Emission reduction value in financing clean energy projects

1
Emission reduction value in financing clean
energy projects
By Jan-Willem Martens EcoSecurities
2
EcoSecurities

• EcoSecurities leading greenhouse gas advisor
  (Environmental Finance survey, 2001, 2002, 2003,
  2004)
• Five offices around the world, 27 people
• Currently working on over 70 CDM projects in more
  than 50 countries
• Active in sale of CERs

3
EcoSecurities Group
Oxford
New York
Den Haag
Los Angeles
Rio de Janeiro
4
Overview

1. Introduction
2. Market Developments Who is selling, who is
   buying ?
3. Project Transaction Issues
4. How can CDM help project finance?
5. How can CDM and ODA go together
6. Country competitiveness
7. Conclusions

5

• Who are the players in the CDM market?

6
What determines the CDM cash flow?

• CDM project revenues
• Price of the Certified Emission Reduction (CER)
• CER market price
• Availability of buyers
• Perceived contribution to sustainable development
• Credit sharing and taxing CERs in the host
  country
• Number of CERs
• Actual production the installations (MWh
  delivered)
• Carbon Emission Factor (CEF)
• CDM project cost
• PDD development
• New or existing methodology
• Host country approval
• Validation/verification
• Registration

7
How does the CEF influence the number of CERs
generated?

• As the CEF is the carbon emissions per actual
  production quantity (tCO2/MWh) of a grid and
  renewable energy has an emission factor 0 so the
  quantity of CERs is determined by
• Production (MWh) CEF (tCO2/MWh) CERs
  (tCO2)
• CDM cash flows can provide a substantial
  contribution to the overall project in counties
  with a high CEF.

Lower CEF Lower CEF Attractive CEF Attractive CEF
Country CEF Country CEF
Malaysia Thailand Philippines Indonesia 0.610 0.611 0.623 0.710 Vietnam Singapore China India 0.835 0.922 1.027 1.055
8
Division of CDM project types
Source EcoSecurities December 2004
Division is based on an analysis of 130 PDDs for
CDM projects
9
Division of CO2 emission reductions from CDM
projects
Source EcoSecurities December 2004
Total amount of Results based on a selection of
130 CDM project proposals
10
Funnel Effect for CDM projects
11
Carbon Market Volumes 2004
12
CER prices 2004
13
Types of Buyers
14
List of governments buying JI and CDM
15
Project Transaction Issues
16
Who is carrying the risks?

• Registration risk this is the risk related to
  getting the project registered under the CDM.
• Performance risk Risk related to project
  performance (including political risk)
• International CER Transfer risk - When will the
  CDM registry be finalised? When will the ITL be
  finalised?

17
Different ways to structure carbon finance

1. Contract form guaranteed delivery
2. Contract form No guaranteed delivery
3. Contract form with floor price
4. Contract form X of the EUA market price
5. Sales of CERs on the EU Spot market (is it
   possible Yes, no unilateral CDM, but obligation
   to report Annex I counter-party to CDM EB?)

18
How does risk influence the price of a CER?
Production price
Political risk
Liquidity risk
Credit risk
Delivery risk
Counterparty risk
Margin
EUA price
19

• Country Competitiveness

20
Does Geography Matter in CDM transactions?

• For most commercial buyers, price and risk
  sensitivity outweighs geographic strategy
• For government buyers, there are geographic
  preferences
• Denmark is targeting Malaysia, Thailand, South
  Africa and Central America
• PCF funds looking for a global approach with
  sectoral distribution
• Forthcoming DBJ fund is expected to be Asia
  weighted
• Does this mean ASEAN or India/China
• For multinational buyer/sellers internal CDM
  opportunities are very attractive
• However, exposure to a country does not equate
  desire for exposure to 3rd Party CDM CERs from
  that country
• Expectation should be for MNCs presenting their
  own CDM projects to host nation DNAs 3rd party
  project finance will give way to balance sheet
  corporate finance as the dominant paradigm

21
How do buyers assess attractiveness of projects?

• Likelihood of Project Approval at host country
  and EB level
• Credit sharing and taxing CERs in the host
  country
• Credibility of Counterparty
• Price, price, price and price
• Who covers upfront costs prior to ERPA?
• Divisions of risk between buyer and seller
• Underlying project risks (technology risk,
  political risk, market risk, etc)
• Will seller deliver even if it experiences
  underperformance?
• Willingness to give buyers options for residue
  at
• Same price or discount to market price

22
What can countries do to improve their position?

• Assuming the DNA office is competent and
  knowledgeable, keep individuals in position as
  long as possible
• Continuity is key
• Domestic capital for asset finance (either
  project or corporate) must understand that these
  cash flows are bankable
• CDM enhances project economics, still requires
  underlying capital and domestic is the most
  realistic source
• CDM alone cannot overcome other cross border
  investment biases but can create interest in new
  opportunities from unconventional sources

23

• Thank you!