OVERVIEW: CDM FINANCING DENR Training Course November 4-6, 2003 Climate Change Information Center...
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Transcript of OVERVIEW: CDM FINANCING DENR Training Course November 4-6, 2003 Climate Change Information Center...
OVERVIEW: CDM FINANCING
DENR Training CourseNovember 4-6, 2003
Climate Change Information CenterManila ObservatoryAteneo de Manila University
Contents
1. Basics of CDM Financing
2. CDM Transaction Costs
3. Risks in CDM Financing
4. State of the Carbon Market
1. Basics of CDM Financing
Starting Point: Viable Project
• A potential CDM Project is a feasible project Technologically feasible Financially sound
• A potential CDM Project is a project which has an Environmental Compliance Certificate (ECC)
Total Project Costs and Sources of Finance
Total Project Cost Estimates • Investment costs, including development costs, up to
commissioning of project
Sources of Finance to be Sought or Already Identified
• Critical to identify other debt and/or equity finance• Typical sources of funding: international development
banks, government funding, private financing, supplier credit
• CDM contribution = typically 5-15% of total project costs
Financing Options in a CDM Project
Emission Reductions Purchase Agreement
• Annex I investor agrees to buy CERs as they are produced by the project
BanksInvestor
DebtEquity
Power Purchase Agreement
$$
Electricity
Emission Reductions Purchase Agreement
CDM Investor$$
CERs
Emission Reduction Purchase Agreement
Emission Reduction Purchase Agreement
• Will improve IRRs• Forward contract
– Payment upon delivery of verified ERs– Upfront payments are rare
• Will provide a hard currency revenue• Helps secure financing and reduce project risk
– Future ER payments as collateral for project loans– Can be paid into an escrow account, protecting
lenders from currency convertibility and transfer risks
Financing Options in a CDM Project
Carbon Funds
• Annex I investors contribute to a mutual fund
• Mutual fund agrees to buy CERs as they are produced by the project
• Examples– WB Prototype Carbon Fund– Netherland’s CERUPT
How Carbon Funds Work..
Industrialized Governments
and Companies
Developing Countries and Communities
Carbon FundCarbon Fund
$$Technology
Finance $$Technology
Finance
CO EquivalentCO Equivalent22
Emission Reductions
CO EquivalentCO Equivalent22
Emission Reductions
Carbon Fund
Carbon Fund
$$ $$
22 22
Emission ReductionPurchase Agreement
BanksInvestor
DebtEquity
Power Purchase Agreement
$$
Electricity
$$
CarbonCredits
Nature of Carbon Financing Contract
Carbon Fund
Carbon Fund
$$ $$
22 22
Emission ReductionPurchase Agreement
BanksInvestor
DebtEquity
Power Purchase Agreement
$$
Electricity
$$CarbonCredits
Emission Reduction Purchase AgreementODA
Non-ODA
Financing Options in a CDM Project
Full or partial equity
• Annex I Investor finances all or co-finances part of a CDM project in return for full or shared financial returns and CERs
• Local investors co-financing CDM projects in a host country may wish to share in CERs so that they have the opportunity to sell the credits at a later time
BanksInvestor
DebtEquity
Power Purchase Agreement
$$
Electricity
CDM Equity Financing
CDM InvestorEquity $$
CERs
ODA
Non-ODA
Financing Options in a CDM Project
Loan
• Annex I Investor provides loan or lease financing at concessional rates in return for CERs
BanksInvestor
DebtEquity
CDM Debt Financing
CDM Investor
CERsElectricity
$$Debt $$
ODA
Non-ODA
2. CDM Transaction Costs
Pre-implementation costs
• Search costs
• Negotiation costs
• Baseline determination costs
• Approval costs
• Validation costs
• Review costs
• Registration costs
Implementation costs
• Monitoring costs
• Verification costs
• Review costs
• Certification costs
• Enforcement costs
Trading costs
• Transfer costs
• Registration costs
Transaction costs Relation to project size
Estimate (k€)
Search costs Fixed 15
Negotiation costs Degressive 25 – 400
Baseline determination costs Fixed 35
Approval costs Fixed 40
Validation costs Fixed 15 – 30
Registration costs Fixed 10
Monitoring costs Fixed 10
Verification costs Degressive 8 per turn
Certification costs Degressive NA
Enforcement costs Proportional
Transfer costs Proportional 1%
Registry costs Proportional 0.03%
Minimum fixed costs (k€) 150Source: Michaelowa et al (2003)
Project size, types & total transaction costsSize Type Reduction
(t CO2 per yr)
€ / t CO2
Very Large
Large hydro, geothermal, landfill methane
>200,000 0.1
Large Wind power, solar thermal, energy efficiency
20,000 – 200,000
0.3 – 1
Small Boiler conversion, DSM, small hydro
