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Emission reduction value in financing clean energy projects

Emission reduction value in financing clean energy projects. By Jan-Willem Martens EcoSecurities. EcoSecurities. EcoSecurities leading greenhouse gas advisor (Environmental Finance survey, 2001, 2002, 2003, 2004) Five offices around the world, 27 people

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Emission reduction value in financing clean energy projects

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  1. Emission reduction value in financing clean energy projects By Jan-Willem Martens EcoSecurities

  2. EcoSecurities • EcoSecurities leading greenhouse gas advisor (Environmental Finance survey, 2001, 2002, 2003, 2004) • Five offices around the world, 27 people • Currently working on over 70 CDM projects in more than 50 countries • Active in sale of CERs

  3. EcoSecurities Group Oxford New York Den Haag Los Angeles Rio de Janeiro

  4. Overview • Introduction • Market Developments – Who is selling, who is buying ? • Project Transaction Issues • How can CDM help project finance? • How can CDM and ODA go together • Country competitiveness • Conclusions

  5. Who are the players in the CDM market?

  6. What determines the CDM cash flow? • CDM project revenues • Price of the Certified Emission Reduction (CER) • CER market price • Availability of buyers • Perceived contribution to sustainable development • Credit sharing and taxing CERs in the host country • Number of CERs • Actual production the installations (MWh delivered) • Carbon Emission Factor (CEF) • CDM project cost • PDD development • New or existing methodology • Host country approval • Validation/verification • Registration

  7. How does the CEF influence the number of CERs generated? • As the CEF is the carbon emissions per actual production quantity (tCO2/MWh) of a grid and renewable energy has an emission factor 0 so the quantity of CERs is determined by: Production (MWh) * CEF (tCO2/MWh) = CERs (tCO2) • CDM cash flows can provide a substantial contribution to the overall project in counties with a ‘high’ CEF.

  8. Division of CDM project types Source: EcoSecurities December 2004 Division is based on an analysis of 130 PDDs for CDM projects

  9. Division of CO2 emission reductions from CDM projects Source: EcoSecurities December 2004 Total amount of Results based on a selection of 130 CDM project proposals

  10. 100 JI/CDM project ideas 20 JI/CDM PDDs 10 validation 5 JI/CDM Funnel Effect for CDM projects

  11. Carbon Market Volumes 2004

  12. CER prices 2004

  13. Types of Buyers

  14. List of governments buying JI and CDM

  15. Project Transaction Issues

  16. Who is carrying the risks? • Registration risk – this is the risk related to getting the project registered under the CDM. • Performance risk – Risk related to project performance (including political risk) • International CER Transfer risk - When will the CDM registry be finalised? When will the ITL be finalised?

  17. Different ways to structure carbon finance • Contract form “guaranteed delivery” • Contract form “No guaranteed delivery” • Contract form with “floor price” • Contract form X% of the EUA market price • Sales of CERs on the EU Spot market (is it possible: Yes, no unilateral CDM, but obligation to report Annex I counter-party to CDM EB?)

  18. How does risk influence the price of a CER? Production price Political risk Liquidity risk Credit risk Delivery risk Counterparty risk Margin EUA price

  19. Country Competitiveness

  20. Does Geography Matter in CDM transactions? • For most commercial buyers, price and risk sensitivity outweighs geographic strategy • For government buyers, there are geographic preferences • Denmark is targeting Malaysia, Thailand, South Africa and Central America • PCF funds looking for a global approach with sectoral distribution • Forthcoming DBJ fund is expected to be “Asia weighted” • Does this mean ASEAN or India/China • For multinational “buyer/sellers” internal CDM opportunities are very attractive • However, exposure to a country does not equate desire for exposure to 3rd Party CDM CERs from that country • Expectation should be for MNC’s presenting their own CDM projects to host nation DNAs – 3rd party project finance will give way to balance sheet corporate finance as the dominant paradigm

  21. How do buyers assess attractiveness of projects? • Likelihood of Project Approval at host country and EB level • Credit sharing and taxing CERs in the host country • Credibility of Counterparty • Price, price, price and price • Who covers upfront costs prior to ERPA? • Divisions of risk between buyer and seller • Underlying project risks (technology risk, political risk, market risk, etc) • Will seller deliver even if it experiences underperformance? • Willingness to give buyers options for residue at; • Same price or discount to market price

  22. What can countries do to improve their position? • Assuming the DNA office is competent and knowledgeable, keep individuals in position as long as possible • Continuity is key • Domestic capital for asset finance (either project or corporate) must understand that these cash flows are bankable • CDM enhances project economics, still requires underlying capital and domestic is the most realistic source • CDM alone cannot overcome other cross border investment biases but can create interest in new opportunities from unconventional sources

  23. Thank you!

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