Renewable Energy innovative financing mechanisms by Roberto Vigotti

1. Milano EWEC Session on Carbon finance 9 may 2007 Renewable Energy innovative financing mechanisms by Roberto Vigotti

2. Opportunities for RE in S.Mediterranean countries • Current low penetration of RE in electricity generation: 8.5% across region - only 0.5% from “new” renewables, rest is large hydro • Substantial regional RE potential, especially wind and solar • Regional similarities in RE resources, economic and rural development  economies of scale in technology manufacturing • Stronger private sector infrastructure which needs attractive return on capital

3. Options for S.Med Countries • SMed countries can make use of additional income streams from industrialised countries through several mechanisms: • Sale of Certified Emission Reductions (CERs) through the Clean Development Mechanism (CDM). CDM is at present the most developed international mechanism, however with some essential drawbacks: • Sale of Tradable Renewable Energy Certificates (TRECs): relatively simple, potentially high priced, depending on bi or multilateral agreements between countries. • Sale of Verified Emission Reductions (VERs): to brokers or companies, for compensation of GHG emissions: less complex than CDM, higher prices, however still a very small market.

4. Carbon market: current structure • Two main types of Carbon transactions: • Allowance-based transactions • Project-based transactions • Segments of the Carbon Market: • The Kyoto Protocol • The EU Emissions Trading Scheme • Approval of climate mitigation plans in Japan, Canada • Non-Kyoto regime • Voluntary market • Retail market

5. How the market develops ? • Investors are generally attracted by high returns on investment • competitive prices, • low financial risk and, • few commercial barriers • Investment in few countries where direct private foreign investment are already concentrated • At present, analysis of the nature of CDM projects: not RUE / RE but rather industrial gas, landfill sites and agriculture

6. Southern Mediterraneans potential countries for CDM • Countries having ratified the KP • Algeria, Egypt, Israel, Lebanon, Jordan, Morocco, Syria, Tunisia • Countries that have not yet ratified the KP • Libya, West Bank/Gaza • Most countries have established their DNA and are eligible to CDM

7. The Architecture of CDM

8. Feasibility Study Project Concept Accepted by Host Country Design Project Design Document (PDD) PDD approved by National CDM Authority Validated by Operational Entity (OE) Validation / Registration Registered by CDM Executive Board Project Implemented Implementation / Monitoring Emissions Reduction Monitored Verified by Operational Entity (OE) Verification / Certification CERs banked or sold CDM Executive Board Issues CERs Issuance CDM Project Life Cycle

9. National regulations Time constraint Uncertainty Lack of capacity Transaction costs Lack of information National priorities Abatement costs CDM barriers Sourcextensive policy and administrative prerequisites , high up-front costs, long lead times, insecure and possibly low prices, complex rules and procedures.

10. Main barriers and constraints for CDM in the Med. region • Lack of awareness at high decision-makers level of CDM opportunities and benefits • Weak capacity of potential project developers • Lack of understanding of Carbon market fundamentals (pricing, legal, and technical) • Volatile and speculative nature of the emerging carbon market • Absence of a clear strategy (project by project basis) • Different approaches of the countries in the North (environment) and in the south (development)

11. Carbon Finance and CDM an opportunity for green energy projects development and new investments in the Mediterranean regionExampleof the Zafarana wind power CDM project in Egypt

12. Zafarana Wind Power Plant as a CDM Project • Zafarana project: 120 MW wind power plant • More than 440 GWh of electricity per year (based on capacity factor 42 %) • Around 90,000 TOE Saved yearly • About 230,000 t of Certified Emission Reductions annually (CERs) if designated as CDM • Expected life time 20 - 25 years A cooperation project between NREA of Egypt and JBIC of Japan who supports project financing

13. Additionality • Probably, the most important issue for CDM-project baseline methodology approval is whether the project satisfies the additionality criterion • Two interpretations turning the condition into fulfillment of two criteria : • Soft interpretation ; Environmental Additionality • Hard interpretation; insists on proving that the project, being more expensive without counting CER revenues compared to the alternative base line, would not be implemented if the CDM project did not exist • Zafarana Project Satisfies BOTH !!

