How does the CDM Work

1
How does the CDM Work? - a wind farm case study
in Mauritius
Sanju Deenapanray CDM National Project
Coordinator, Mauritius
UNDP CO, Port Louis, Mauritiu
2
Overview

• Generating Certified Emission Reductions (CERs)
• Additionality
• Overview
• Environmental additionality
• Financial additionality
• Legal additionality
• Sustainable Development Criteria (SDC)
• Project Monitoring

3
How does a project generate carbon credits?
4
The CDM project cycle
6 to 12 months
1.5 months
Crediting period of the project
Project Developer
Project feasibility assessment / PIN
CDM project development / PDD
Host country approval
DNA
Project validation
DOE
Project registration
CER issuance
CDMExecutiveBoard
5
Sub-Saharan Africa is struggling
Number of CDM Projects In Selected Countries
(March 2008) (Registered projects)
7

• 4 countries (China, India, Brazil and South
  Korea) account for 70 of CDM projects and 80 of
  CERs through to 2012
• Sub-Saharan Africa accounts for 2 of registered
  projects and 5 of CERs through to 2012
• 88 non-Annex 1 countries have yet to benefit from
  any registered CDM project activity

2
1
0
0
Kenya
Tanzania
Mozam-bique
Ethiopia
Mauritius
6
UNDPs objective
7
The Millennium Development Goals
8
Linking the MDGs and the CDM
9
UNDPs two-pronged carbon strategy
10
MDG Carbon Facility
MDG Carbon Facility CDM Activities
Fortis
UNDP
Project Development Services
Carbon Banking Services
Project Proponents
www.mdgcarbonfacility.org
11
Overview

• Generating Certified Emission Reductions (CERs)
• Additionality
• Overview ?
• Environmental additionality
• Financial additionality
• Legal additionality
• Sustainable Development Criteria (SDC)
• Project Monitoring

12
Additionality

• Has been defined as
• Environmental additionality reductions in GHG
  emissions
• Financial additionality the project only
  happens because of the financial incentive
  offered by carbon credits
• Legal additionality the project does more than
  what is required by local law
• The Kyoto Protocol is somewhat vague, stating
  simply
• Reductions in emissions must be additional to
  any that would occur in the absence of the
  project activity
• Assessment of additionality is intrinsically
  linked with baseline establishment

13
The additionality tool
Step 0. Start date
Cultural, technological or economic barriers
Financial additionality
Step 2. Investment analysis
The proposed CDM project activity is additional
14
Overview

• Generating Certified Emission Reductions (CERs)
• Additionality
• Overview
• Environmental additionality ?
• Financial additionality
• Legal additionality
• Sustainable Development Criteria (SDC)
• Project Monitoring

15
A CDM project costs money. Is it worth the effort?
Indicative CDM Cost Profile For A Typical CDM
Project
Assumes a 10-year project. Recurrent costs
discounted at 3 annual rate to express in
present-value terms. Registration costs,
Administration Fee and Adaptation Fund Levy not
included.
16
Not all carbon projects are born equal
17
Baseline monitoring methodologies

• A CDM project must use an approved CDM
  methodology. If no relevant methodology exists,
  the CDM project developer can design a new
  methodology and submit it for approval
• A CDM methodology contains 2 components
• A baseline methodology is an application of a
  baseline approach to an individual project
  activity, reflecting aspects such as sector and
  region. Refers to the baseline scenario
• A monitoring methodology refers to the method
  used by the project developer for the collection
  and archiving of all relevant data necessary for
  the implementation of the monitoring plan. Refers
  to the project scenario
• The baseline methodology and monitoring
  methodology must be used in combination
• CDM methodologies approved by the CDM Executive
  Board are publicly available on the UNFCCC CDM
  website

18
Structure of a CDM methodology
19
ACM0002 / Version 7 (for wind farm connected to
grid)

• Consolidated baseline methodology for
  grid-connected electricity generation from
  renewable sources
• Consolidation of 8 different approved
  methodologies
• It refers to several tools
• Tool to calculate the emission factor for an
  electricity system
• Tool for the demonstration and assessment of
  additionality
• Tool to calculate project or leakage CO2
  emissions from fossil fuel combustion

