Carbon Credit Basics, Process and CDM Inventory Jaap Smink

1. Carbon Credit Basics, Process and CDM InventoryJaap Smink PCJ-MEM June 22nd 2011

2. Overview • Key Elements of the CDM under Kyoto • Energy Efficiency and Programs under CDM • The CDM Process • Jamaica’s DNA Process (Nicole O’Reggio) == BREAK === • CDM Inventory for Jamaica:

3. Key Components of the Kyoto Mechanisms

4. Kyoto Protocol: Project Based Flexibility Mechanisms If a company in a regulated market (Annex I country) needs to offset his emissions he can use CERs from the CDM • Annex 1 Parties assist non-Annex 1 Parties, the host parties (developing countries w/o emission caps) to implement project activities to reduce GHG emissions (or removal by sinks) • Credits, Certified Emission Reductions (CERs), Issued based on emission reductions achieved by the project • Annex 1 Parties can use CERs to contribute to their GHG emission reduction targets • Three Criteria for Project Based Credits: • Emission reductions must be real and measurable. • The project must be based on voluntary participation of all parties involved. • Additionality, size, leakage... key in the assessment of project feasibility

5. Project Emissions Baseline Beginning of the project End of the Project CDM Projects: Key Concepts Baseline Additionality A CDM project activity is additional if GHG emissions are reduced below those that would have occurred in the absence of the registered CDM project activity: Economic demonstration (financial) Technology demonstration (not Business as Usual BAU) Institutional demonstration (Barrier analysis) • Baseline scenario is the one that would have occurred in the absence of the proposed CDM project. • Emission reductions are calculated by comparing baseline emissions vs. proposed project emissions. Emission Reductions Real Project Emissions

6. ERPA Structures 1) • Issued Credits can also be traded as Secondary CERs, • normally traded at a slight discount from EUAs

7. Carbon Market PricesHistoric Evolution Different Instruments/ prices; the highest risk, the lowest price. Primary CERs “stable” at 9 Euro

8. Project Summary • Projects are the Bread& Butter of CDM. • Approval Process is slow and besides Industrial Gasses and Landfill/Waste or Coal Mine Methane projects the benefits are seldom substantial from an IRR perspective. • Early Consideration and Additionality receiving more and more scrutiny .... Increase in number of projects rejected. • Fossil Fuel Projects tough to get approval • Conceptual NEP based project potential for Jamaica: • Fuel Switching in Power & Industrial sector • Waste to Energy • Bagasse Cogen • Larger Scale Renewable Energy Projects (Wind)

9. Size Matters How large does a project need to be to develop as CDM Project? Assume a grid emission baseline of 700 kg CO2/MWh Assume project needs to generate >10,000 tons/year in CERs Project size needs to save/generate ~ 15,000 MWh/year What does that mean for the projects considered: Min. Size Wind 35% Cap Factor Solar 20% Cap factor ~ 5 MW SWH Avg 6 MWh/yr/HH 2,000 HH/Units Lamps 75W => 20 W 3hrs/day ~250,000 CFL/LEDs >2 MW >5 MW W2E 85% Cap Factor Other reasons could play a role to develop smaller projects under CDM; Soft Loans, Credibility, Status ……

10. Why Were PoA’s Started • Households & small/medium enterprises - each which could not individually achieve enough ERs • Mitigation activities that are dispersed & happen over time due to unpredictable uptake rates - RE or EE in buildings & individual/family, transportation etc • Smaller Developing countries underrepresented in the CDM - few large single point emission sources • PoA should give a boost to “small scale” activities in Developing nations that get implemented over time.

11. Main Steps of PoA Prepare and gather data for activity you want to develop & baseline you would like to use in line with the METHODOLOGY approved by the UN EB: • Write PoA Design Document (PoA DD) • Write Generic CPA DD (Template for all projects) • Write Specific CPA DD (a Real Case) • Get Letter of Approval from all relevant host country DNA’s All three DD’s get validated by DOE and send to UN EB for approval. PoA get registered Follow on CPA’s can get registered with only validation for consistency by DOE.

