Innovative Financing for Solar Water Heating: Carbon & Renewable Energy

Certificate Trading

Examples and Lessons from Selected International Experiences

Green Power and Solar Thermal Energy Symposium

Washington DC, Oct. 5th, 2005

Steven KaufmanGreen Markets International, Inc.

Presentation Overview

International carbon reduction trading, the Clean Development

Mechanism (CDM), and solar water heating

Example CDM solar water heating experience: Kuyasa Project, Cape

Town, South Africa

International Renewable Energy Certificate (REC) trading, and

RECs for solar water heating

Example solar water heater REC experience: Australia

Lessons for program design and market participation

Innovative Financing for Solar Water Heating

Green Markets International is a non-profit organization working to expand the use of renewable energy for climate protection and development.

Conducting REEEP-supported initiative, focusing on financial and commercial innovations for solar water heating in the Caribbean region and Brazil:

Developing model business plans for SWH ESCO and fee-for-service operations

Building stakeholder knowledge of carbon trading and helping to develop SWH CDM projects

Exploring international REC trading possibilities

International Carbon Markets

Fueled by mandatory requirements of the Kyoto Protocol, international trade in greenhouse gas reductions is now a large and rapidly growing market.

Governments and private companies in industrialized countries with emission reduction obligations have already committed over a billion dollars for emission reductions from projects outside their borders.

The international carbon market has the potential to provide an important boost for renewable energy projects and markets in many parts of the world.

The Kyoto Protocol & Carbon Trading

Under the Kyoto Protocol, three mechanisms enable cross-border trading in greenhouse gas (GHG) emissions reductions:

International Emissions Trading (IET)Trading blocks of emissions credits between emissions-capped industrialized countries, called Annex 1* countries

Joint Implementation (JI)Project-based trading among Annex 1 countries

Clean Development Mechanism (CDM)Project-based trading between Annex 1 and non-Annex 1 countries

Certified Emission Reductions (CERs), created in the CDM process, can be used by Annex 1 countries to meet their reduction commitments during 2008-2012, and can accrue for project activities that commence before 2008.

*Countries with emissions caps under the Kyoto Protocol are technically “Annex B” countries, though they are called Annex 1 here, referring to Annex 1 of the UNFCCC. In practice, these terms are commonly used interchangeably.

Eligibility Requirements for the CDM

CDM Projects Must: Be implemented in a non-Annex 1 country that is a party to the

Kyoto Protocol

Be additional to what would occur in the absence of the project activity

Support sustainable development in the host country

Obtain approval of host country’s Designated National Authority for the CDM

Result in real, measurable, long-term climate change benefits

CDM Projects Must Not: Divert Official Development Assistance (ODA)

Involve nuclear power

CDM Project Cycle & Transaction Costs

EstimatedStep Cost - $US

Project Identification, Project Idea Note Development 20,000Baseline Study & Monitoring Plan 20,000Project Design Document Preparation 25,000Stakeholder Consultation & Host Country Approval 10,000Validation by an Operating Entity 30,000Registration Fee 30,000Transaction Negotiation & Contracting 20,000Project Monitoring (Periodic) variesInitial Verification by Operating Entity & Certification 15,000Periodic Verification 10,000Approximate Total: >180,000

Note: Actual costs can vary considerably depending on various factors.

Challenge for Small-Scale Projects

Transaction costs can be proportionally much higher for small-scale projects, since many of the costs are fairly fixed and do not vary much based on project size

Parties to the climate convention recognized that small-scale projects often have substantial sustainable development benefits, and that high transaction costs could prevent small-scale projects from participating in the CDM

Parties to the convention instructed the CDM Executive Board to develop simplified modalities and procedures for small-scale projects.

CDM Simplifications for Small-Scale Projects

Simplified modalities and procedures for small-scale projects include:

Simplified Project Design Document

Simplified, pre-approved methodologies for baseline setting and monitoring plans

Ability to bundle project activities at various stages in the CDM cycle

Simplified requirements for environmental impact analysis

Lowered project registration fees

Shorter review period for project registration

Same Designated Operational Entity can validate and verify & certify emissions reductions for a specific small-scale project

Small-Scale CDM Project Definitions

Project activities defined as “small-scale” for CDM participation include:

Renewable energy systems with less than 15 MW capacity

Energy efficiency projects less than 15 GWh/year

Other projects emitting less than 15 kilotonnes CO2/year

Small-Scale CDM Project Categories with Approved Methodologies*

Project Type Project Activity Category

I. TYPE I: I.A. Electricity generation by the userRENEWABLE I.B. Mechanical energy for the userENERGY I.C. Thermal energy for the user [Note: this category is applicable for solar water heating]PROJECTS I.D. Renewable electricity generation for a gridII. TYPE II: II.A. Supply side energy efficiency improvements – transmission and distributionENERGY II. B. Supply side energy efficiency improvements – generationEFFICIENCY II.C. Demand-side energy efficiency programmes for specific technologiesIMPROVEMENT II.D. Energy efficiency and fuel switching measures for industrial facilitiesPROJECTS II.E. Energy efficiency and fuel switching measures for buildings