2000 – 20,000 10
Mini Energy efficiency in housing & SME, mini-hydro
200 – 2000 100
Micro PV < 200 1000
Source: Michaelowa et al (2003)
Project size thresholds
• PCF considers any project with a volume below 3 million € greenhouse gas benefits would not be attractive due to transaction costs Threshold of about 50,000 t CO2 per year for
a 20–year project• Transaction costs should not be more than 25%
of proceeds of CER sales to make a project viable (Shell, 2001)
• Cost threshold of about 1 € / t CO2
Viability of CDM Projects
• Given CER market price estimates of 1 – 5 € pet t CO2 (Jotzo and Michaelowa, 2001)
• Given PCF transactions priced at 3 – 4 € per t CO2
Only projects classified as large and very large are viable
Many small-scale projects would not be viable
Ways to reduce transactions costs
Bundle projects to jointly undertake each step of the project cycle
1 2 3
4 5
Ways to reduce transactions costs
• Do verification and certification not annually but at long intervals
• Exempt projects from one or more steps of the project cycle
• Streamline the information needs on each step of the project cycle
• Standardization of parameters
Source: Michaelowa et al (2003)
Ways to reduce transactions costs
• Do unilateral CDM projects that reduce search and negotiation costs
• Registration and certification fees proportional to the size of the project
• Validation and verification fees proportional to the size of the project
Source: Michaelowa et al (2003)
3. Risks in CDM Financing
Risks in CDM Financing
• Renewable energy projects are considered risky by financing institutions
• Multitude of risks could reduce the value of the project to zero
• Measures are needed to mitigate risks at different stages of the project
“Normal” Project Risks
• Political/Country Risks• Sponsor Risks
• Construction Risks• Technical Risks
• Fuel Risks• Environmental Risks
• Financial Risks• Legal Risks
• Operation Risks
CDM-Specific Risks
• Market/Price Risk– Will there be a market for project-based ERs? – Will contract price exceed market price?
• Policy/Compliance Risk– What if no Kyoto Protocol?– What if host country does not ratify or comply?– What if host country does not approve project?
Market and Policy Risk are closely linked
• Baseline Risks– Eligibility--will ERs be Kyoto-compliant?
– Will project be validated and registered?– Will ERs be verified and certified?
– Baseline design--is the baseline robust? Will its assumptions remain valid over time?
– Performance--actual performance will determine level of ERs generated
CDM-Specific Risks
4. Emerging Trends in the Carbon Market
Summary of carbon markets currently in operation
Project-based Emission Reduction purchases
Allowance Trading
Within National trading systems
Intra-Firm tradingRetail
UK
DK
Shell
BP
“Pre-Compliance”
From voluntary
To Kyoto Pre-Compliance
Market Intelligence:“Few Countries Benefiting,
Little Private Sector Buying” • Market: cumulative 200 million tonnes CO2
traded ($500 million) since 1996
• Five-fold increase between 2001 and 2002
• Only 43% of all carbon transactions made in CDM/JI (2001-2002), dominated by Dutch and PCF
• Only 13% of the private sector’s purchases were in CDM (2001-2002)
• African countries, smaller countries and small-scale projects are largely bypassed
Carbon Market Volume has increased
Source: Authors’ own calculation, as above, volume projection by PointCarbon
0
10
20
30
40
50
60
70
80
1996 1997 1998 1999 2000 2001 2002(to date)
2002(Proj.)
Est
imat
ed v
olu
mes
tra
nsa
cted
(M
tCO
2e)
ER TransactionNational MarketsPoint Carbon 02 proj.
Who is buying ER Credits?
Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon
1996-2000 2001-2002
Canada
USA
Netherlands
Other WEU
Japan PCF
Australia
Canada
USA
Other WEU
Japan
Australia
PCF
Netherlands
Balance in Asset Classes Emerging
Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon
0%
10%
20%
30%
40%
50%
60%
70%
Fuel-Switching EnergyEfficiency
Renewables Industrial Transportation LFG LULUCF GeologicalSequestration
1996-2000
2001-2002
0
2
4
6
8
10
12
14
16
18
Annex II JI Countries CDM Countries
Volu
me
of
ER
Pro
ject
s (M
tCo
2e)
Carbon Finance flows 2001-2002
Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon
USA
Canada
Australia
Latin America
AsiaAfrica
Who’s buying where? (2001-2002)
Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon
0
2
4
6
8
10
12
14
16
18
20
Annex II JI CDM
Volu
me
(MtC
o2e
)
Private
Private/Public partnerships
Public
In 2001-2002, private companies acting alone have purchased only 13% of their reductions in developing countries.