20
Emission Reduction (ER)
emission reduction (tCO2/yr)
ERy (EFgrid,CM,y X EGy) PEy - Ly
grid emission factor (tCO2/MWh)
electricity fed to grid (MWh/yr)
project emission (tCO2/yr)
project leakage (tCO2/yr)
21
Grid Emission Factor
EFgrid,CM,y EFgrid,OM,y X wOM EFgrid,BM,y X
wBM
Generation-weighted average CO2 emissions net of
electricity generated (excludes low-cost, must
run plants CDM projects)
Generation-weighted average CO2 emissions net of
electricity generated of either 5 most recently
built plants or 20 of last power generated
(whichever is larger)
wOM 75 and wBM 25
For Mauritius EFgrid,OM,y 1.0886 tCO2 / MWh
EFgrid,BM,y 1.2659 tCO2 / MWh
EFgrid,CM,y 1.1329 tCO2 / MWh
22
Emission Reduction (ER) 25 MW Wind Farm
EFgrid,CM,y 1.1329 tCO2/MWh EGy 52,875
MWh/yr PEy Ly 0 tCO2/yr
ERy 59,900 tCO2/yr
23
Overview

• Generating Certified Emission Reductions (CERs)
• Additionality
• Overview
• Environmental additionality
• Financial additionality ?
• Legal additionality
• Sustainable Development Criteria (SDC)
• Project Monitoring

24
Adding a Carbon credit layer to existing revenue
25
Investment analysis (choice of indicator
assumptions)

• Financial indicator is Internal Rate of Return,
  IRR (I.e. the discount rate for which the Net
  Present Value (NPV) of the project is zero)
• Hurdle rate 12 (typical interest rate on a
  bank loan)
• Developed an investment model with following
  assumptions
• Electricity output 52,875 MWh/yr
• Price of electricity exported to grid Rs5/kWh
• Project financing (20 equity 80 debt 12
  interest rate)
• Depreciation of turbines 5 per annum
• Operation costs are 0.5 of total plant and
  machinery costs
• Breakdown of initial investment cost
  turbines-64 electricity export facilities-15
  civil and erection-13 project management-1
  development cost-1

26
Result of Investment analysis
Project needs CDM revenue to be financially
viable ?
27
Overview

• Generating Certified Emission Reductions (CERs)
• Additionality
• Overview
• Environmental additionality
• Financial additionality
• Legal additionality ?
• Sustainable Development Criteria (SDC)
• Project Monitoring

28
Legal additionality

• Legal additionality the project does more than
  what is required by local law
• Examples of questions asked
• Is it mandatory to build a wind farm to produce
  electricity in Mauritius?
• Is it mandatory to reduce/minimise GHG emissions
  during electricity generation in Mauritius?

29
Overview

• Generating Certified Emission Reductions (CERs)
• Additionality
• Environmental additionality
• Financial additionality
• Legal additionality
• Sustainable Development Criteria (SDC)
• Project Monitoring

30
The CDM project cycle
6 to 12 months
1.5 months
Crediting period of the project
Project Developer
Project feasibility assessment / PIN
CDM project development / PDD
Host country approval
DNA
Project validation
DOE
Project registration
CER issuance
CDMExecutiveBoard
31
The twin purposes of the CDM
Kyoto Protocol Article 12.2
The purposes of the Clean Development Mechanism
shall be to assist Parties not included in Annex
I in achieving sustainable development and in
contributing to the ultimate objective of the
Convention, and to assist Parties included in
Annex I in achieving compliance with their
quantified emission limitation and reduction
commitments under Article 3.
32
Sustainable development criteria for Mauritius
33
Mauritius DNA a CDM Office served by a
Technical Committee
The Meteorological Service
Ministry of Finance Economic Development
Ministry of Environment(Chair)
Ministry of Agro-Industry Fisheries
National CDM Office(Ministry of Environment)
Ministry of Local Government
Ministry of Public Infrastructure
Ministry of Foreign Affairs
Ministry of RE Public Utilities
Central Electricity Board
34
Overview

• Generating Certified Emission Reductions (CERs)
• Additionality
• Overview
• Environmental additionality
• Financial additionality
• Legal additionality
• Sustainable Development Criteria (SDC)
• Project Monitoring

35
The CDM project cycle
6 to 12 months
1.5 months
Crediting period of the project
Project Developer
Project feasibility assessment / PIN
CDM project development / PDD
Host country approval
DNA
Project validation
DOE
Project registration
CER issuance
CDMExecutiveBoard
36
End
Sanju Deenapanray CDM National Project
Coordinator UNDP, 3rd Floor, Anglo Mauritius
House prakash.deenapanray_at_undp.org Tel [phone]