CDM PROJECT FINANCING

1. CDM PROJECT FINANCING Pim Kieskamp Senior Climate Change Adviser Renewable Energy, Energy Efficiency and Climate Change Program (REACH) Asian Development Bank

2. documentation of GHG  Requirements (energy) projects

3. So, main striking characteristics of CDM is stringent documentation of baseline and monitoring • Why is that? Because Annex I countries have to comply with KP target and they want to do that in the most cost effective way.

4. Kyoto Protocol:Overview Annex I EmissionTrading Emission Trading CleanDevelopmentMechanism 1990 level Joint Implementation - 5% Domestic Actions Domestic Actions Assigned Amounts Present day 2012 (BaU) 2012 with KP

5. Business as usual: baseline CO2 emission Reduced emissions Project implemented year Baseline and CERs

6. Costs/burden • Ordinary project preparation requirements PLUS • Project preparation to satisfy sustainability requirements (e.g., civil society participation) • Baseline • MVP • Validation • Certification of reductions • On-going monitoring, verification, etc • To be born by project partners

7. For many projects in Asia, financing is becoming the single-most important factor for their successful implementation • Companies are finding it difficult to provide the equity needed for projects • Commercial lenders are cautious in providing new loans particularly to projects involving unfamiliar technologies • Technologies, equipment & processes relevant for CDM are available commercially, many of which offer viable economic returns; yet, not many of such projects are being implemented in Asia compared to what can be potentially achieved.

8. Financing modalities • Self Financing: • Company uses internal funds to finance investment. • Funds come from existing cash reserves. • On Balance Sheet Financing: • Firm takes out a loan to finance the investment. • Firm reflects loan on its balance sheet.

9. Finance Debt finance Equity finance Share issue Reserves Borrowing Retained earnings Internal finance External finance

10. Loan FINANCING INSTITUTION Construction Payment EPC CONTRACTOR Heat/Power FACILITY SITE OWNER Construction Services Biomass fuel supply ENERGY PLANT Other Power Off-takers On Balance Sheet Financing Model

11. Other Fuel Supply Sources Power Sales to the Grid Other Investors EPC CONTRACTOR Project Finance Model Fuel Supply Power Payment Fuel Payment Power Sales Biomass Fuel Supply Equity Fuel Payment Dividends Energy Payment Heat/Power Construction Services Equity Construction Payment Dividend FACILITY SITE OWNER ENERGY PLANT COMPANY Loan Repayment PPA Assignment Loan Funding Completion Guarantee Construction Guarantee FINANCING INSTITUTION

12. Financing options/Schemes System Scope Should develop innovative financial mechanisms; seek assistance for capacity building. • Self-financing • On-balance sheet • Micro-credit • Grant/subsidy • RESCO/ESCO • Leasing • First-cost subsidies & lower import duties • Mortgage financing • Vendor credit • Dealer credit • Financial bundling Small-scale/Non-grid • Solar home systems • Small wind power systems & hybrid solar/wind/diesel systems that have no associated distribution network • Pico- and micro-hydropower • Size of project < 1 MW

13. Financing options/Schemes System Scope Should use innovative financing mechanisms, while exploiting the benefits of financing schemes applied to conventional energy. • On-balance sheet • Equity financing • Venture capital • Project finance (ltd. recourse) • Corporate guarantee • Grant/subsidy • RESCO/ESCO • Leasing • Vendor credit • Targeted project credit • Financial bundling • Mini-hydropower • Biomass gasifiers & cogeneration systems • Wind/diesel/solar hybrids & other medium-scale renewable energy systems in the range of 1-15 MW Medium-scale/Isolated-grid/Grid-connected

14. Financing options/Schemes System Scope Should operate within the same financing rules applied to conventional energy projects. • Project finance (limited/non- recourse) • Venture capital • Multilateral lending • ECAs • Political risk guarantee • Bonds issuance • Refinancing • BOO/BOT Large-scale/Grid-connected • All (renewable) energy systems with capacity greater than 15 MW

15. Financial models CDM projects • So, a variety of financial options for CDM project: • • Full or Partial Equity: a company finances all or co-finances part of a CDM project in return for full or shared financial returns and CERs; • • Financial Contribution: a company financially contributes towards the cost of a CDM project equal to some portion of the incremental cost of the project over and above the baseline technology, or finances the removal of market barriers, in return for CERs; • Loan: a company provides loan or lease financing at concessional rates in return for CERs; or, • • Certified Emissions Reduction Purchase Agreement: a company agrees to buy CERs as they are produced by the project.

16. Despite the existence of the foregoing mechanisms, there is still a dearth of examples of projects that have been financed (RE/EE) or will be financed (CDM), in a more sustainable way i.e., on a purely commercial basis without full recourse to the sponsors. • WHY?

17. CDM:Project modalities • Bilateral: An investor in a Annex I (developed) country invests in a entity in a non-Annex I (developing) country, transferring financial resources and technology • Multilateral: Investors contribute to a multilateral fund set up by some international agency (e.g. World Bank, ADB, or private bank). This fund invests in a portfolio of projects in developing countries designed to generate CERs and conventional commodities • Unilateral: An entity in a non-Annex I country invests in a project in its own or another non-Annex I country designed to generate CERs and conventional commodities

18. CDMProject modalities: e.g. bilateral private-private OEn / EB CER Non Annex I ANNEX I audit incentives/ authorization registration authorization Company Company Admin $ $ benefits benefits Project Abatement fund 2%

19. Without CERs not implemented; with CERs implemented Without CERs implemented With CERs not implemented No CDM CDM FIRR CER income

20. Normal project risks: • Country/political risk • Sponsor risk • Technical risk • Environmental risk • Fuel/feedstock risk • Financial/legal risk • Construction risk • Operation risk

21. Apart from the “normal” risks there are: • New risks associated with: • project preparation • project approval • baseline & MVP validation • monitoring & verification of certified emissions • Additional risks • lack of firm market, price, sales & trade mechanisms/history for CERs • unfamiliarity of CDM by financiers who would need to count CERs as part of finance plan

22. So, with it additional costs and additional risks is there a future for CDM???? • Example: • The Netherlands will reduce 100Mt CO2eq through CDM/JI (tender, CDM facilities etc) at average costs of ca 4 US$/ton CO2eq • This means 400 M US$ for CERs/ERUs. Contribution to the capital costs may by be 5-15% (at least for CERs). Consequently an investment of 4,000 M US$ is needed to generate the credits for the Netherlands. • Note: Should be new and additional (see also sheet FIRR)

23. Characteristics of expected CDM Market* Asia • Volume : 100 - 200 Mt C year • Export revenues: 1500 - 5000 M US $ • Profit : 500 - 2500 M US $ • Expected beneficiaries • China, India • Indonesia, Philippines, Bangladesh and Pakistan • * Without USA

24. Thank you pkieskamp@adb.org +63 2 632 6607 www.adb.org/REACH