International Finance Corporation

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International Finance Corporation

• Carbon Finance
• Issues and Opportunities for the Private Sector

MDL en Centro America San Salvador, El Salvador
March 27-28, 2003
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What is IFC?

• Private sector affiliate of World Bank Group
• Promotes economic development through
  commercially viable, private-sector investments
• Largest multilateral source of loan and equity
  finance for private enterprises in developing
  countries
• Catalytic role in stimulating and mobilizing
  private investment

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What does the IFC do?

• Project finance - loans, equity, etc.
• Departments Power, Oil Gas, Mining,
  Chemicals, Agribusiness, Funds/Private Equity,
  Communications Information Technology,
  Manufacturing, Regional
• Mobilization of capital
• Capital markets development
• Financial advisory work
• Project development facilities
• Special development initiatives

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IFCs Value Added

• Direct funding with long-term staying power
• Catalyst for other investors and lenders
• ( possible concessional funding for alternative
  energy projects)
• Honest broker/neutral partner
• Reassuring presence for joint venture partners
  and host Government
• Risk identification and mitigation
• Potential access to funding for environmental
  projects

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IFCs Catalytic Role

• IFC acts as a catalyst to stimulate andmobilize
  private investment
• IFC investments approved US 4.0 billion
• IFC syndications US 1.8 billion
• Other funding sources US 9.7 billion
• Total project cost (223 projects) US 15.5
  billion
• (for FY ending June 2002)

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Why does IFC make a special effort to finance
environmental projects?

• Because accelerating market acceptance
  ofenvironmentally beneficial technologies,
  products and servicesoffers one of the best ways
  to meet IFCs mission of
• improving peoples lives
• and
• reducing poverty

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IFC Renewable Energy Portfolio

• 11 projects in 7 countries 1 regional 3
  global
• Total project cost 860 million
• Financing of 240 million for IFCs account plus
  200 million in syndicated commercial bank loans
• Hydro 5 projects in Latin America Nepal
  Turkey
• Geothermal and biomass cogen in Guatemala
• Financial Intermediaries Energia Global, REEF
• Energy Efficiency (includes distribution)

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Potential Transactional Barriers for Renewable
Energy

• Smaller project sizes ? Higher transaction costs
• Longer lead times ? Higher development costs
• Higher ratio of capital ? Need for
  longer-termcosts to operating costs financing
  at reasonable rates
• Newer technologies ? Higher operating risks
• Less experienced sponsors ? Higher completion
  and operating risks
• Unfamiliar to financiers ? Scarce/higher-cost
  capital
• Either excess or absence ? Over-subsidized orof
  concessional funding under-competitive

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Financing for GHG Reduction

• Global Environment Facility (GEF)
• UNFCCC
• Carbon Finance/Emissions Trading
• UNFCCC and Kyoto Protocol

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IFC/GEF Climate Change Projects

• Photovoltaic Market Transformation Initiative
• 30 M to accelerate solar power in India, Kenya,
  Morocco
• Solar Development Group (SDG)
• 50 M global equity/BDS fund for PV (6 M IFC
  10 M GEF)
• Renewable Energy and Energy Efficiency Fund
• 65 M worldwide fund (15 M IFC 30 M GEF)
• Small and Medium Scale Enterprise Program
• 21 M for SMEs from Costa Rica to Bangladesh
• Hungary Energy Efficiency Co-financing Program
• 17 M partial guarantee facility (12 M IFC 5
  M GEF)
• Commercializing Energy Efficiency Finance Program
• 48-93 M partial guarantee facility (30-75 M IFC
  18 M GEF)

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Why is IFC interested in Trade ofEmission
Reduction Credits..