12. Anticipated CDM Timeline DOE Validation Design PoA operationally Write PoA, CPADDs DNA - Host Country approval 1-3 months 1-4 months 1-2 months 2-6 months Total CDM Cycle ~ 10 -24 months 1- 3 months 1- 2 months Could start first CPA after submission for validation Request approval DOE next CPA Request approval DOE next CPA Request approval DOE next CPA Request approval DOE next CPA Next CPA Next CPA Next CPA Next CPA DOE request for Registration UN EB Registration Start first CPA 1-6 months Next CPAs only needs DOE consistency check ~ 1month 2-6 months

13. Pro’s and Con’s of PoA’s Pro’s –advantage over PDD: • Allows to develop several projects over time and only have to go through UN approval process once. DOE approves additional CPA’s • Allows for cross border (Caribbean Scale; all DNAs need to approve upfront) • Allows to add projects later (as long as PoA is valid – 28 years) All of the above should result in smaller projects being able to benefit from CDM, faster CER generation and cheaper process for follow on projects (CPA’s) Con’s –disadvantage compared to PDD: • DOE Liability – DOE is liable for issues with CPA and needs to pay back any disputed CERs issued for that CPA (max 1 year) • Indefinite exclusion if rejected – inconsistent These issues will require extra scrutiny by developer/consultants because DOE will not take any risk with the Program – Keep it Simple, Follow the Rules, Think Through what you want to do Operationally, spend the time on the DESIGN

14. CDM Project Cycle Early Consideration • Project Idea Note (PIN) • Mandatory by your DNA? Generally used for marketing purposes –Setting out project outline, proof of Early consideration • Takes 12+ months to get approval for new methodology or can use existing methodologies. • Project developer responsible for developing PDD – sets out how project reduces emissions, justifies methodology used, additionality etc. • Host country has to have a Designated National Authority (DNA) in place. Endorses project and confirms that it is in line with the Sustainable Development aims of that country • Independent Designated Operational Entity (DOE) reviews PDD, confirms it is accurate & meth. chosen is applicable • Validation report submitted to the CDM Executive Board (EB) for registration. Any stakeholders free to comment and request review for ~60 days • Project Developer responsible for monitoring the project in accordance with protocol set out in PDD. DOE responsible for verifying this report and submitting to EB • EB reviews verification report and issues CER’s assuming that all is in order Letter of No Objection • Select / submit project methodology • Project Design Document (PDD) • Host country approval Letter of Approval • Validation • Registration • Monitoring & Verification • CER Issuance

15. Overall CDM Potential in Jamaica Low Carbon Roadmap:1. Fuel Switching in the Power & Industrial Sector2. Bagasse Cogeneration in the Sugar Industry3. Waste to Energy (MSW)4. EE in Industrial and Power generation (WHR/Cogen)5. Petcoke Cogen in the refinery6. Energy Efficiency Programs Commercial & Residential 7. Smart Grid ?======+ “All” Renewable Energy Projects (Hydro, Wind, Solar PV, SWH)

16. Over 300 MW Renewable Energy CDM Potential Opportunities identified: Bagasse Cogen; 60 - 100 MW Waste to Energy; 20 + 45++ MW identified Hydro Dam; 50MW Wind; Up to 60 MW Hydro; Up to 30 MW RoR Solar Water Heaters All Program candidates Solar PV –small scale Green Building Code Larger Projects as “stand-alone” CDM Projects, smaller projects as Programs – Hydro PoA will be discussed this afternoon. RE < 5 MW is “automatically” additional – faster & cheaper CDM cycle, still need to follow the process !! Carbon Impact Minimal; <1 cent/kWh ; <3% IRR for most projects……

