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Project structuring. National Workshop on CDM Paramaribo, 23 April 2008 Adriaan Korthuis. Overview . Project types Strategy development Price and risk mitigation Bundling small projects: “Programmes of activities”. Project types. Reduction of emission of industrial gasses

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project structuring

Project structuring

National Workshop on CDM

Paramaribo, 23 April 2008

Adriaan Korthuis

overview
Overview
  • Project types
  • Strategy development
  • Price and risk mitigation
  • Bundling small projects: “Programmes of activities”
project types
Project types
  • Reduction of emission of industrial gasses
    • HCF23 and Nitrous oxide
    • Very high greenhouse warming potential
    • Few projects, high emission reductions (> 5 million tonnes CO2e/yr)
    • Low abatement costs, very high revenues
  • Methane abatement
    • Landfill gas, waste water, manure treatment, mine methane
    • High greenhouse warming potential
    • Many projects, varying sizes (250,000 – 2 million tonnes CO2e/yr)
    • Carbon revenue fully supports project development
  • Renewable energy
    • Avoids fossil fuel through biomass, hydropower, wind power;
    • CO2 largest greenhouse gas
    • Countless projects, from very small to large (10,000 – 2 million tonnes CO2e/yr)
    • Carbon revenue strengthens project finance
forestry projects
Forestry projects
  • CDM:
    • only Afforestation and Reforestation (A/R)
  • Related project categories:
    • decreasing Non-renewable biomass
  • Voluntary markets:
    • Forest management
    • Land management
    • Forest restoration
    • Avoided deforestatation
programmatic cdm i
Programmatic CDM I
  • Need for programmatic approach:
    • Small projects are at disadvantage
    • Large GHG mitigation potential in so far under represented sectors (energy efficiency, rural energy projects)
    • Bundles and “programs” can reduce transaction costs
  • Programmatic approaches can also include:
    • Program under mandatory programs
    • Across >1 country
    • Large projects
  • Important:
    • Clearly define program
    • Appoint “aggregator” or “intermediary”
    • Apply same baseline + methodology
programmatic cdm ii issues
Programmatic CDM II - issues
  • Need for a strong aggregator/intermediary
  • Aggregator enters into ERPA and is responsible for compliance under the ERPA
  • Aggregator pools CERs and $$$
  • Need for a strong incentive framework (the individual participants must acknowledge the benefit they have from participating in the programme)
  • Avoid double-counting
slide7

Legal Agreements for Large Scale

Non-Bundled Projects

Host Country

National Legislative Framework / Agreement / Authorization

Letter of Project Approval

Buyer

Seller

Emission Reductions Purchase Agreement

slide8

Legal Agreements for Projects

Under a Programmatic CDM Approach

Host Country

Letter of Project Approval

Project Entities

Buyer

Seller

ERPA

Subsidiary Agreements

cer marketing development of a strategy
CER marketing: Development of a strategy

Project developers developing a CER sales strategy should consider the following questions:

  • Is the CER cash flow essential for my project?
  • Do I need additional funds to cover my investment costs? Do I need an advance payment?
  • How would outsiders value my company? Do I have any credit rating or a balance sheet backing the transaction?
  • Would I benefit from technical advice and knowledge transfer?
  • What is the general risk profile of my project?
  • What are the CDM specific risks of my project?
  • Do I have more than one project in the pipeline?
  • Do I have access to full market intelligence (re: pricing and market forecasts)?
  • What price do I expect and which price can realistically be achieved under a forward contract?
structure of a renewable energy cdm project
Structure of a renewable energy CDM Project

Equity

investor

Technology

Supplier

Wind Project

Tech

Bank

ERPA

CERs

e

Approval

Local currency

Construction

O&M

Access

Affected people

etc

CER Buyer

Government

Electricity

purchaser

risk allocation
Risk allocation

Principle: Assign risk to the party best able to bear it

Investors/creditors/seller assume most project risks

Buyer or Seller take Kyoto Protocol related risks

Market risk is often shared

elements of risk in carbon deals
Elements of risk in carbon deals

Market/Price Risk

Project Risk

Finance, Approvals, Construction, Production

Has an impact on:

Existence of Project

Therefore existence and production of CERs

Needs management for the long term

Kyoto Protocol Risk

Host Country Approval, Compliance, Eligibility, Transfer

Has an impact on:

Existence and compliance of CERs/ERUs

Price

Needs management for the long term

risk mitigation tools
Market/Price risk:

Selling/purchasing CERs of different seniority

Flexible pricing

Option contracts (put or call)

Kyoto risk:

Host country agreement or letter of endorsement

Using approved methodologies

Entering into an ERPA after project registration

Securing the right to communicate with the EB

Obtaining Host Country and Annex I country approval (+authorization)

Risk mitigation tools
risk mitigation tools14
Project and delivery risk

Ensure management and operational capacity of the counterpart

Secure stable financing of the project

Ensure resource availability

Ensure legal compliance

Using conservative CER projections

Sell from a pool

Ensure the senior right to the CERs (buyer)

Establish reporting obligations (buyer)

Seller payment/receipt of CER risks

Credit check

Alternative registries/delivery = issuance

Escrow agent (see CERSPA guidance document)

Risk mitigation tools
counterparty analysis
Counterparty analysis
  • Financial Standing (buyer and seller)
    • Solid balance sheet?
    • Credit rated?
    • Parent company or subsidiary?
  • Technical Capacity (usually seller)
    • Experience and track-record in project construction, implementation and operation?
    • Qualified staff and/or professionals?
  • CDM Development Experience (usually seller)
    • Previous experience in CDM project development?
    • Main hurdles: baseline issues; monitoring issues; project performance; concrete environmental benefits.
example landfill project
Example: Landfill Project
  • Landfill Projects generating ERs through capture of methane [and electricity generation]
  • Generally public projects or public private partnerships
  • Contractually flexible as different rights and obligations get easily separated [waste, land, landfill gas, CERs..]
  • Rights to exploit LFG (and thus to future CERs) often transferred from the owner of the waste or land to a third party contractor
landfill project i
Landfill Project I

Power Purchase A.

Carbon Contract

Municipality

Owns the land

Operates the landfill

Collects the waste

Sells the Electricity

slide18

Landfill Project II

Power Purchase Agreement

Carbon Contract

Shareholder Agreement

Power Generation License

Special Purpose Company

Loan Agreement

Environmental License

Construction Agreement

Landfill Gas Transfer Agreement

Grid Connection Agreement

Landfill Concession Agreement

Operations- and Management Agreement

Use of Land Agreement

conclusion
Conclusion
  • Different ways to tailor carbon finance to your needs
  • Be rational with risk allocation
  • Programmes of activities provide possibilities for bundles of small projects