Title: Standard Bank EcoSecurities Carbon Emissions Conference: a financial markets perspective Financing E
1Standard Bank EcoSecurities Carbon Emissions
Conference- a financial markets perspective
Financing Emission Reductionsa Banks
perspectiveColin King8 February 2005
2Outline of the Presentation
- Introduction
- Assessing Risk and Risk Structuring
- Challenges for Developing Country Developers
- Economics of Emission Projects
- Case Studies
- Opportunities in South Africa and Markets for CDM
Projects - The Standard Bank-EcoSecurities alliance
- Conclusion
3What is the opportunity?
The owners of more environmentally sustainable
assets in energy, natural resources, and
environmental technology have the potential to
develop, capture and sell rights to the positive
environmental performance they engender. The
monetization of these environmental benefits is a
rapidly growing business opportunity.
4An additional value from clean sector projects
5Capturing Emission Value Requires New Components
in the Project Finance Process
- Emission Trading Assets require investment in
additional aspects of analysis - Generally, best undertaken in the stages prior
to project financing and groundbreaking - Relevant documentation, verification
requirements and transaction negotiations all
require specialised services - For many parties, outsourcing will be the answer
6Outline of the Presentation
- Introduction
- Assessing Risk and Risk Structuring
- Challenges for Developing Country Developers
- Economics of Emission Projects
- Case Studies
- Opportunities in South Africa and Markets for CDM
Projects - The Standard Bank-EcoSecurities alliance
- Conclusion
7Assessing Risk
- How do commercial banks assess and respond to
risk when appraising carbon and energy projects? - What are the risks and rewards from a
financiers perspective?
8Assessing Risk (Continued)
- What Risks?
- Generic project risks
- Demand (off-take)
- Technology
- Construction
- Operations Maintenance
- Supply (fuel, water, spares)
- Political risk
- Environmental
- Force Majeure
- Funding mismatch
- Collections
9Assessing Risk (Continued)
- What Risks?
- Specific Carbon Market project risks
- Currently, there is no spot market for CERs
they are bought forward into a project i.e.
purchasing with the hope/expectation that the
project will deliver credits - Set volume delivered over a number of years is
bought (a vintage stream) i.e. you cant choose
the volume you want to purchase, nor the year of
delivery - While there are standardised contracts, the
contracting process is time consuming it also
requires specific expertise and partners who are
CDM Consultants and Designated Operational
Entities - A portion of risk payment (upfront unrecoverable
payment is usually made) - The purchase is for physical delivery (not
financially settled)
10Assessing Risk (Continued)
- What Risks?
- Specific Carbon Market project risks
- Registration risk the possibility that a
project is not registered as a CDM project in the
UNFCCC database - Political / Country risk the possibility that
the host country DNA does not issue the letter of
approval or that the country establishes barriers
for the CER transaction - Project risk the possibility that the project
does not generate the expected amount of CERs.
There are basically three reasons for
non-performance on a project - Force majeure
- Financial risk
- Performance risk
11Risk Structuring
How to improve the risk profile of carbon
energy transactions?
Overriding principle Risks to lie with party
best able to manage them!
