Emission reduction value in financing clean energy projects
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Emission reduction value in financing clean energy projects. By Jan-Willem Martens EcoSecurities. EcoSecurities. EcoSecurities leading greenhouse gas advisor (Environmental Finance survey, 2001, 2002, 2003, 2004) Five offices around the world, 27 people

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Emission reduction value in financing clean energy projects

Emission reduction value in financing clean energy projects

By Jan-Willem Martens

EcoSecurities


Ecosecurities
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


Ecosecurities group
EcoSecurities Group

Oxford

New York

Den Haag

Los Angeles

Rio de Janeiro


Overview
Overview

  • Introduction

  • Market Developments – Who is selling, who is buying ?

  • Project Transaction Issues

  • How can CDM help project finance?

  • How can CDM and ODA go together

  • Country competitiveness

  • Conclusions



What determines the cdm cash flow
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


How does the cef influence the number of cers generated
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.


Division of cdm project types
Division of CDM project types

Source: EcoSecurities December 2004

Division is based on an analysis of 130 PDDs for CDM projects


Division of co 2 emission reductions from cdm projects
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


Funnel effect for cdm projects

100 JI/CDM project ideas

20 JI/CDM PDDs

10

validation

5 JI/CDM

Funnel Effect for CDM projects







Who is carrying the risks
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?


Different ways to structure carbon finance
Different ways to structure carbon finance

  • Contract form “guaranteed delivery”

  • Contract form “No guaranteed delivery”

  • Contract form with “floor price”

  • Contract form X% of the EUA market price

  • 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?)


How does risk influence the price of a cer
How does risk influence the price of a CER?

Production price

Political risk

Liquidity risk

Credit risk

Delivery risk

Counterparty risk

Margin

EUA price



Does geography matter in cdm transactions
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 MNC’s 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


How do buyers assess attractiveness of projects
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


What can countries do to improve their position
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



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