17. What does this mean for Jamaica - The Caribbean • Limited number of Projects; rest will have to be combined to make the CDM effort affordable. • Focus needs to be on Energy Efficiency and Renewable Energy Programs – potentially cross border. • Move from Projects to Programs • Programs in LDC and SIDS (Caribbean) have a strong role to play in a post 2012 Regime. (Cancun agreement) • Funding for these Programs can come, sometimes with additional grant money from the Developed Nations, WB/IDB/IFC etc. at favorable terms • From Carbon Credits to Carbon Finance

18. Demand Side Energy Efficiency Programs

19. Demand Side ENEF CDM Methodologies • A clear trend towards energy efficiency methodologies; the industry has gained experience from the pilot projects. • Some of the Approved CDM methodologies for households: • 4 small scale new methodologies • AMS-I.C : Thermal energy production with or without electricity (SWH) • AMS-II.C: Demand side energy efficiency programs for new technologies (Appl.) • AMS-II.E: Energy efficiency and fuel switching measures for buildings (Green Building Code) • AMS-II.J: Demand side activities for efficient lighting technologies (EE lighting for Households) • “full-size” new methodology • AM0060: Power saving through replacement by energy efficient chillers • AMS-II.C Also applicable for Street-lighting and other specific EE technology switches. • Project under Small Scale Program <60GWH/yr/15 MW RE installed …. management key to avoid prohibitive monitoring cost

20. Demand Side ENEF Project Structure: Expected Revenue Streams • Consumer Based Income:Loan repayments in line or below the expected value of energy saving, paid through monthly electricity bill • Carbon Based Income: Carbon credits generated by CDM projects • Financial Incentives:Possible existing government subsidies for energy efficient equipment or technology provider’s rebates to help promote their equipment penetration in the market; Potential grants and ODA loans to help fund the programs • International Grants:A certain contribution to Jamaica’s Low Carbon Roadmap as part of the UNFCCC “Cancun” agreement –Nationally Appropriate Mitigation Actions or NAMAs Public Private Partnership Key to Capture all Benefits and Make EE Programs Feasible

21. Demand Side ENEF Main hurdles to be expected potential solutions to gain CDM approval: Leverage Monitoring to create Awareness around EE opportunities and usage ….potentially use to calculate compensation in performance based- or ESCO type contracting with Equipment suppliers/installers

22. Why ESCO’s • Issues with EE in general: • Customers don’t understand EE • Customers don’t trust EE savings • Suppliers have a tendency to overestimate EE savings (don’t deliver) • Customers doesn’t have the financial means, nor the time and resources to dedicate investments in EE. • ==== ESCO Solution ===== • Customer needs “Turn-Key” solution from supplier/installer who is willing to guarantee performance and have some “skin in the game” (ideally provides financing). • Customer needs help monitoring and correct behaviour “outsource the policing & awareness of EE behaviour”

23. The Importance of Monitoring • EE Savings “evaporate” w/o monitoring: • Lack of user awareness, user behaviour and lack of maintenance will substantially erode energy savings over time. • With tight Mon.& Control EE savings can even exceed theoretical savings; User participation & behaviour change critical for EE.

24. Basic ESCO Concept Elements • Performance Contract: • The ESCO company guarantees the performance of the project based on certain parameters/models as agreed with Client. • Funding: • The ESCO provides (partial) funding of the project and gets repaid the loan/payment deferral out of the savings realized by the Client • How and why can the ESCO company do this: • Deep understanding of the variables driving the savings for the Client (savings go up or down with underlying usage of facility/plant); financial model to calculate savings/payments. • ESCO maintains the project to assure good performance • ESCO monitors and corrects potential issues “immediately” • Expertise, experience and economies of scale

25. Performance Contracting Basics • Contractor takes substantial Risk in the ultimate performance of the project....... And credit risk on Client.... • The benefits/savings are shared between Client and ESCO to assure aligned interest and positive behaviour. • Contract has a long(er) term to allow for repayment of the loan/deferred payment (in USA up to 20 years). • Savings go up or down with usage in underlying process/ occupancy of building etc.; appropriate compensation required to compensate for that • Financial skills and understanding critical for success • Different levels of “Skin in the game”: • Funds total project (on Bal. Sheet or through bank) • Guarantees performance to Bank – Client takes out loan • Defers profit • Bonus/Penalty during maintenance period ... LTSA upside

