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


Emission reduction value in financing clean energy projects

Who are the players in the CDM market?


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


Carbon market volumes 2004

Carbon Market Volumes 2004


Cer prices 2004

CER prices 2004


Types of buyers

Types of Buyers


List of governments buying ji and cdm

List of governments buying JI and CDM


Project transaction issues

Project Transaction Issues


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


Emission reduction value in financing clean energy projects

Country Competitiveness


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


Emission reduction value in financing clean energy projects

Thank you!


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