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Components of cash flow(costs and revenues) in CDM projects.
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1.Capital costs – all capita expenditures to estabish the project. These include general investments and the purchase of equipment required to reduce GHG emissions. Future replacement and rehabilitation costs are also part of capital costs.
2.Operating Costs – i.e. fixed and variable costs: Fixed or overhead costs are incurred irrespective of how many units are produced e.g. salaries, rentals etc.
Variable costs are costs that vary with the project output e.g. cost of more fuel to produce more units of electricity.
3.Revenues – depend on the nature of tariffs and other product and service prices. Income from the sale of CERs is also part of revenues.
4.Interest payments – If the discount rate used reflects the cost of capital(debt servicing costs + returns to equity investors), then interest should be included in the discount rate.
Range of possible investors
volume and selling price
who can act in good faith on your behalf i.e develop
plans and facilitate complex transactions
and project and project base lines i.e. a methody that
conforms to evolving rules of the CDM.
(1) Conventional Project Financing (e.g. banks):
i.Advantages - from point of view of project sponsor:
(a) Ability to raise large amounts of capital
(b) Improved rate of return for equity providers
(c) Limited or no recourse to the assets of the project sponsors
(a) Cost and time to obtain project finance
(b) Contracts must be with credit worthy counterparties
(c) Delayed returns on equity
(2) Corporate financing by project host(100% equity financing by developer)
(a) Project retains all the CER revenue from project
(b) Financing may be raised more rapidly
(a) Lack of expertise – unlikely that the project host has all elements
of specialised expertise required. This would require outsourcing
some elements of the project e.g. installation of plant and
(3) Equipment lease financing – depends on type of equipment etc
(a) Reduced up-front expenditure and closer match between lease
payments and project revenue
(b) Management of equipment performance risk
(a) Limited ability to modifications to equipment
( b)Relatively high cost of capital
(4) Supplier Credit – financing provided by suppliers of goods and services
(a) Widespread availability
(b) Deferred payment for up-front capital expenditure
(a) Relatively high cost of capital
(5) Up-front payments
(a) Repayment of up-front capital expenditure can be brought forward
(b) Relatively rapid and low cost due to dilligence by CRE buyers
(c) (Possibly) less conservative view of CDM-specific risks
(a) Risk allocation towards buyer
(b) Lower net CER revenue for project host/developer
(c) May not solve problem of obtaining finance for construction
(6) Low interest loans or debt – e.g. development banks with lending programmes
(a) Stable currency
(b) Support with CDM component
(a) Loans must fit the objectives of the lending programme
(b)Stringent due dilligence
(7) Micro-credit- aimed at providing small amounts of credit to lenders with limited
ability to pay
(a) Access to finance – often no collateral
(a) Limited scale
(b) High interest rate
1.Generic project risks:
explore the likelihood of occurence of baseline-related risks.
(iv) Commercial risks:these risks are under the control of the project developer; it is prudent for the project developer to mitigate them. Risk mitigation should be guided by standards and criteria for good practice guidance in the forestry sector.High initial costs can be recovered by increased project permanence and credibility - both of these lower commercial risks.
(v) Institutional Risks: e.g. unplanned events in host-country:
Radical changes in government may lead to a risk of all types of foreign
direct investment. For example, social unrest leading to invasion and sequestration losses. This could be mitigated if the investor issues a list of countries whose institutional risks will not be covered by the investor.
(vi) Host country takes over commitment in the land use sector:
Host country may undergo a change of status within the climate regime i.e becoming Annex I. The effect on A/R projects is a conversion of expiring CERs issued to permanet reduction units with the
subsequent risk of the release of sequestered carbon residing in the host country. This could be avoided through an MOU exante.
2. Plannig phase risks:
3. Construction Phase risk:
(i) The risk that the project is not commisioned on schedule.
(ii) Capital cost over-run risk: The risk that the costs involved in implementing the project are higher than expected. This can be managed through entering into fixed price contracts for the principal components of the project.
4. Operational phase risks:
Project sponsors usually undetake risk assessment
early in the project planning process.
Risk assessment steps:
Risk matrix increases confidence of investors if the
developer demonstrates a proactive attitude towards
mitigating risks. The matrix should contain the following:
(i) categories of risks in question
(ii) exact nature of the risks
(iii) which are most affected by risks
(iv) all mitigation strategies adopted to counter those
(v) the financial or other consequences of any mitigation
instruments and strategies