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CER aggregation – Opportunities and Risks March 2006 Background Market situation More than 3.6 million CER’s registered (Source: UNFCCC) Of the 93 CDM projects registered, 23 are from India* Almost 50% of projects in the pipeline are from India*

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CER aggregation – Opportunities and Risks

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Cer aggregation opportunities and risks l.jpg

CER aggregation – Opportunities and Risks

March 2006


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Background


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Market situation

  • More than 3.6 million CER’s registered (Source: UNFCCC)

  • Of the 93 CDM projects registered, 23 are from India*

  • Almost 50% of projects in the pipeline are from India*

  • India consistently ranked no.1 on CDM country ranking for the past year (Source: Point Carbon)

*Source: CD4CDM.org analysis, Feb 2006


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Power Generation

Industry

Transport

India’s potential

  • Over 75% of India’s CDM potential lies in the energy sector

Source: TERI National Strategy Study 2004


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Market Players – Buyers

  • End Users

    • Energy Utilities (Shell, BP)

    • Industries (Steel, Small scale users)

  • Cross Border Funds

    • PCF (World Bank)

    • Nation funds (Japan Carbon Fund, Danish Carbon Fund)

  • Private funds

    • Banks (BNP, AXA)

    • Carbon funds (EcoInvest, Trading Plc. Etc)

  • Aggregators

    • Consultants (Ecosecurities, Agrienergy etc.)

    • Trading agencies (Mitsui etc.)


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CER Pricing

  • Difficult to gauge demand as information is closely guarded

  • Currently a sellers market but sellers unable to utilize market position

  • CER pricing pushed down by creating a high risk profile for projects originating out of India

  • Buyers take advantage of fragmented sellers


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Market Aggregation


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Market Makers - Current

  • Market fragmentation and lack of risk mitigation drives down prices

Cross Border Funds

Sellers

End Users

Project Owners

Private Funds

CER

Prices


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Market Makers - Proposed

  • Higher volume results in better price negotiation and results in increase in prices

Cross Border Funds

Sellers

Seller Side

Aggregators

End Users

Project Owners

Private Funds

CER

Prices


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Value Proposition

  • Risk mitigation

    • In case of non-delivery of CER’s a safety margin of total CER’s (around 20%) caters to defaults

    • Larger geographical and sectoral spreads (multiple renewable types, across geographies) reduces project risks

  • Price Consolidation

    • Larger volumes command larger pricing; better negotiation power

  • Market movement

    • In case of upward price movement, further sale can be initiated from existing CER reserves


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Value Proposition

  • Aggregator provides access to reputed buyers

    • Aggregator will have the scale to provide access to genuine buyers

  • Making smaller CDM projects viable

    • Smaller CDM projects (<15,000 CER) generally have difficulty finding buyers, due to high transaction cost at buyer side

    • Being part of aggregate makes these projects viable

  • Aggregator helps develop the CER market

    • Aggregation attracts sellers with attractive pricing and lower administrative hassles for project owners


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Aggregation - Approach

  • Aggregation approach

    • Sharing Validation cost

      • Validation costs can be brought down due to volumes

    • Project Participant for Aggregator

      • Aggregator becomes a Project Participant to reduce its project risk. Project participant status helps reduce chances of disputes in case of withdrawal from aggregation

    • Subsidizing Registration cost

      • Registration cost can be partially met by aggregator; zero risk investment for aggregator


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Aggregation – Sale Strategy

  • CER sale strategy (long term view)

    • Buyers based on prices

      • Select multiple buyer based on geographical demands. Some regions have higher demands

    • Regulations

      • Some regions have stiffer penalty requirements. Utilize for more effective pricing

    • Seasonal Demand

      • Harsh winters give rise to higher energy demand – more energy output – more GHG emissions – Higher CER demand


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Risks and

Returns


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Aggregation Risks

  • Project Registration rate is lower than expected (assumed at 75%)

    • Mitigation 1: Spread projects across multiple sectors like mini hydro, wind, bio mass

    • Mitigation 2: Spread projects across geographies within and outside India

  • CER price does not rise as expected

    • Mitigation 1: Sell only a % of aggregated CER, banking the rest for potential rise later

    • Mitigation 2: Identify buyers based on demand; driven by regulations, seasonal demand change etc.


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Revenue Model

  • Cost

    • Administration cost for local and overseas office

      • Cost is more time related than cash flow

  • Revenue

    • Fixed margin. aggregator charges a fixed margin (for example 3%, benchmarked to financial transactions)

      • Lower administrative overhead for Aggregator


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Returns

  • Assumption

    • Aggregation of 200,000 CER in 2007

    • CER base price of USD 11 in 2007

    • Forward contract for a crediting period of 7 years

    • Overheads assumed at INR 10 lakh per annum

  • Expected Revenues Model 1

    • Fixed margin of 3% on CER revenues

    • EBITDA of INR 13.6 lakhs from year 2, for 7 years

    • EBITDA increase to INR 34 lakhs if CER price increases to USD 16


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