Jari Vayrynen Operations Team Leader Carbon Finance Unit World Bank March 2007

1. World Bank ERPA Features and Risk Profile of JI Projects Jari Vayrynen Operations Team Leader Carbon Finance Unit World Bank March 2007

2. World Bank ERPAs- purpose-key features

3. Generation of CERs & ERPA ERUs ERPA $$ Issuance of ERUs by the Host Country Verification by an independent auditor (Independent Accredited Entity) Generation of Emission Reductions

4. Purpose of ERPA • Record agreement • Identify responsibilities • Establish rights • Manage risk

5. Basics of World Bank ERPAs • Goals: consistency, flexibility, reducing transaction costs • Two parts • General Conditions - standard terms, conditions, rights/ obligations • Negotiated agreement - purchase amount, price, payment terms, preconditions, representations and warranties

6. WB ERPA Features • Sale and Purchase agreement • Object is the “commodity” of ERs • Amount, Price and Delivery/Payment Schedule • Defines who does what with regard to: • Validation • Registration • Monitoring • Verification & Certification • Provisions on payment for ERs and preparation/supervision cost recovery (if any): • Payment generally upon delivery, some advance payments possible • Recovery of cost, if any, capped and defined • Events of Defaults and Remedies • E.g. under delivery of ERs • Other than for willful breach, no tough penalties, preferred option to amend ER delivery schedule • WB ERPAs typically do not include “delivery guarantee” from seller

7. Risk Profile of JI Projects- principle of risk allocation- key elements of risk - impact on pricing- some practical considerations

8. Risk Allocation between Buyer and Seller • Risk is allocated to the party best able to bear it • Three key risk categories: • Underlying project risks • Kyoto Protocol risks • ERPA structuring/terms risk • Rules of thumb: • Project risks borne by seller • Kyoto Protocol risk primarily borne by either the seller (ERU) or buyer (VER) • ERPA structuring/terms risk relatively less important and matter of negotiation

9. Kyoto Protocol Risks (1) • Risk may be allocated either to seller or buyer: • VER: buyer takes Kyoto risk >> lower price • ERU: Project owner takes Kyoto (including host country compliance) risk >> higher price • Important price determinant because if the project does not meet Kyoto requirements, it generates no asset for Kyoto compliance needs

10. Kyoto Protocol Risks (2) • Main component is risk of project determination • methodology, additionality • Letter of Approval • Other component ERU issuance risks • Risks related to proper monitoring and verification • Risks related to host country actually issuing and transferring the ERUs to buyer

11. Project Risks • Risk of the underlying project • Construction, operation, delays, licensing/permits • Reliability and level of complexity of the technology used • Generally borne by Project Entity but can be limited by e.g. • conservative ER estimates • Also a very important price determinant as has direct impact on likelihood and timing of the physical ERs being generated

12. Risks related to ERPA Structure (1) • ERU delivery guarantees required by buyer or not: • 3rd important price determinant • If guarantees provided by seller, can get 10%-30% higher price but a big risk to take • Large variation on how delivery guarantee defined • WB ERPAs typically do not include “delivery guarantee” from seller • Advance Payments: • Risk to buyer that the project is not completed and does not deliver the emission reductions • The price may be discounted to reflect this risk taken by buyer • Can be mitigated by the seller providing a guarantee for the advanced amount

13. Risk Related to ERPA Structure (2) • Preparation costs: • If buyer pays for them, may discount the price to reflect this • Structure of delivery: • If buyer has rights to all/first ERUs generated, likely to pay a higher price

14. Some practical considerations/lessons learned

15. Other practical considerations that can manage risk and expedite process (1) • Prepare technical and financial (pre-)Feasibility study • Ensure clear commitment from company management (and not just operational staff): • E.g. included in the business plan • Establish clear institutional set up between project owner, advisers, and technology provider/sub-contractor important • Advanced stage of negotiations with equity and debt financiers is helpful • Compliance with environmental regulations, including transparent stakeholder consultations

16. Other practical considerations that can manage risk and expedite process (2) • Application of an already approved CDM methodology makes a big difference: • Cuts down JI preparation time and reduces risk of non-Determination • Typically point source reductions or clearly defined systems are easier: • e.g. landfill gas flaring, N20 catalyzer, utilization of coal mine methane • e.g. wind power project displacing coal in the national grid • Dispersed or multi-component/measure projects tend to be more challenging: • expect a longer preparation time • e.g. transportation, household level energy efficiency • e.g. complicated industrial energy efficiency improvement programs or complex district heating system upgrades

17. Other practical considerations that can manage risk and expedite process (3) • Consider your commercial strategy for ER sales carefully: • Sell all ERs or part of the ERs, save some for sale at the spot market? • Sell all ERs to one buyer or to several buyers? • What is the delivery schedule of the ERs to the buyer(s) • E.g. deliver all of them in the first 2 year of the project OR, for example, deliver 400,000 ERs/year over five years?

18. Thank youwww.carbonfinance.org