II.F. Energy efficiency and fuel switching measures for agricultural facilities and activitiesIII. TYPE III: III. A. AgricultureOTHER III. B. Switching fossil fuelsPROJECT III. C. Emission reductions by low-greenhouse gas emitting vehiclesACTIVITIES III. D. Methane recovery

III. E. Avoidance of methane production from biomass decay through controlled combustion

*As of February 15, 2005 and outlined in Appendix B of the simplified modalities and procedures for small-scale CDM project activities

CDM Participation & Transaction Costs

Non-SSC SSCCost Item: CDM Project CDM Project

Project Identification, Project Idea Note Development 20,000 15,000Baseline Study & Monitoring Plan 20,000 5,000Project Design Document Preparation 25,000 20,000Stakeholder Consultation & Host Country Approval 10,000 7,000Validation by an Operating Entity 30,000 8,000Registration Fee 30,000 5,000Transaction Negotiation & Contracting 20,000 15,000Project Monitoring (Periodic) varies variesInitial Verification by Operating Entity & Certification 15,000 5,000Periodic Verification 10,000 5,000Approximate Total: >180,000 >85,000Note: Actual costs vary considerably depending on various factors.

Estimated Cost - $US

SSC=Small-Scale

Kuyasa: Sustainable Energy CDM Project Involving SWH

Location: Community of Kuyasa, Cape Town, South Africa

Project Activities: Three Residential Energy Enhancements: - Solar Water Heaters (150 liters avg.) - Insulated Ceilings - CFLs

Number of households: 2,307 existing homes in phase 1, and 4,000 new homes in phase 2

Source: SouthSouthNorth

Kuyasa Solar Water Heating Component

Pre-Project Situation: people heated water on stove tops

CDM Project Baseline: emissions from hot water via electric tank water heaters based on “suppressed demand” for this energy service

Emission Reduction Estimates: based on model output for thermal energy from SWH, electric water heater efficiency of 70%, and coal-fired electricity generation = 1.288 tons CO2/sys/year

Kuyasa Project: Revenue from Carbon Trading

The project is now registered with the CDM, but project participants have not yet completed carbon reduction sales transactions

Participants anticipate generating revenue equal to at least 12% of the project’s capital costs, based on a CO2 price of €8; at higher carbon prices, carbon reduction sales could potentially supply 76% of capital costs at €25 and 100% at €33 (Source: SouthSouthNorth)

Carbon prices have recently been increasing

Carbon Trading Prices

Source: Point Carbon, various others

Carbon Market ProgramApprox. $/TonCO2 (Summer 2005)

Clean Development Mechanism (CDM)

$5 to $10

European Union Emission Trading System (EU ETS)

$20 to $30

Retail and other voluntary markets

$3 to $15

International Trade in Renewable Energy Certificates

There have been a few international REC transactions:

Guatemala hydro RECs to the Netherlands

Symbolic REC contribution to WSSD from ENEL: wind farm in Cost Rica and geothermal in Italy

Probably some voluntary transactions within North America, with more activity to come…

To date, though, experience is very limited.

RECs for Solar Water Heating: Australia

Key Features of Australia’s REC Program for SWH

Regulations adopted in 2001 enable solar water heaters to generate RECs for compliance with Australia’s Mandatory Renewable Energy Target (MRET) which requires 2% of electricity generation by renewables though 2010.

SWH systems must either be installed in a new building, or it must replace an electric water heater or an electric-boosted solar water heater that has been installed for over 1 year.

RECs anticipated over 10 years are credited to SWH system buyers upon registration. Typical SWH systems are eligible for between 10 and 64 RECs depending on the user’s location and system type. A table in the MRET regulations specifies the amount of RECs.

RECs for Solar Water Heating: Australia, cont.

Program Features and Reported Results Registering a Solar Water Heater to obtain RECs costs A$20

(US$15) and must be done within 1 Year of SWH installation

Agents provide SWH REC registration services and buy RECs from SWH owners, which eases market participation

REC prices have reportedly ranged from nearly A$40 (the cost of the fine charged to parties not meeting REC obligations) for the first few years to the mid-A$20’s more recently

Australia’s SWH REC program has boosted Australia’s solar water heating market considerably, especially during the first few years of the program when REC prices were higher

Lessons From Selected International Experiences

Regarding Carbon Trading and REC Rules and Markets The carbon market for Kyoto compliance is large and growing, but

participation can be arduous

SWH initiatives still can benefit from Kyoto carbon markets if scale is sufficient to cover participation costs; simplified procedures also help

Australia’s simple REC rules, upfront crediting, and agents to ease participation give a good boost to the SWH market

Simple rules and procedures, and active intermediaries, could facilitate SWH in US REC markets and emerging carbon markets, such as RGGI (the Northeast’s Regional Greenhouse Gas Initiative)

THANK YOU!

For more information, see:

http://www.green-markets.org/SWH

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Arlington, MA 02476 USA

Note: Cover Photos Courtesy of SouthSouthNorh