Carbon Partnership Facility April 2014 Seller Participant Training

1. Carbon Partnership Facility April 2014 Seller Participant Training Key Commercial Aspects of sub-ERPAs

2. Outline • Contracting structure • Experience in delivery • Managing under-delivery • Risk categories • Possible solutions

3. Contracting structure CPF Other Buyers CERs CERs ERPAs $ $ C/ME Sub-ERPAs CERs $ CPA CPA CPA CPA CPA

4. Experience in delivery so far • Projects often under-deliver • Technical difficulties • Implementation delays • Monitoring capacity • Regulatory delays • Under-delivery is detrimental to everyone: • Inefficient allocation of capital for buyers • Unpredictable/smaller revenue stream for sellers • Delivery highly dependent on • Sectors (waste management ≠ hydropower ≠ HFCs) • Capacity of project entities (big, small, private, public) • Downstream amendment of contracts to match volume and value is costly and time consuming

5. Managing under-delivery • The challenge: allow enough flexibility for sellers to deliver, and enough certainty for buyers to receive assets. • Potential issues: • Identify and develop enough CPAs to be included under the PoA in a given period of time • Replacement/additional CPAs? • Manage under-/over-delivery of individual CPAs vis-à-vis the entire PoA? • Other lessons as we go along • How to address default/liability issues? • Who should bear the risk? • CMEs (public/private) • CPAs (public/private) • Buyers • How should the risk distribution be reflected in the price? • What remedies should be available?

6. Risk categories • Market risk • Price fluctuations • Post-2012 framework • LIABILITY for delivery • Financial risk • Buyers’ and sellers’ viability • CPA implementers’ viability • Technology and implementation risk • Sector • CPA implementers’ technical capacity and experience • Regulatory risk • CDM additionality risk • Methodology changes • Methodology, monitoring and verification risk • Policy risks • Social and environmental quality risk • Host country regulatory risk

7. Potential solutions • Flexible commercial agreements • Framework agreement between the seller and the CPF (General Conditions/Framework ERPA) • CPA Sub-ERPAs for each new CPA or batch of CPAs • No two projects are the same  contractual agreements need to be “tailor-made” • Realistic assessments • Minimum annual delivery target according to CPA probability (certain, probable, risky) • Maximum contract value/volume • Seniority and sweep clauses to accelerate delivery and to facilitate negotiations of contracts with junior buyers for additional CERs • Put and/or call options • “Fungibility” of CERs from different CPAs

8. Option 1 - Regular annual delivery Max volume or value reached on year 9

9. Option 2 - Front loading delivery

10. Pros and cons • Option 1: Regular delivery • Possibility to use call or put options, or to sell or auction extra CERs each year on the spot market • Very low prices for the foreseeable future • Obligation to match Sub-ERPAs conditions to ERPA: • Less flexibility to manage the PoA as a whole and to “benefit” from performing CPAs • Option 2: Front loading • Allows better delivery management: • CERs from any CPAs are swept until the maximum volume or value is reached • Easier to structure agreements with junior buyers for later delivery (if any)

11. C/MEs experience • Brazil • Morocco • Vietnam • Philippines • Tanzania