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Contents. Some CDM points of departure Some brief examples of CDM projects An example of using natural gas to replace coal and electricity What is the market for CERs? What is required – Designated National Authority. CDM points. A CDM project activity is mostly a part of a larger project

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  1. Contents • Some CDM points of departure • Some brief examples of CDM projects • An example of using natural gas to replace coal and electricity • What is the market for CERs? • What is required – Designated National Authority

  2. CDM points • A CDM project activity is mostly a part of a larger project • CDM is available for emissions mitigation projects and certain sequestration projects • CDM is market based • CDM is project based • CDM outputs are Certified Emissions Reductions (CER) = 1 tonne CO2equivalent • CERs give annex 1 countries possibility to emit one tonne of CO2 = globally neutral

  3. Points of departure for CDM • CDM is the first multi-lateral trade mechanism insisting on Sustainable Development article 12 of KP “…assist Parties not included in Annex 1 in achieving Sustainable Development and contributing to the ultimate objective of the Convention….” • CDM assists Annex 1 countries in meeting their emissions reduction targets in return for income for credits derived from projects that contribute to sustainable development

  4. Experience limited to the front end of the cycle

  5. First project participant

  6. Bellville South Reduced landfill gas to industry replacing LSO/HFO 124000 CO2e tonnes/year

  7. Kuyasa low cost housing upgrades Insulated ceilings, solar water heaters and CFLs reduce electricity for services

  8. 2.8 tonnes CO2/house/year • 2.8 tonnes CO2e/house/year • Total 6558 tonnes CO2e/year

  9. Mondi Richards Bay biomass project Biomass replaces coal and methane avoided 122000 tonnes CO2e /year

  10. Example of fuel switch Note: CH4 has 21 times the global warming potential of CO2

  11. Case study • Mondi Business Paper (large paper mill in Richards Bay) • Natural Gas powered cogeneration 27MW (electricity) • Replacing coal for steam • Replacing grid electricity

  12. Rationale for project • Require autonomous electricity supply because of production losses as a result of decreasing quality of supply and cost escalations. • Co-benefits of process heat.

  13. Process of project identification and design • Concept – Project Identification Note (PIN) • Pre-feasibility • Feasibility (technical, financial, legal etc.) • Project Design Document (PDD) is required to register a CDM project • www.cdmguide.com

  14. Project design document sections • A: Introduction • B: Baseline scenario and additionality test • C: Crediting period • D: Monitoring Plan • E: Calculations • F: Environmental impacts • G: Stakeholder comments • Annexes include contact details, baseline data, public funding and methodologies

  15. Methods employed in design • Size (small-scale) <15MW, <15GWh/year, and <15kiliotonnes/year • Small-scale: top-down methodologies • Regular: Bottom-up methodologies

  16. Small-scale methodologies Type II: Efficiency of demand and supply side Type III: Other - Switching fossil fuels - Emission reductions from low Greenhouse Gas emitting vehicles

  17. Regular size Methodologies AM0008: Industrial fuel switching from coal and petroleum to natural gas without extension of capacity and lifetime of capacity AM0009: Recovery and utilisation of gas from oil wells that would otherwise be flared AM0014: Natural Gas-based package co-generation

  18. In Gas Turbine project • Regular size project • None of the approved methods fit • Conclude to design new methodology using 3 others, plus using accepted additionality tool

  19. Additionality Theory • What would have happened in the absence of the project activity? • Additionality test: Standard tool may be applied • Investment analysis (IRR/NPV/Payback of base-case i.e. without emissions reductions) is this conservatively below the investment threshold? • Barrier tests (are there technical, normative, investment, other barriers)

  20. Additionality case study: Investment analysis • Total capital costs: 15.2 Euros • Operational costs: cost of gas, less cost of coal and electricity • Full conservative discounted cash flow analysis with and without CDM • IRR (including inflation after tax over 15 years) = 22.27% (if company threshold of 25% is required project would not have happened without CDM

  21. Technology barrier test

  22. Emissions calculations • Baseline emissions: • heat: 128 000 tonnes/year • electricity: 251 000 tonnes/year • Project activity emissions: • Cogeneration: 123 000 tonnes/year • Less leakage: positive: physical leaking from pipeline, negative ash removal from coal • Total less leakage: 256 000 tonnes/year worth +/-Euros 2.5/year • Total project return on investment: 30.55% (at 10 Euro per tonne up to 2012)

  23. Project status • Project methodologies being reviewed (see www.UNFCCC.int) • Project design validation against approved methodologies to follow • Project is to register as a unilateral project • Mass and energy balance with Sasol underway for 2.5 million GJ/year (Sasol total 450million GJ/year plus) • Gas price negotiations and contracting underway

  24. Project status: Transaction costs • Cost of validation: Euro 12 000 • Cost of design: Euro 26 000 (estimate) plus share of risks • Cost of registration: Euro 15 000 • Costs of adaptation levy: 2% of CERs • Cost of govt. approval: varies (SA=0) • Costs of monitoring, verification, issuance, tax: ? • Income from CERs: Euro 2.5m/year (nominal) total discounted to 2012: Euro 12.3m • Plus operational savings (on electricity, coal and downtime because of outages less cost of gas)

  25. Markets for ERs • Markets: • Compliance (CERs) • Verified (VERs) • Offset (VERs) • Gold Standard (high quality CERs) • Incremental cost (GEF not market)

  26. Mechanisms for sale/ purchase of CERs • Multilateral funds (World Bank PCF, CDCF, etc.) • Bilateral procurements through tenders: Austria, Netherlands, Belgium, Finland, Japan etc. • Private purchases • Transfer within multinationals • Brokers • Project developer/wholesale purchases • Spot (still to come) • Forward purchases, guarantees, rights of refusal, options etc…

  27. Prices • Prices going up (early PCF price $3.5/CER) • Bilateral procurements Euro 8/CER • Current price range reported 8 to Euros 10/CER • EU Emissions Trading Scheme (EUETS) Euro 18 to 20/CER for allowances • VERs Euro 2 to 10/tonne

  28. Designated National Authority • To be able to participate in CDM country must be a party to Kyoto Protocol and establish a DNA • Required to cede emissions reductions to project participant • Required to approve the projects against sustainable development requirements • Required to be established in law in host country • Approval is part of validation of project activities • DNA must put project out for public comment • DNA can be a promoter of projects • DNA should be fast and transparent

  29. Doing CDM in the South • CDM is not easy – it requires specialists… • It results in no net emissions reductions • CDM has very little to do with Sustainable Development – sadly… • Attracting FDI appears to be higher priority that SD. • CDM can leverage technology leapfrogging • There are few points of leverage for the South: choosing projects, choosing partners, timing transactions.

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