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Overview of the MDG Carbon Facility

Overview of the MDG Carbon Facility. Matt Spannagle Carbon Technical Adviser Millennium Development Goals Carbon Facility Bureau for Development Policy United Nations Development Programme. Afforestation & Reforestation, 0.2%. Fuel switch, 7%. Cement & Coal mine/bed, 7%.

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Overview of the MDG Carbon Facility

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  1. Overview of the MDG Carbon Facility Matt Spannagle Carbon Technical AdviserMillennium Development Goals Carbon Facility Bureau for Development Policy United Nations Development Programme

  2. Afforestation &Reforestation, 0.2% Fuel switch, 7% Cement & Coalmine/bed, 7% Energyefficiency7% HFC & N2Oreduction40% CH4reduction16% Renewable Energy23% Recall:

  3. Recall: High Objective for UNDP’s Carbon Strategy MDG Impact CurrentCDM Market* Low Low Number of Countries High

  4. Process of selecting Fortis • Internal Approvals • Process • Step • RFP:Expression • of Interest • RFP: • Review • Period • RFP: • Evaluation • Period • RFP:Negotiations • with • Finalist • Oct, Nov • 11 December: • Launch RFP • 11 January: • Participants’ Meeting • 31 January: • Proposals due • 5-19 February: • Selecting 3 Finalists • 26 Feb – 5 March: • Interviews and • ranking of Finalists • 26 March: • Commence negotiations • May: • Signing of contract • Launch (June 5) • Timing 2006 2007 1 15 12 6 3 • Number • of • Banks Start Qualified for RFP Attended Meeting Proposals Received Finalists Winner

  5. Fortis Bank - overall best deal for Project Proponents Market leader in carbon finance • Early key player and investor - can best manage risk, and offer best prices • 2004: awarded “Carbon Trade of the Year” for first ever trade of EU Allowances using a derivates based contract. • 2008: awarded “Best Carbon Trader 2008” One of the largest banks in the world, a counterparty that will honor its contracts to purchase credits • Institutional stability / solvency – a strong solvent partner to the Facility. • In current time of credit uncertainty, Fortis are in a strong position to honor their Facility obligations, including their contracts with Project Proponents. • According to S&P, Fortis is rated AA+

  6. 2 Year Agreement Fortis Project Due Diligence Services UNDP Delivery of Carbon Credits 15m credits Payment of Cost Recovery Fee $285k / project Project Management Services Payment for Credits Emissions Reduction Purchase Agreement (ERPA) Cost Recovery Service Agreement Project Proponents MDG Carbon Facility Partnership with Fortis

  7. Fortis – Carbon Banking Services • Carbon Market Price

  8. Pricing Formula Example • Illustrative FSP Pricing • Floor: €10 • Rolling Component: 50% discount • Example at two market prices: • EUA Phase 2 • at €12 • EUA Phase 2 • at €22 • Floor • Component • €10.00 • €10.00 • €11.00 • €6.00 Fortis – Carbon Banking Services

  9. Fortis – Carbon Banking Services • Features • 15 million credits, ~36 projects • Key feature: one price across the portfolio, irrespective of project characteristics • Benefits for project proponents • Fixed price protects against market downside • Advance payment for UNDP’s Cost-Recovery Fee • Fortis as a solvent counterparty

  10. UNDP - Project Development Services Registration 1st CreditIssuance ERPA • Part 1: • Due • Diligence • Part 2: • Project • Documentation • Part 1: • Due • Diligence • Part 3: • Establish • Monitoring System • Part 2: • Project • Documentation • Two step process • Initial screening • In depth evaluation • Implementation and oversight of monitoring system in project’s first year • Preparation of documentation • Approval by host country • Validation by 3rd party auditors

  11. Project Idea Note (PIN) Project idea Recall SA/ERPA PDD Designated Host country approval national authority MoU/LoE Operational entities Validation MoU/LoE Registration SA/ERPA Financing & implementation Project owner Monitoring Verification & certification Executive Board Issue CERs

  12. MDGCF services

  13. UNDP - Team Structure • MDG Carbon Facility Team • Country Office Role • Part 1: • Due • Diligence • Part 2: • Project • Docs. • Part 3: • Monitoring System Project 1 Project n RTA CO Conslts RTA CO Conslts • Assist in identifying/sourcing projects • Assist in due diligence and • gathering of documents • Assist in project documentation formulation • Liaise with local authorities and actors • Oversee collection of operational data • Desk top review and site visits Carbon Projects Technical Central Support Finance & Legal Execution

  14. No. of potential projects Due Diligence effort, $$$ & scrutiny per project SCREENING EVALUATION Commitment MDG Carbon due diligence • Commercial banks buying ‘product’ (emission reductions) – they need to be sure they are committing to a stable, safe partner in project proponent • requirement for formal due diligence process • requirement for formal due diligence process

  15. Due diligence Aspects • Due diligence on 5 aspects: • Carbon layer • Technical feasibility (engineering) • Financial/Management/Legal viability • Compliance with environmental & social principles + MDG impacts • Country risk

  16. MDG Carbon due diligence MDG Carbon due diligence process that all projects must undergo: • Phase 1: Screening • CDM eligibility, financial and technical feasibility etc. • early elimination of ineligible or unviable projects • low cost to screen • Phase 2: Evaluation • in depth • May require additional studies or info collection • Recommend either for commitment or rejection. • Risk areas are identified and risk management strategies developed.

  17. SCREENING Carbon layer Technical feasibility Financial and Legal Country risk E&S compliance + MDG impacts EVALUATION Commitment Due diligence aspects in Screening and Evaluation • Intensity of due diligence varies between screening & evaluation depending on aspect • e.g. carbon layer due diligence performed mainly at Screening while MDG impact assessment requires more effort and is mainly conducted at Evaluation • Due diligence applied in coordination and iteratively • e.g. if Carbon layer assessment reveals low volume of CERs, the underlying financial security is analyzed before continuing with other aspects

  18. MDG Impact assessment and project selection • Intrinsic and extrinsic MDG impacts are quantified • Quantification based on “no. of people impacted under each MDG” • PP not required to re-invest CERs into extrinsic benefits but may do so to increase MDG Impact Project-intrinsic MDG benefits e.g. employment/income, Access to energy air quality improvement Project-extrinsic MDG benefits e.g. invest part of CER income to: schools or health clinics, HIV education campaigns, environmental restoration MDG Score + = Maximization of portfolio’s development dividend

  19. What might MDG Carbon projects look like? • 15 million credits • 28 to 44 projects (mid-point 36) launched in 07-08 • Projects vary by • Size • Technology • Geography • MDG attributes • Pipeline will be developed on an on-going basis

  20. www.undp.org/mdgcarbonfacility/ • www.mdgcarbonfacility.org/

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