INTRODUCTORY REMARKS

1. Can carbon markets deliver as a tool to promote wind energy investments? Part IMaría Isabel BLANCOHead of market regulationStrategic Planning Dept. of GAMESA

2. INTRODUCTORY REMARKS OBJECTIVES OF THE PRESENTATION: • To offer an in-depth analysis of the reasons for the modest success of the Clean Development Mechanism (hence CDM) as a tool to promote wind energy investments in developing countries. • To propose ways to improve it for the post 2012 period. METHODOLOGICAL APPROACH: The analysis is made from a private investor’s point of view. Therefore, the main decision variables are the expected future income stream & the internal rate of return, the project risk, the institutional framework & legal security, the electricity market functioning and the wind resource available.

3. CONTENT OF THE PRESENTATION INDEX: 1- Current situation of wind energy projects in CDM countries 2- Key variables considered at the time of deciding where to locate a wind energy investment in a CDM country 3- Regional approach to wind energy projects location 4- Gamesa experience in relation to the CDM 5- An example on the impact of the CDM on the internal rate of return of a wind energy project 6- Proposals for the improvement of the CDM (after 2012)

4. THE CDM TODAY: GLOBAL OVERVIEW In Feburary 2009 there were: of which: 4,200 CDM projects submitted to UNFCCC 1,377 CDM have been registered 2,900,000,000 of CERs up to 2012 1,440,000,000of CERs up to 2012 FUENTE: UNFCCC Feb 2009.

5. WIND ENERGY CDM PROJECTS • Representing 15% of all registered projects, wind energy is the second most popular option in terms of volume, but receives just 9% of the Certified Emissions Reductions –CERs-. • Most of the projects are located in China and India; to a lesser extent in Mexico and Brazil. Extensive parts of the developing world have not benefited at all from the CDM. The other techologies that can be used in a CDM project face exactly the same situation. FIGURE 1: Expected yearly CERs coming from wind energy projects by host party. SOURCE: UNFCCC database, updated Feb 09.

6. KEY VARIABLES FOR WIND ENERGY PROJECTS • FACTORS THAT INFLUENCE ITS OCURRENCE AND LOCATION: • The wind resource • The economic situation of the country and future prospects • The risk level (political/ social/ legal) for the private investor • The features of the power market (private investors allowed; transparency & competition) • The quality of the infrastructure (electrical and other) • Appetite for electricity, lack of indigenous energy resources • The existence of support policies for wind energy/ renewable energy deployment. An analysis of the countries where CDM wind energy projects have taken place shows that none of these factors in isolation explains investors’ choices. However, there is a well-established impact related to the existence of CREDIBLE support policies for wind energy. Good wind resource and low level of risk can be considered as pre-requisites.

7. REGIONAL ANALYSIS (I) • SUB-SAHARAN AFRICA: Power market theoretically liberalised but poor transparency & security for the investor. Political and social instability. Very low income and uncertain prospects. Electrical & other support infrastructure is generally missing. Some countries have published renewable/ wind energy targets, but incentives are lacking. These countries do not host CDM wind energy projects and the situation is not likely to change in the near future, unless foreign financial support is offered for that purpose. • NON-EU MEDITERRANEAN COUNTRIES: with higher income and better economic indicators, they could certainly host wind energy projects, but the legislative framework and the electricity market rules are not appropriate for private generators. Some countries are making an effort to attract foreign investment in this field, and some dedicated policies are being published or in preparation. This region will certainly increase its modest position in the CDM ranking if these measures come to fruition and if electricity connection lines with the EU are built (Mediterranean energy ring).

8. REGIONAL ANALYSIS (II) • LATIN AMERICA: Mexico and Brazil are the two countries leading wind energy installations. However, their Governmental policies are patchy and change too often; the rate of project failure is very high. The rest of LA –private generators are generally allowed- needs to enact and implement credible renewable energy policies, together with a strict observance of the property rights of the investments. If these conditions are met, LA has the potential to become a major recipient of wind energy CDM investments in the short/ medium term. • ASIA: except in China and India (64% of all wind energy CERs awarded), the continent has remained indifferent to wind energy investments. Some countries have good economic, legal and infrastructure indicators, but lack political will to support renewable energies. Other countries are closer to Sub-Saharan Africa in terms of poverty and instability. The first group of countries would certainly become attractive for wind energy investments if credible policies were applied. The second will need additional financial support from developed countries.

9. THE ROLE OF CERs WHAT ROLE DO CERs PLAY IN THE OCURRENCE AND LOCATION OF WIND ENERGY INVESTMENTS?: CER prices are highly volatile and generally too low to promote wind energy investments in CDM countries. The income received by a wind energy investor does not only depend on CER prices, but also on the emission factor of the country where the investment takes place. These vary between 0,3 and 1,2 approx. To date, CERs –regardless of their selling price- are not enough to foster wind energy investments in developing countries. SOURCE: Pointcarbon News, Feb. 2009. CER appear in blue colour.

10. GAMESA EXPERIENCE IN RELATION TO THE CDM Chinese projects are not registered yet. China has got a high emission factor –over 1 tonCO2/MWh-. In this country, CERs account for roughly 10% of China’s wind project revenues, and are seen as a key contributor to project profitability.

11. IMPACT OF THE CDM ON THE IRR OF WIND ENERGY PROJECTS Example: La Ventosa project in Mexico (registered in the UNFCCC in Dec 05) Change of the IRR of the project under different CER price scenarios: With current prices (around 6€) the impact of the CERs on the IRR of the project is almost negligible. A higher price could change the picture.

12. PROPOSALS FOR THE IMPROVEMENT OF THE CDM (I) In the current Post-Kyoto negotiations, involved parties should take into account a number of proposals –if they would like wind energy investements to increase-: A) Wind energy projects should receive a more favourable treatment in terms of CERs awarded. Wind energy projects are a source of jobs and income for host countries, and strongly contribute towards their sustainable development. This has to be reflected in the number of CERs that they receive. B) The baseline for the calculation of CERs awarded must be easy to work out and reflect the fact that wind energy projects, for their own nature, are always additional. C) The new system must guarantee the continuation of CERs after 2012 for a period of 21 years –as it is now-. D) The agreement should limit the capacity of host countriesto modify the requisites for the approval and awarding of CERs (e.g. China).

13. PROPOSALS FOR THE IMPROVEMENT OF THE CDM (II) E) The Post-Kyoto agreement must help to ensure the legal security of the investments in CDM countries. Some sort of penalty for the incumbents and a financial compensation for the damaged parties in case of non-compliance should be implemented. F) The administrative burden of CDM projects must be substantially reduced. Current costs –time and money- are too high in relation with the income that they entail. G) The excessive volatility of CER prices should be avoided. Some sort of floor-ceiling could be proposed, as a means to reduce investor’s risk. H)Additional funds for less developed countries will be needed, if investments are to be greographically spread in a more even way. Some of these funds could be devoted to the construction of support infrastructure necessary for the implementation of clean energy investments.

14. Thank you!