TRANSACTION TYPES and FINANCING Architecture of CDM transactions By Steve Thorne SouthSouthNorth...
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Transcript of TRANSACTION TYPES and FINANCING Architecture of CDM transactions By Steve Thorne SouthSouthNorth...
TRANSACTION TYPES TRANSACTION TYPES and FINANCINGand FINANCING
Architecture of CDM transactionsArchitecture of CDM transactionsBy Steve Thorne By Steve Thorne SouthSouthSouthSouthNorthNorth
Addis Ababa 21Addis Ababa 21stst October 2003 October 2003
Contents of presentationContents of presentation
CDM rationale overviewCDM rationale overviewContribution of CDM to projects Contribution of CDM to projects Example of cash flowsExample of cash flowsTypes of transactionsTypes of transactionsExamples of types of transactionsExamples of types of transactionsWhat kind of finance is aroundWhat kind of finance is aroundWho is in the marketWho is in the market
Emitter in NORTH Emitter in SOUTH
Target level ofemissions
Achieved level of emissions
COST $
COST $
Investment funds
EmissionReduction
credits
The Clean Development Mechanism
ENERGY PROJECTDEVELOPED BY THE
PARTICIPANT(e.g. Delivering of low-cost
houses)
CDM PROJECT ACTIVITY (e.g. retrofitting by installing energy efficient technologies.)
COST OF PROJECT AS WHOLE
COST
VALUE BROUGHTFROM PROCEEDSOF SALE OFCER’s
PRICE
ENERGY PROJECTDEVELOPED BY THE
PARTICIPANT(e.g. Delivering of low-cost
houses)
CDM PROJECT ACTIVITY (e.g. landfill projects.)
COST OF PROJECT AS WHOLE
COST
VALUE BROUGHTFROM PROCEEDSOF SALE OFCER’s
PRICE
Let’s look at a CDM landfill…Let’s look at a CDM landfill…
December 2003:CDM registered
with EB
This creates a setof registered and
un-transactedCertified Emission
Reduction Certificates
CER’s
The lifetime of the project is say 8 years, and in the MVP you verify every two years (optional)…
Year 2
Year 4
Year 6
Completion
These issued CER’s are now commodities which can besold, at a price the market dictates….
December2005: $6/t
December2007: $11/t
December2009: $23/t
December2011: $21/t
TOTAL CDM
REVENUE
The block of CER’s can be transacted along The block of CER’s can be transacted along three broad choices…three broad choices…
1: self develop the project
andsell forward the
predictedCER’s via an option
or2: bring in an
investor
Self developThe project and
sell the CER’s as they are
issued at prevailingmarket price
1: get a partner to help with the
development of theentire project
In return for saleof the CER’s
Option 1:Option 1:
1: get a partner to help with the
development of theentire project
In return for an option on the CER’s
RISK:here the risk is zero: you get
help to put together the project and you get money
REWARD:the reward is financed and
transacted project
PRICE:will obviously be
greatly discounted againstrisk
Option 2:Option 2:
1: sell forward the predictedCER’s via an option
2: bring in an investor
RISK:here the risk is how to cover
underperformance and future market uncertainty
REWARD:the reward is flow of
capital or letter of credit
PRICE:will obviously be
discounted againstrisk
Option 3:Option 3:
Sell the CER’s as they areissued at prevailing
market price
RISK:here the risk is the market
price at time of going tomarket (issuance or beyond)
REWARD:have to self finance, but rewards could be great
PRICE:prevailing price,
Maximum benefit if price is good
Sources of CDM financeSources of CDM finance Donor Funds for frictional costs (capacity Donor Funds for frictional costs (capacity
development, institutional development, non-development, institutional development, non-validation and verification transaction costs; validation and verification transaction costs; establishment of African DOEs etc.)establishment of African DOEs etc.)
Buyers of “off-the-shelf” CERs;Buyers of “off-the-shelf” CERs; Investors in project technologies (equity, forward Investors in project technologies (equity, forward
purchase etc.);purchase etc.); Mixtures of types;Mixtures of types; Multinational internal trading;Multinational internal trading; Others?Others?
Who is in the market?Who is in the market?
Donor funds: Dutch, British, US, Germans, Donor funds: Dutch, British, US, Germans, Danes etc.Danes etc.
World Bank e.g. PCF, CDCF, bio-carbon World Bank e.g. PCF, CDCF, bio-carbon fund…fund…
CERUPT (Dutch funding)CERUPT (Dutch funding)Finnish, Danish, Govt. purchasersFinnish, Danish, Govt. purchasersPrivate sector: Eco-securities etc.Private sector: Eco-securities etc.
Emission trading
Carbon markets under KyotoCarbon markets under KyotoKyoto
Protocol
Annex I Annex INon
-Annex I
JI projectCDM
Project
Company Company
Expected sizes
EU Emission Trading Scheme: Eur 8 billion/year; CDM/JI: Max 6-8% (600 mln/year)
CDM institutional buyers: PCF, CDCF,Bio Carbon Fund; Cerupt: Eur 200 mln Danes/Austrians/France (Eur 20 - 80 mln?) Japanese / Canadians