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World Bank ERPA Features and Risk Profile of JI Projects. Jari Vayrynen Operations Team Leader Carbon Finance Unit World Bank March 2007. World Bank ERPAs - purpose -key features. Generation of CERs & ERPA. ERUs. ERPA. $$. Issuance of ERUs by the Host Country.
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World Bank ERPA Features and Risk Profile of JI Projects Jari Vayrynen Operations Team Leader Carbon Finance Unit World Bank March 2007
Generation of CERs & ERPA ERUs ERPA $$ Issuance of ERUs by the Host Country Verification by an independent auditor (Independent Accredited Entity) Generation of Emission Reductions
Purpose of ERPA • Record agreement • Identify responsibilities • Establish rights • Manage risk
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
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
Risk Profile of JI Projects- principle of risk allocation- key elements of risk - impact on pricing- some practical considerations
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
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
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
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
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
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
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
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
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?