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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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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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