- Combine Grant funding with DFI financing and
Commercial bank debt - Grant funding assumes first loss position
- DFIs assume the riskier elements of quasi
equity and/or subordinated debt - Commercial lenders provide the senior debt
- Allows grant funds to have largest impact using
multiplier effect
12Risk Structuring (Continued)
Combine Grant funding with DFI financing and
commercial bank debt
13Outline of the Presentation
- Introduction
- Assessing Risk and Risk Structuring
- Challenges for Developing Country Developers
- Economics of Emission Projects
- Case Studies
- Opportunities in South Africa and Markets for CDM
Projects - The Standard Bank-EcoSecurities alliance
- Conclusion
14Challenges for Developing Country Developers
- CDM process is complex
- Lack of clarity at international level (CDM
Executive Board) - Documentation and project baselines produced on
an ad hoc basis - Room to streamline (standardisation of documents
baseline benchmarks internationally) - Transaction costs high
- Policy Risk evident
- Fear market is not real
- Signals from host nations and investor nations
not clear enough - Project Developers generally unwilling to risk so
much in absence of any clear indications from
host nation of potential eligibility
15Challenges for Developing Country Developers
(Continued)
- Institutional
- Inability to secure Host Nation Approval
- Lack of clarity/transparency as to process lead
agency - Often no clear indication of host nation
priorities - Sustainable development objectives, projects and
technologies - Developers taking risk, and developing in the
dark - Support
- Lack of an Enabling Environment
- Institutional capacity to support project
development (projects office) - Limited engagement of financial community
domestically - Limited Operational Entity capacity in country
- No ability to support developer in identifying
buyers and contracting
16Outline of the Presentation
- Introduction
- Assessing Risk and Risk Structuring
- Challenges for Developing Country Developers
- Economics of Emission Projects
- Case Studies
- Opportunities in South Africa and Markets for CDM
Projects - The Standard Bank-EcoSecurities alliance
- Conclusion
17Monetizing carbon credits increases project IRRs
18The Economics of waste to energy projects are
especially attractive
Wind farm project 20 MW installed
capacity 50,000 t CO2 ERs p.a.(10
years) Project costs US20m () Carbon
value _at_ 3/ t CO2 1.72m _at_ 5/ t CO2
2.87m Proportion of project costs _at_ 3/ t CO2
8.6 _at_ 5/ t CO2 14.35
Waste to energy project 2 MW installed
capacity gt50,000 t CO2 ERs p.a.(10
years) Project costs US3.5m Carbon value
_at_3 /t CO2 1.72m _at_5 /t CO2 2.87m
Proportion of project costs _at_ 3/ t CO2
49.1 _at_ 5/ t CO2 82.0
19Certified Emission Reductions (CERs) Can Help
Improve Project Annual Debt Service Coverage
Ratios (DSCRs)
- Sale of CERs involve minimal costs therefore is
essentially Free Cash Flow - This cash flow can be readily applied to Debt
Service - Direct Payments on Annual Debt Service
Requirements - Funding Debt Service Reserve Accounts
- Using Forward ERPA Sales as Collateral
- Funding an Account to supplement variations in
EBITDA - Applying Carbon Cash Flow to Debt Service Can
Result in more favorable Capital Structures
(Higher DE ratios) - Higher DSCR (More Debt Carrying Capacity) means
less Equity Requirement Thereby Increasing ROE - Allows Project to be Financed Because Increases
DSCR past Predetermined Threshold set by the
Lender - Either Way, Both Project Developer and Project
Lender are Better Off.
20 A Wind Project Example
- This Simplistic Example Assumes
- US82m Capital Outlay 300GWh
- 75 EBITDA Margins 0.7 tCO2e/MWh Coefficient
- 4 Price per CER D/E of 50
- 40 Price per MWh 15 yr Term, 7 interest Rate
- CER Cash Flow Can Increase DSCR by up to 0.2, or
roughly 4m (10) in additional debt carrying
capacity. - If CER price is increased to 8 (current
forecasts are between 8-12 in 5 years) this
could mean up to 8m LESS equity investment a
full 20 reduction. - At price of 4 CER sales represent 19 of
annual debt service - At price of 8 CER sales represent 37 of
annual debt service - In jurisdictions with high carbon coefficients (gt
1) or in methane (CH4) projects these benefits
are significantly enhanced
21DSCR Matrix
Extra Debt Capacity
22Outline of the Presentation
- Introduction
- Assessing Risk and Risk Structuring
- Challenges for Developing Country Developers
- Economics of Emission Projects
- Case Studies
- Opportunities in South Africa and Markets for CDM
Projects - The Standard Bank-EcoSecurities alliance
- Conclusion
23NovaGerar Landfill Gas to Energy Project, Brazil
- Project Capture of landfill gas currently
venting to the atmosphere for electricity
generation, Rio de Janeiro, Brazil. Expected
capacity 10 MW. - Carbon credits generated 10.7 M tonnes CO2 over
21 years - Regulatory status Approved by Brazilian
Government - Value of carbon Carbon contract agreed with
World Bank Prototype Carbon Fund for 2.5 M tCO2
(up until 2012). Price paid 3.33/tCO2. Value of
contract 8.3 M.