26. Biggest Hurdles with ESCOs (in Jamaica) • Contractors don’t know how to bid, because they don’t understand, or can not explain to Client how to price/model the savings. • No experience with Performance Contracting by Contractor and Client (Rules of Engagement/ Responsibilities/ Penalties) • ESCO can not finance the project itself and has no/limited access to bank financing (Banks nor ESCO know how to underwrite the project & High funding cost). • Mentality towards Energy Consumption – substantial part of savings can get lost/leaked through (miss)behaviour by Client. • No experience with Long Term Service Agreement (LTSA). • Tendency to go cheap, versus life cycle cost approach by Client and/or Contractor. • Bidding/tendering process doesn’t allow/facilitate mixing of equipment purchase with maintenance/service contracts.

27. ESCO Pro Forma ESCO contract >2 * Client’s PBP; Electricity price risk

28. Why leverage CDM --- ESCO • CDM addresses Clients’ concern how to objectively measure and establish the savings realized with the project/program. • CDM logic/philosophy is very similar to ESCO/ Performance contracting. • CDM rigor will help with execution to assure savings materialize. • CDM methodologies can provide baseline and monitoring guidelines and calculation tools to objectively establish project performance – Could be basis of Performance Contract formulas • CDM rigor can provide additional credibility to your approach when talking to Clients, Banks and Government Agencies. • “Programs” managed by institutions could create Carbon Value as well as tap into international funding available.

29. “CFL” PoA Data Requirement Baseline & Monitoring: • Electricity grid baseline : • All operating data (KWh and fuel consumption by plant) • Transmission& Distribution losses –official JPS/OUR report OK; only technical losses • Lamp usage baseline: • Replaced lamp wattage (old vs. new) • CFL lamp operating hours/day (through questionnaire or direct measurement) • Capture addresses of where the CFLs got installed • Sampling of CFLs still working to correct calculated savings for lamp failure • Number of Incandescent lamps destroyed “under 3rd party supervision” • A CPA can only start AFTER PoA has been submitted for Validation. • Minimal variations between CPAs; to be identified in advance in PoA • After PoA registration – above data need to be gathered and potentially updated for each CPA. • CPA will be reviewed by DOE for consistency; if consistent => DOE approves and next CPA can start earning credits immediately.

30. Waste to Energy Meth. AM 0025: Avoided emissions from organic waste through alternative waste treatment processes. Renewable Energy – Offset Fossil Fuel use Avoided Methane Emissions – 21 CERs/ ton of Methane avoided; build up based on decay formula leakage if Plastic etc. gets incinerated. Two streams of CER Revenue and scale make this an interesting opportunity. Applicability: Incineration or gasification of fresh Organic Waste (<10 days old) Need to have data on the composition of the waste to apply appropriate gas generation model to the Organic portion of the waste No Industrial or Hospital waste Auxiliary fuel <50% of energy generated Difficult Monitoring and Industrial waste limitation could be an issue, but the benefits can be substantial. Additionality based on common practice, technical and financial hurdles due to lack of tipping fee and low FIT.  Early consideration communication key!

31. Energy Efficiency Industrial – Power Gen. EE is possible, proof of Additionality often an issue.. Meth. ACM 07: Conversion from Single Cycle to CC Power. Clearly possible, 14 project tried to register- 6 with issues to date and 4 registered. Applicability: Waste heat generated on site is not utilizable for any other purpose on-site; The project activity does not increase the lifetime of the existing gas turbine or engine during the crediting period; Project developers have access to appropriate data to estimate the combined margin emission factor, of the electricity grid to which the proposed project is connected. Additionality based on common practice, technical and financial hurdles could be an issue since I understand that there is a new huge CC plant installed recently.  Early consideration communication key!

32. Thanks Jaap Smink Jaap@SminkConsulting.com +1-713.855.4216 Jamaica cell +1-876.568.6118