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Project structuring

Project structuring. National Workshop on CDM Paramaribo, 23 April 2008 Adriaan Korthuis. Overview . Project types Strategy development Price and risk mitigation Bundling small projects: “Programmes of activities”. Project types. Reduction of emission of industrial gasses

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Project structuring

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  1. Project structuring National Workshop on CDM Paramaribo, 23 April 2008 Adriaan Korthuis

  2. Overview • Project types • Strategy development • Price and risk mitigation • Bundling small projects: “Programmes of activities”

  3. Project types • Reduction of emission of industrial gasses • HCF23 and Nitrous oxide • Very high greenhouse warming potential • Few projects, high emission reductions (> 5 million tonnes CO2e/yr) • Low abatement costs, very high revenues • Methane abatement • Landfill gas, waste water, manure treatment, mine methane • High greenhouse warming potential • Many projects, varying sizes (250,000 – 2 million tonnes CO2e/yr) • Carbon revenue fully supports project development • Renewable energy • Avoids fossil fuel through biomass, hydropower, wind power; • CO2 largest greenhouse gas • Countless projects, from very small to large (10,000 – 2 million tonnes CO2e/yr) • Carbon revenue strengthens project finance

  4. Forestry projects • CDM: • only Afforestation and Reforestation (A/R) • Related project categories: • decreasing Non-renewable biomass • Voluntary markets: • Forest management • Land management • Forest restoration • Avoided deforestatation

  5. Programmatic CDM I • Need for programmatic approach: • Small projects are at disadvantage • Large GHG mitigation potential in so far under represented sectors (energy efficiency, rural energy projects) • Bundles and “programs” can reduce transaction costs • Programmatic approaches can also include: • Program under mandatory programs • Across >1 country • Large projects • Important: • Clearly define program • Appoint “aggregator” or “intermediary” • Apply same baseline + methodology

  6. Programmatic CDM II - issues • Need for a strong aggregator/intermediary • Aggregator enters into ERPA and is responsible for compliance under the ERPA • Aggregator pools CERs and $$$ • Need for a strong incentive framework (the individual participants must acknowledge the benefit they have from participating in the programme) • Avoid double-counting

  7. Legal Agreements for Large Scale Non-Bundled Projects Host Country National Legislative Framework / Agreement / Authorization Letter of Project Approval Buyer Seller Emission Reductions Purchase Agreement

  8. Legal Agreements for Projects Under a Programmatic CDM Approach Host Country Letter of Project Approval Project Entities Buyer Seller ERPA Subsidiary Agreements

  9. CER marketing: Development of a strategy Project developers developing a CER sales strategy should consider the following questions: • Is the CER cash flow essential for my project? • Do I need additional funds to cover my investment costs? Do I need an advance payment? • How would outsiders value my company? Do I have any credit rating or a balance sheet backing the transaction? • Would I benefit from technical advice and knowledge transfer? • What is the general risk profile of my project? • What are the CDM specific risks of my project? • Do I have more than one project in the pipeline? • Do I have access to full market intelligence (re: pricing and market forecasts)? • What price do I expect and which price can realistically be achieved under a forward contract?

  10. Structure of a renewable energy CDM Project Equity investor Technology Supplier € € € Wind Project Tech Bank € € ERPA € CERs e Approval Local currency Construction O&M Access Affected people etc CER Buyer Government Electricity purchaser

  11. Risk allocation Principle: Assign risk to the party best able to bear it Investors/creditors/seller assume most project risks Buyer or Seller take Kyoto Protocol related risks Market risk is often shared

  12. Elements of risk in carbon deals Market/Price Risk Project Risk Finance, Approvals, Construction, Production Has an impact on: Existence of Project Therefore existence and production of CERs Needs management for the long term Kyoto Protocol Risk Host Country Approval, Compliance, Eligibility, Transfer Has an impact on: Existence and compliance of CERs/ERUs Price Needs management for the long term

  13. Market/Price risk: Selling/purchasing CERs of different seniority Flexible pricing Option contracts (put or call) Kyoto risk: Host country agreement or letter of endorsement Using approved methodologies Entering into an ERPA after project registration Securing the right to communicate with the EB Obtaining Host Country and Annex I country approval (+authorization) Risk mitigation tools

  14. Project and delivery risk Ensure management and operational capacity of the counterpart Secure stable financing of the project Ensure resource availability Ensure legal compliance Using conservative CER projections Sell from a pool Ensure the senior right to the CERs (buyer) Establish reporting obligations (buyer) Seller payment/receipt of CER risks Credit check Alternative registries/delivery = issuance Escrow agent (see CERSPA guidance document) Risk mitigation tools

  15. Counterparty analysis • Financial Standing (buyer and seller) • Solid balance sheet? • Credit rated? • Parent company or subsidiary? • Technical Capacity (usually seller) • Experience and track-record in project construction, implementation and operation? • Qualified staff and/or professionals? • CDM Development Experience (usually seller) • Previous experience in CDM project development? • Main hurdles: baseline issues; monitoring issues; project performance; concrete environmental benefits.

  16. Example: Landfill Project • Landfill Projects generating ERs through capture of methane [and electricity generation] • Generally public projects or public private partnerships • Contractually flexible as different rights and obligations get easily separated [waste, land, landfill gas, CERs..] • Rights to exploit LFG (and thus to future CERs) often transferred from the owner of the waste or land to a third party contractor

  17. Landfill Project I Power Purchase A. Carbon Contract Municipality Owns the land Operates the landfill Collects the waste Sells the Electricity

  18. Landfill Project II Power Purchase Agreement Carbon Contract Shareholder Agreement Power Generation License Special Purpose Company Loan Agreement Environmental License Construction Agreement Landfill Gas Transfer Agreement Grid Connection Agreement Landfill Concession Agreement Operations- and Management Agreement Use of Land Agreement

  19. Conclusion • Different ways to tailor carbon finance to your needs • Be rational with risk allocation • Programmes of activities provide possibilities for bundles of small projects

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