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TRANSACTION TYPES and FINANCING

TRANSACTION TYPES and FINANCING. Architecture of CDM transactions By Steve Thorne South South North Addis Ababa 21 st October 2003. Contents of presentation. CDM rationale overview Contribution of CDM to projects Example of cash flows Types of transactions

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TRANSACTION TYPES and FINANCING

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  1. TRANSACTION TYPES and FINANCING Architecture of CDM transactions By Steve Thorne SouthSouthNorth Addis Ababa 21st October 2003

  2. Contents of presentation • CDM rationale overview • Contribution of CDM to projects • Example of cash flows • Types of transactions • Examples of types of transactions • What kind of finance is around • Who is in the market

  3. The Clean Development Mechanism Investment funds Emitter in NORTH Emitter in SOUTH COST $ COST $ Emission Reduction credits Target level of emissions Achieved level of emissions

  4. ENERGY PROJECTDEVELOPED BY THE PARTICIPANT (e.g. Delivering of low-cost houses) COST OF PROJECT AS WHOLE COST CDM PROJECT ACTIVITY (e.g. retrofitting by installing energy efficient technologies.) VALUE BROUGHT FROM PROCEEDS OF SALE OF CER’s PRICE

  5. ENERGY PROJECTDEVELOPED BY THE PARTICIPANT (e.g. Delivering of low-cost houses) CDM PROJECT ACTIVITY (e.g. landfill projects.) COST OF PROJECT AS WHOLE COST VALUE BROUGHT FROM PROCEEDS OF SALE OF CER’s PRICE

  6. Let’s look at a CDM landfill… December 2003: CDM registered with EB The lifetime of the project is say 8 years, and in the MVP you verify every two years (optional)… Year 2 This creates a setof registered and un-transactedCertified EmissionReduction CertificatesCER’s Year 4 Year 6 Completion

  7. These issued CER’s are now commodities which can besold, at a price the market dictates…. December2005: $6/t TOTAL CDM REVENUE December2007: $11/t } December2009: $23/t December2011: $21/t

  8. The block of CER’s can be transacted along three broad choices… 1: get a partner to help with the development of theentire project In return for saleof the CER’s 1: self develop the projectandsell forward the predictedCER’s via an optionor2: bring in an investor Self develop The project and sell the CER’s as they areissued at prevailingmarket price

  9. Option 1: eg: PCF projects RISK:here the risk is zero: you get help to put together the project and you get money 1: get a partner to help with the development of theentire project In return for an option on the CER’s REWARD:the reward is financed and transacted project PRICE:will obviously be greatly discounted againstrisk

  10. Option 2: investor projects RISK:here the risk is how to cover underperformance and future market uncertainty 1: sell forward the predictedCER’s via an option2: bring in an investor REWARD:the reward is flow of capital or letter of credit PRICE:will obviously be discounted againstrisk but investors are few and far between

  11. Option 3: unilateral projects RISK:here the risk is the market price at time of going tomarket (issuance or beyond) Sell the CER’s as they areissued at prevailingmarket price REWARD:have to self finance, but rewards could be great PRICE:prevailing price, Maximum benefit if price is good

  12. Sources of CDM finance • Donor Funds for frictional costs (capacity development, institutional development, non-validation and verification transaction costs; establishment of African DOEs etc.) • Buyers of “off-the-shelf” CERs; • Investors in project technologies (equity, forward purchase etc.); • Mixtures of types; • Multinational internal trading; • Others?

  13. Who is in the market? • Donor funds: Dutch, British, US, Germans, Danes etc. • World Bank e.g. PCF, CDCF, bio-carbon fund… • CERUPT (Dutch funding) • Finnish, Danish, Govt. purchasers • Private sector: Eco-securities etc.

  14. Emission trading Company Company Carbon markets under Kyoto Kyoto Protocol Annex I Annex I Non -Annex I JI project CDM Project

  15. Expected sizes • EU Emission Trading Scheme: Eur 8 billion/year; CDM/JI: Max 6-8% (600 mln/year) CDM institutional buyers: • PCF, CDCF,Bio Carbon Fund; • Cerupt: Eur 200 mln • Danes/Austrians/France (Eur 20 - 80 mln?) • Japanese / Canadians

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