integrate several commercially proven technologies to convert the coal into DME.

DME production in China is expected to reach 2 million to 3 million tons a year over the next few years as several other projects come on stream, the IFC said.

Wang Yusuo, Xinao's chairman, said producing DME made sense given the abdundance of coal supplies in China.

''Given the demand for energy we have to carry out the central government's policy of developing an energy industry with Chinese characteristics and the goal to diversify energy (sources) ... so there is a huge market potential for DME,'' Wang said.

He said the decision to turn to DME was also motivated by supply concerns given the limits to natural gas production in China which the company currently distributes.

Rashad Kaldany, IFC director for oil, gas, mining and chemicals, said the impact of the project will be measured by the number of people who convert to DME and the jobs created through the project.

''You will not be able to reduce pollution completely just through this project but we feel it will have a major impact in certain cities in particular,'' he said.

REUTERS VJ RK0128