World Bank ERPA Features

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• World Bank ERPA Features
• and
• Risk Profile of JI Projects

Jari Vayrynen Operations Team Leader Carbon
Finance Unit World Bank March 2007
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World Bank ERPAs- purpose-key features
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Generation of CERs ERPA
ERUs
ERPA

Issuance of ERUs by the Host Country
Verification by an independent auditor
(Independent Accredited Entity)
Generation of Emission Reductions
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Purpose of ERPA

• Record agreement
• Identify responsibilities
• Establish rights
• Manage risk

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Basics of World Bank ERPAs

• Goals consistency, flexibility, reducing
  transaction costs
• Two parts
• General Conditions - standard terms, conditions,
  rights/ obligations
• Negotiated agreement - purchase amount, price,
  payment terms, preconditions, representations and
  warranties

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WB ERPA Features

• Sale and Purchase agreement
• Object is the commodity of ERs
• Amount, Price and Delivery/Payment Schedule
• Defines who does what with regard to
• Validation
• Registration
• Monitoring
• Verification Certification
• Provisions on payment for ERs and
  preparation/supervision cost recovery (if any)
• Payment generally upon delivery, some advance
  payments possible
• Recovery of cost, if any, capped and defined
• Events of Defaults and Remedies
• E.g. under delivery of ERs
• Other than for willful breach, no tough
  penalties, preferred option to amend ER delivery
  schedule
• WB ERPAs typically do not include delivery
  guarantee from seller

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Risk Profile of JI Projects- principle of risk
allocation- key elements of risk - impact on
pricing- some practical considerations
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Risk Allocation between Buyer and Seller

• Risk is allocated to the party best able to bear
  it
• Three key risk categories
• Underlying project risks
• Kyoto Protocol risks
• ERPA structuring/terms risk
• Rules of thumb
• Project risks borne by seller
• Kyoto Protocol risk primarily borne by either the
  seller (ERU) or buyer (VER)
• ERPA structuring/terms risk relatively less
  important and matter of negotiation

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Kyoto Protocol Risks (1)

• Risk may be allocated either to seller or buyer
• VER buyer takes Kyoto risk gtgt lower price
• ERU Project owner takes Kyoto (including host
  country compliance) risk gtgt higher price
• Important price determinant because if the
  project does not meet Kyoto requirements, it
  generates no asset for Kyoto compliance needs

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Kyoto Protocol Risks (2)

• Main component is risk of project determination
• methodology, additionality
• Letter of Approval
• Other component ERU issuance risks
• Risks related to proper monitoring and
  verification
• Risks related to host country actually issuing
  and transferring the ERUs to buyer

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Project Risks

• Risk of the underlying project
• Construction, operation, delays,
  licensing/permits
• Reliability and level of complexity of the
  technology used
• Generally borne by Project Entity but can be
  limited by e.g.
• conservative ER estimates
• Also a very important price determinant as has
  direct impact on likelihood and timing of the
  physical ERs being generated

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Risks related to ERPA Structure (1)

• ERU delivery guarantees required by buyer or not
• 3rd important price determinant
• If guarantees provided by seller, can get 10-30
  higher price but a big risk to take
• Large variation on how delivery guarantee defined
• WB ERPAs typically do not include delivery
  guarantee from seller
• Advance Payments
• Risk to buyer that the project is not completed
  and does not deliver the emission reductions
• The price may be discounted to reflect this risk
  taken by buyer
• Can be mitigated by the seller providing a
  guarantee for the advanced amount

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Risk Related to ERPA Structure (2)

• Preparation costs
• If buyer pays for them, may discount the price to
  reflect this
• Structure of delivery
• If buyer has rights to all/first ERUs generated,
  likely to pay a higher price

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Some practical considerations/lessons learned
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Other practical considerations that can manage
risk and expedite process (1)

• Prepare technical and financial (pre-)Feasibility
  study
• Ensure clear commitment from company management
  (and not just operational staff)
• E.g. included in the business plan
• Establish clear institutional set up between
  project owner, advisers, and technology
  provider/sub-contractor important
• Advanced stage of negotiations with equity and
  debt financiers is helpful
• Compliance with environmental regulations,
  including transparent stakeholder consultations

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Other practical considerations that can manage
risk and expedite process (2)

• Application of an already approved CDM
  methodology makes a big difference
• Cuts down JI preparation time and reduces risk of
  non-Determination
• Typically point source reductions or clearly
  defined systems are easier
• e.g. landfill gas flaring, N20 catalyzer,
  utilization of coal mine methane
• e.g. wind power project displacing coal in the
  national grid
• Dispersed or multi-component/measure projects
  tend to be more challenging
• expect a longer preparation time
• e.g. transportation, household level energy
  efficiency
• e.g. complicated industrial energy efficiency
  improvement programs or complex district heating
  system upgrades

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Other practical considerations that can manage
risk and expedite process (3)

• Consider your commercial strategy for ER sales
  carefully
• Sell all ERs or part of the ERs, save some for
  sale at the spot market?
• Sell all ERs to one buyer or to several buyers?
• What is the delivery schedule of the ERs to the
  buyer(s)
• E.g. deliver all of them in the first 2 year of
  the project OR, for example, deliver 400,000
  ERs/year over five years?

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