World BankCarbon Finance Vehicles
BioCarbon Fund
Netherlands CDM Facility
Italian Carbon Fund
World Bank’s Carbon Finance Business- at a Glance
Carbon Purchases agreed and under negotiation: ~40, ~US$250 million Number/Value of PCF and Netherlands Projects approved for carbon purchase: 64, US$ 440 millionCarbon Asset portfolio: ~50 million tCO2e
Underlying CDM/JI project finance: ~$3.0 bn
Regional Distribution of Active PCF Pipeline ProjectsTotal of Approx. US$ 227 Million
East Asia23%
Eastern Europe17%
Latin America 24%
Africa20%
South and Central Asia
16%
Technological Distribution of Active PCF Pipeline ProjectsTotal of Approx. US$ 227 Million
Bagasse6% Biomass
8%
Energy Efficiency
18%
Geothermal12%
LULUCF4%
Waste Management
21%
N20 Removal5%
Small Hydro12%
Wind14%
Sample Projects• Latvia: $2.5 million PCF Purchase
– anaerobic decomposition of about 20,000 tons of garbage a year– ERs from the existing landfill site gas recovery began June 2002
• Uganda: $3.9 million PCF purchase– a 5.1 MW and 1.5 MW small hydro generating facilities in the
West Nile region– Displaces >200 small and few large public diesel gensets
• Chile: $6 m PCF Purchase– 26MW run-of-river hydro generating 175 GWh to replace
coal/gas
• Brazil: $5 mm of PCF Purchase– Substituting coal/coke by sustainably produced charcoal in pig
iron production, plus afforestation and ecosystem restoration, biodiversity and health benefits
Contrasting the New FundsContrasting the New Funds
CF to small-scale energy projects
Generate high-value ERs (contract prices: $4-5t/CO2e)
“Development + Carbon”
CDM countries only:
emphasis on smaller, poorer
countries and communities
Multiple tranches
Community Development Carbon Fund (CDCF) BioCarbon Fund
CF to agricultural, forestry, and land use
Generate cost-effective ERs (contract prices: $3-4/tCO2e)
Carbon + biodiversity cons., fight against desertification, reduction in rural poverty
CDM and JI
Learn-by-doing prototype
Historical Emissions
Low Surplus (High Demand, Low
Supply)
High Surplus (Low Demand, High
Supply)
1990 2000 % change2000-2010
CarbonBalanc
e
% change2000-2010
CarbonBalanc
eGROSS DEMAND 220 53
EU Carbon 911.4 895.5 7% 120 -3% 30
Japan Carbon 305.3 313.7 10% 58 -3% 17
Canada Carbon 128.6 158.0 15% 61 0% 37
+ Net other GHGs (+5, -5%) 12 -2
- Managed forest allowance -30 -30
Buyers of Carbon Credits[MtCe/yr]
(Source: Grubb, March 2003)
Historical Emissions
Low Surplus (High Demand, Low
Supply)
High Surplus (Low Demand, High
Supply)
1990 2000 % change2000-2010
CarbonBalance
% change2000-2010
CarbonBalance
SUPPLY 331 587
Russia Carbon 647 450.7 20% 106 0% 196
Ukraine Carbon 191.9 104.5 20% 67 0% 87
Accession 10 Carbon 245.2 146.6 25% 45 5% 75
Other EITs 87.8 45.4 25% 24 0% 36
Other GHGs (10, 20%) 24 79
+ Managed forest allowance 40 40
CDM
15
50
Sellers of Carbon Credits[MtCeq/yr]
(Grubb, March 2003)
Kyoto Protocol:Flexibility Mechanisms
Present day
2012 (BaU)
Assigned Amounts
Domestic Actions
Joint Implementation
Emission TradingAnnex I
Emission Trading
Clean Development Mechanism
Domestic Actions
2012 with KP
- 5%
1990 level
Probable prices for CERs(£/tCO2e)
(Grubb, March 2003)
• Renewable energy and energy efficiency projects under CDM fast-track procedures for small scale projects £10 – 25 per tCO2e
• Land use and other CDM projects £ 5 – 15 per tCO2e
Key Factors in CDM Market Development
• Need 5 years+ for carbon finance to make a difference in a project at current prices;
• Buyers only want ERs delivered by 2012. They heavily discount ERs after 2012
• If value of post 2012 ERs is not assured by 2006, CDM market activity will decline sharply
Lead Time and Uncertainty Constraints on Project-Based
Mechanism (esp. CDM)
2006 20082003 2012
Operating
Wind, Efficiency, Waste to Energy
Large Hydro, Geothermal, Coal to Gas PowerCDM Investment Window: 3years
IF NO Decision; No Incentive beyond 2012,
No Investment, Market Development Stalled
Operating
= Start Construction
Roberto C. Yap, S.J., Ph.D.
Environmental Economist
Climate Change Information Center
Manila Observatory
Ateneo de Manila University
Tel +63 2 426-6144
Fax +63 2 426-6070