14. Baseline Methodology Steps The project is additional because: • There is no incentive program to promote wind power projects currently in Egypt • The cost for a wind power plant is higher than for conventional thermal power plants, in terms of levelized cost of KWh produced • The economic growth in Egypt has led to stricter terms and conditions for foreign financial assistance • Currently wind generated KWh cost cannot compete withthermal generated kWh cost and thus needs at leastCDM support to be implemented

15. Profitability? At present € per ton CO2 & around 0.56kg CO2 avoided emissions per kWh produced from thermal power stations Wind produced kWh will have a bonus of around 4 piaster which cannot close the gap between wind and thermal generation CDM cannot solely make uncompetitive projects economically attractive Rather, CDM can make near economic projects feasible or more attractive

16. The way forward:recommendations • Importance of regional sharing of competence for the designing of projects. • Design the teams and manage the channels through which projects can be built. • The stake is the post-Kyoto. • Importance of development of sectoral policies and sets of associated projects that would be useful for the country’s development that could be eligible for CDM. • Efforts are being made.

17. The way forward - recommendations • CDM cannot be a substitution for the countries' public policies • CDM participates in these policies and has to develop with them coherently • The DNA have an important role to play (to ensure that projects address SD) • The key factor: participation of the private sector

18. What are the benefits of TRECs? • Remove physical barrier to trade of RES-E • Facilitate international trade in RES-E • Provide a robust mechanism for tracking & verification of RES-E • Provide a robust & reliable system to prove compliance with public support schemes

19. Critical success factors for TRECs • Creating demand is key - demand for TRECs is higher in mandatory schemes • Willingness of regions to coordinate & harmonise systems - need for a common vision • Common standards are key to harmonisation • Definitions • Roles, procedures and responsibilities • Technical standards • Levels of verification • Interaction of TREC systems with regulatory policies must be clear

20. Criteria for a sound certificate system • Clear definitions of eligible RES sources and technologies • Information content & validity of certificates • Manageable and simple • Robust against error and fraud - system of verification needed • Compatible with existing policies • If utilised to support growth in RES-E then additionality required

21. Opportunities for pilot trades of TRECs TRECs from renewable energy projects in Southern Mediterranean countries might be imported into Europe : • as a contribution or supplementary to the RE targets of the importing country; • in a common TREC market; • in a voluntary TREC market (e.g. for green electricity products). In the current situation in the Mediterranean region the most sensible way forward is through dialogue, the set up of pilot trades and utilising them as learning opportunities and the investigationof options for multilateral arrangements. Dialogue is important because unlocking RE resources and stimulating RE technology uptake against lowest cost can only be achieved through the development of a market with substantial size.

22. Role of countries in pilot trades TRCs can generate direct benefits for the trading countries, but can also provide learning opportunities and input for dialogue To progress toward pilot trading, participating governments need to: • Set the aims for future bilateral arrangements to increase the deployment of renewable energy technologies between the countries; • support and adequately resource the development and execution of a pilot trading scheme between the countries; and • agree on a model to commence bilateral cooperation to introduce the pilot trading scheme.

23. Case study: Italy-SMC TREC trading • TREC trading between Italy and the SM region (Algeria, Egypt, Libya, Morocco and Tunisia) • Trading period: from 2010 to 2020 • Reciprocity conditions of Italy’s domestic TREC (green certificate) system: • Additionality • Directive 2001/77/EC forbids any non-EU imports of RES-E or Guarantees of Origin from counting towards national RE obligations • Driver: additional quota on top of existing 2+% electricity generation obligation on suppliers in Italy

24. Key actions to allow TRC transferinto the Italian market In Italy such possibility is subject to several factors: • Adoption in the host country of “similar” mechanisms for supporting renewable sources • Physical connection between the electric grids • Reciprocity mechanism that allow stakeholders of Med countries to realize RE plants in Italy thanks to mechanisms in place in their countries similar to GC • The adoption of an ad hoc regulatory frame to allow a foreign entrepreneur to sell RE energy so produced • Creation of an authority super partes for arbitrage • An agreement between Italian TSO and the corresponding local authority

25. Impact on RE investment in SMC • TREC quota: 1% over eligible electricity generation in Italy, assumed 280 TWh by 2020 • Model results (simplified assumptions: 80% wind, 15% concentrated solar power, 5% solar PV): • Average additional annual revenue to RE projects in SMC: USD 47.1 million • Additional generation capacity: 1,150 MW • Additional electricity production: 2,810 GWh • TREC revenue support could contribute up to 25% of capital investment required for development  Increase of 3.2% on installed capacity, 1.9% power generation over 2003 in SMC region

26. TRECs & CDM: comparison

27. CDM and TRECs • Both can provide additional funding for renewable energy projects • CDM has wider coverage • Few opportunities for selling TRECs at present, outside of established national systems • Funding through the CDM is available now, though the market is still emerging

28. roberto.vigotti@inergia.it www.inergia.it