24VM do Brasil, Fuel Switching Project, Brazil
- Project Switching from coke to sustainably
produced charcoal for steel manufacture, Minas
Gerais, Brazil. - Carbon credits generated 15 M tonnes CO2 over 21
years. - Regulatory status Approved by Brazilian
Government. - Value of carbon 5M tonnes sold to the Dutch
government at US3/tonne, another 400,000 tonnes
of 2002-03 vintage reductions sold to Toyota
Tsusho, a Japanese trading house.
25Holcim Cement Project, Costa Rica
- Project Energy efficient process, co-firing with
alternative fuels, higher proportion of mineral
components i.e. lower clinker factor - Carbon credits generated 627 kg CO2 to 542 kg
CO2/t cement, 0.5 M tCO2 2005-2011 - Regulatory status Approved by Costa Rican
government. - Value of carbon Contract negotiations on-going
with Dutch Government as part of CERUPT. Price
4.3/tCO2.
26Outline of the Presentation
- Introduction
- Assessing Risk and Risk Structuring
- Challenges for Developing Country Developers
- Economics of Emission Projects
- Case Studies
- Opportunities in South Africa and Markets for CDM
Projects - The Standard Bank-EcoSecurities alliance
- Conclusion
27Opportunities in SA
- Mining sector (coal mine methane, coal bed
methane, co-firing, clean-coal technology) - Landfill gas sector (methane capture,
gas-to-power) - Pulp and paper (sinks, fuel switching)
- Energy sector power, oil and gas (including
energy efficiency and DSM programmes) - Renewable energy sector (bagasse, solar, wind,
fuel cells, biofuels, etc.)
28What are the Markets for CDM Projects?
- The CDM links Emerging Market Opportunities with
Developed Market Demands - Origination Market (project finance)
- Carbon trading represents a new component of
traditional project finance for infrastructure
energy projects with green credentials - Projects will be found in clean energy, energy
efficiency and waste management - Successful carbon transactions enhance project
debtequity ratios or give the client better debt
service coverage ratios than they might otherwise
enjoy - Secondary market (commodity trading)
- Trading in Credits in Emission Capped
Jurisdictions in the EU, Canada, Japan . . . . - Strong linkages to other traded energy products
(electricity, coal, gas, oil) - Potential Development of synthetic green energy
exports - Investment opportunities
29Outline of the Presentation
- Introduction
- Assessing Risk and Risk Structuring
- Challenges for Developing Country Developers
- Economics of Emission Projects
- Case Studies
- Opportunities in South Africa and Markets for CDM
Projects - The Standard Bank-EcoSecurities alliance
- Conclusion
30The Standard Bank EcoSecurities alliance
- Objective to work together to offer carbon
trading deals to Standard Banks client base and
beyond - To become the Premier provider of Financial
Services for Green assets that can gain from
Emissions Trading - A series of leads and deals already originated
around the world
31Who are EcoSecurities?
EcoSecurities has been rated as the worlds
leading greenhouse gas advisory firm.
Environmental Finance Magazine Reader
survey December 2001, 2002 and 2003
32What will Standard Bank and EcoSecurities offer?
- Project Baselines Analysis and Monitoring and
Verification Protocols - Project Design Document Development
- Negotiations with 3rd party validators
- Negotiations with Government for export agreement
of Carbon Credits - Sourcing Buyers for carbon credits and
structuring origination transactions - Enhanced Debt and Equity Project Finance using
Green House Gas (GHG) values as a Cornerstone - More Sophisticated Trading Derivative Services
33Outline of the Presentation
- Introduction
- Assessing Risk and Risk Structuring
- Challenges for Developing Country Developers
- Economics of Emission Projects
- Case Studies
- Opportunities in South Africa and Markets for CDM
Projects - The Standard Bank-EcoSecurities alliance
- Conclusion
34Conclusions Points to remember
- Most projects involving cleaner energy
technologies will create this additional carbon
value - essentially free cash flow - It is imperative that we develop the CDM project
documentation before the project becomes
operational otherwise it is not eligible for
participation in these mechanisms - Skilled carbon/financial advisers and arrangers
can manage virtually the entire process for
clients either as part of conventional
commercial/financial relationships or strictly
on a carbon project development basis
35Conclusion
QUESTIONS?