• IFC specializes in project-based investments
• New source of financing for projects in our
  pipeline and portfolio that will reduce GHG
  Emissions
• Stimulate participation of developing country
  private sector in evolving market (non-IFC
  projects)
• Lower marginal costs to reduce GHG emissions in
  developing and transitional countries
• Facilitate transition to private sector
  intermediation and provision of value-added
  financial products

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Impacts of Emission Reduction Sales

• World Bank and others have found ER revenues can
  have an impact on Project IRR
• For example, _at_ 3/mtCO2e...
• Energy efficiency / district heating 2.0-3.0
• Wind 0.9-1.3
• Hydro 1.2-2.6
• Bagasse 0.5-3.5
• Biomass with methane kick up to 5.0
• Municipal Solid Waste gt 5.0

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IFC-Netherlands Carbon Facility (INCaF)

• Estd. Jan 2002 in partnership with Dutch
  Government
• 44 M to buy GHG emission reductions
• from eligible projects in developing countries
  that reduce or avoid GHG emissions compared to
  BAU
• under KPs Clean Development Mechanism for
  benefit of Netherlands to use toward national
  obligations under KP
• Target sectors
• Renewable energy, Energy efficiency, Fuel
  switching
• Waste management, Landfill gas and CBM
  utilization
• Location
• All developing countries except Central Eastern
  Europe

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General Requirements

• Eligible sector and region
• Project likely to close in short-term
• IFC and non-IFC projects eligible
• Non-IFC projects subject to due diligence and ES
  review
• Host country approval
• KP ratification
• Endorsement of project
• Independent Audits focusing on
• Likelihood of project to achieve reductions
• Achievement of actual reductions over time

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What does INCaF offer?

• Cash in
• Additional revenue stream (enhancement) for
  projects
• Upfront payments possible in some cases
• Can expect 3-5/mtCO2e
• Forward contracts
• Payments over 7, 10, or 14 years
• Periodic certification of actual GHGs reduced
• Assistance (incl. financial) at all stages
• Project design baseline identification
• Monitoring verification plan
• Validation and registration

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Value Added for RE Projects

• Improves competitiveness of power generation from
  landfills and other sources of methane
• Can make some marginal RE projects bankable
• Reduces investor/lender risk
• Provides contracted flow of forex for seller
• Cash flows from sale of ERs can provide security
  for lenders (e.g., improved DSCR)
• Advance payments can be critical to financial
  closure
• Stricter standards apply
• Transaction costs have to be managed

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Current CDM Pipeline

• Letters of Intent Signed/Under Negotiation
• Industrial fuel switching VM Tubes, Brazil
  15M
• Waste-to-energy South Asia
• 3 x 8-10 MW biomass South America
• Biogas Southeast Asia
• 25 MW bagasse Central America
• 3 x 12-15 MW small hydro South America
• 100 MW hydro South America
• 2 x 20 MW bagasse South Asia
• Sample Projects Under Review/Discussion
• Waste-to-energy South Asia
• 4 x 3-8 MW small hydro South Asia
• 70 MW biomass Latin America
• 40 MW bagasse Latin America
• Fuel switching Africa

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Transaction Costs

• Key to expanded participation by private sector,
  and therefore, success of CDM
• INCaFs early experience in reducing transaction
  costs
• Purchase significant portion of ERs generated by
  project
• Working with sponsors / investors who have
  contracted with advisors
• Anchor buyer for projects generating large volume
  of ERs (ability for other smaller buyers to come
  in at significantly lesser costs)
• Bundling of smaller projects to take advantage of
  common sponsor sector baseline need a theme
  to wrap around
• Processing with project contract structuring /
  streamline Kyoto Protocol requirements

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IFCs Plans Going Forward

• Establish a JI Facility
• Intermediation A few small CER (CDM) and ERU
  (JI) AAU transaction structures and vehicles as
  private sector roles and activities increase
• Prefer to partner with companies/FIs with long
  term interest in emerging markets
• Value-added products
• Use IFC ability to take long term credit risk
• Develop project finance-related products in
  collaboration with other FIs to unlock the
  investment potential of ERPAs
• Consider investing IFC capital in carbon market
  businesses and products

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Carbon FinanceIssues and Opportunities for the
Private Sector

• For additional information on IFCs carbon
  finance activities, please contact

Sid Embree Consultant, Carbon Finance
Environmental Finance Group International
Finance Corporation Washington, DC USA phone 1
202 473 1830 fax [phone] e-mail sembree_at_
ifc.org web www.ifc.org/carbonfinance