Emission reduction value in financing clean energy projects
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Transcript of Emission reduction value in financing clean energy projects
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Emission reduction value in
financing clean energy projects
By Jan-Willem Martens EcoSecurities
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2 EcoSecurities
• EcoSecurities leading greenhouse gas advisor (Environmental Finance survey, 2001, 2002, 2003, 2004)
• Five offices around the world, 27 people
• Currently working on over 70 CDM projects in more than 50 countries
• Active in sale of CERs
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EcoSecurities Group
Oxford
Rio de Janeiro
Den Haag
Los Angeles
New York
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4Overview
1. Introduction
2. Market Developments – Who is selling, who is buying ?
3. Project Transaction Issues
4. How can CDM help project finance?
5. How can CDM and ODA go together
6. Country competitiveness
7. Conclusions
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Who are the players in the CDM market?
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6What determines the CDM cash flow?
• CDM project revenues
• Price of the Certified Emission Reduction (CER)
• CER market price
• Availability of buyers
• Perceived contribution to sustainable development
• Credit sharing and taxing CERs in the host country
• Number of CERs
• Actual production the installations (MWh delivered)
• Carbon Emission Factor (CEF)
• CDM project cost
• PDD development
• New or existing methodology
• Host country approval
• Validation/verification
• Registration
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How does the CEF influence the
number of CERs generated?
• As the CEF is the carbon emissions per actual production quantity (tCO2/MWh)
of a grid and renewable energy has an emission factor 0 so the quantity of CERs is determined by:
Production (MWh) * CEF (tCO2/MWh) = CERs (tCO2)
• CDM cash flows can provide a substantial contribution to the overall project in counties with a ‘high’ CEF.
Lower CEF Attractive CEFCountry CEF Country CEFMalaysia
Thailand
Philippines
Indonesia
0.610
0.611
0.623
0.710
Vietnam
Singapore
China
India
0.835
0.922
1.027
1.055
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Division of CDM project types
Division is based on an analysis of 130 PDDs for CDM projects
22%
17%
17%11%
8%
6%
5%4%
2%
2%
2%
4%
Hydropower
Landfill gas
Biomass
Efficiency
wind
Fuel switch
Geothermal
Anaerobic digestion
biofuel
cement
HFC-23 destruction
other
Source: EcoSecurities December 2004
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Division of CO2 emission reductions from CDM
projects
Total amount of Results based on a selection of 130 CDM project proposals
29%
16%15%
10%
6%
6%5%
4%
3%
2%
1%
3%
N2O reduction
HFC-23 destruction
Landfill gas
Hydropow er
Geothermal
Eff iciency
Biomass
Fuel sw itch
flare gas recovery
w ind
Anaerobic digestion
Other (< 3Mt)
Source: EcoSecurities December 2004
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10Funnel Effect for CDM projects
100 JI/CDM project ideas
20 JI/CDM PDDs
10 validation
5 JI/CDM
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11Carbon Market Volumes 2004
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12CER prices 2004
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13Types of Buyers
Equity Investment
Purchase of emission reductions
Individual buyers
1.
Buyer invests in individual CDM/JI projects
2. Buyer purchases
emission reductions from individual CDM/JI
projects Intermediaries
3. Buyer invests in an
external CDM/JI Equity Investment Fund
4. Buyer participates in an external CDM/JI
Purchase Facility
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14List of governments buying JI and CDM
tCO2e Governments
Austria 14 Mt Canada 20 Mt Belgium 24 Mt Denmark 20-25 Mt Finland 2.5 Mt Italy 11 Mt Spain 100 Mt The Netherlands 100 Mt Japan 95 Mt
Total ~ 490 Mt
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Project Transaction Issues
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16Who is carrying the risks?
• Registration risk – this is the risk related to getting the project registered under the CDM.
• Performance risk – Risk related to project performance (including political risk)
• International CER Transfer risk - When will the CDM registry be finalised? When will the ITL be finalised?
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17Different ways to structure carbon finance
1. Contract form “guaranteed delivery”
2. Contract form “No guaranteed delivery”
3. Contract form with “floor price”
4. Contract form X% of the EUA market price
5. Sales of CERs on the EU Spot market (is it possible: Yes, no unilateral CDM, but obligation to report Annex I counter-party to CDM EB?)
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How does risk influence the price of a
CER?
Production price
Credit risk
Delivery risk
Political risk
Counterparty risk
Margin
EUA price
Liquidity risk
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Country Competitiveness
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Does Geography Matter in CDM transactions?
• For most commercial buyers, price and risk sensitivity outweighs geographic strategy
• For government buyers, there are geographic preferences
• Denmark is targeting Malaysia, Thailand, South Africa and Central America
• PCF funds looking for a global approach with sectoral distribution
• Forthcoming DBJ fund is expected to be “Asia weighted”
• Does this mean ASEAN or India/China
• For multinational “buyer/sellers” internal CDM opportunities are very attractive
• However, exposure to a country does not equate desire for exposure to 3 rd Party CDM CERs from that country
• Expectation should be for MNC’s presenting their own CDM projects to host nation DNAs – 3 rd party project finance will give way to balance sheet corporate finance as the dominant paradigm
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How do buyers assess attractiveness of
projects?
• Likelihood of Project Approval at host country and EB level
• Credit sharing and taxing CERs in the host country
• Credibility of Counterparty
• Price, price, price and price
• Who covers upfront costs prior to ERPA?
• Divisions of risk between buyer and seller
• Underlying project risks (technology risk, political risk, market risk, etc)
• Will seller deliver even if it experiences underperformance?
• Willingness to give buyers options for residue at;
• Same price or discount to market price
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What can countries do to improve their
position?
• Assuming the DNA office is competent and knowledgeable, keep individuals in position as long as possible
• Continuity is key
• Domestic capital for asset finance (either project or corporate) must understand that these cash flows are bankable
• CDM enhances project economics, still requires underlying capital and domestic is the most realistic source
• CDM alone cannot overcome other cross border investment biases but can create interest in new opportunities from unconventional sources
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Thank you!