Investing in CDM and PoAs in LDCs Experiences of KfW

1. Investing in CDM and PoAs in LDCsExperiences of KfW Matthias Börner KfW Carbon Fund EU Practitioners Workshop on Climate Change Paris, 24th March 2011

2. Topics • Why PoAs in LDCs? • CDM Experiences in LDC Countries • Experiences in the Design and Implementation of PoAs • Design of PoAs • Implementation of PoAs • Specific CDM / regulatory issues • Conclusions

3. 1. Why PoA’s in LDC’s? Reminder: Intention of CDM Programmes (PoA) EXAMP L ES Small Hydro Mini-Hydro Cook-stove SWH CFLs CH4: Animal waste / WW / landfill Figures / ESMAP 2007

4. 1. Why PoA’s in LDCs? Situation in LDCs • Only few stand alone CDM project types possible in LDCs • Project sizes tend to be (very) small • Bigger opportunity for programmatic intervention • Typical PoA types suitable for LDCs • e.g. cook stoves, solar home systems, solar lanterns, household biogas digesters etc. • CDM can support sustainable development • In combination with or as a substitute for ODA support • CERs generated in LDCs shall be eligible under EU ETS 3

5. 2. CDM Experiences in LDCs Up to now very few registered CDM projects in LDC’s Reasons: • Small potential • Low CDM capacity / knowledge of Implementing Agencies • Lack of experience at national (DNA) level leads to long processes • Few project developers / CDM consulatants are based in LDC’s • Less competition, higher prices, lower quality • Financing of projects is a challenge • Implementation takes longer than in other countries But: • Situation is improving • Development Impact of CDM is generally bigger than in other countries

6. 3. Experiences in the Design and Implementation of PoAs KfW Programmes © KfW • KfW Carbon Fund

7. 3. Experiences in the Design and Implementation of PoAs PoA Pipeline of KfW © KfW • KfW Carbon Fund 7 7

8. 3. Experiences in the Design and Implementation of PoAs a) Design of PoAs Main elements: • Coordinating and Managing Entity • Incentive Structure • CDM Aspects

9. 3. Experiences in the Design and Implementation of PoAs a) Design of PoAs Roles and Responsibilities of Coordinating and Managing Entity • CDM Development of PoA (e.g. development of CDM documents, validation and registration of PoA, etc.) • Regular Monitoring of ER in accordance with CDM methodology • Communication with UNFCCC • Technical Implementation of PoA (e.g. selection of technology, appointment of suppliers, awareness / marketing campaigns, necessary approvals etc.) • Supervision and maybe support in operation • Management of Cash Flows • Financing Concept Experiences: • Most CMEs do not have the capacity to fulfill all these tasks and need support • Some tasks can be outsourced to experts (e.g. consultants) • Careful assessment of CME and evaluation of strengths and weaknesses is necessary

10. 3. Experiences in the Design and Implementation of PoAs b) Design of Incentive Structure Program Participants (e.g. households, SMEs, etc.) need to be incentivized to participate in PoA Possible Incentive Structures: • CDM revenues subsidize interest on loans ( seed funding needed) • Investment Costs are subsidized by CDM revenues ( seed funding needed) • Maintenance contracts or guarantees are financed by CDM revenues • Payment on Delivery Experiences: • Ideal incentive structure needs to be identified for each individual PoA • However, “ideal” incentive structure may be too complicated and risky • Balance between complexity and incentive power needs to be found

11. 3. Experiences in the Design and Implementation of PoAs c) CDM Aspects CDM requirements need to be assessed Important CDM aspects: • Is methodology available and suitable for PoA type? • Complexity of Baseline establishment • Can monitoring requirements be implemented in a PoA? • Is Carbon Impact big enough to finance PoA specific costs (CME administration etc.) and incentive scheme? • Validation issues (e.g. liability, complexity of validation etc.) Experiences: • Baselines and Monitoring requirements often very complex in PoAs • PoAs should be simplified as much as possible, even if this leads to smaller CER volumes (e.g. some methodology allow simplified monitoring systems based on default values) • Carbon Impact at current CER-prices often hardly sufficient (depending on PoA type) • Validation is expensive, challenging and often needs to be supported

12. 3. Experiences in the Design and Implementation of PoAs Example of two extremes CDM revenue is main revenue of the programme: CDM revenues form only small part of programme revenues • e.g. Energy Efficiency / RE Programmes in SMEs • Short repayment period of investments through energy savings • Incentive: Payment on Delivery • Additionality: Mainly Barriers • Risk for financing of investment measures similar to normal project financing risk • Financing Options: • Commercial financing for Investments • Seed Funding may be needed • Additional Subsidy (e.g. Development Financing) may be needed if incentive through CDM revenues is not sufficient • e.g. CFL Programmes • Additionality: Mainly Financial • Programme requires external funding • Incentive: Subsidy of CFL costs • Repayment depends (mainly) on delivery and sale of CERs • High risk for financing institution due to: • Possible CER delivery shortfalls • Future CER-price is unknown • Risks are sometimes taken by private investors • Financing: • Private Investors • Development Aid if private / commercial funding is not possible © KfW • Thema der Präsentation • Ort • Datum 12 12

13. 3. Experiences in the Design and Implementation of PoAs Example of PoA structure

14. 4. Conclusions CDM Projects in LDCs are challenging. CDM PoAs are very challenging. What about CDM PoAs in LDCs??? Recommendations: • PoAs need to be carefully identified, designed and structured • Generally strong support is needed at all levels • Know how for organization and implementation of projects in developing countries is needed • Financing possibilities often needed Opportunities for Development Organizations: • Expertise of such organizations is often needed • Additional funds for development programs can be raised through CDM • PoAs are a stepstone on the way to NAMAs and Sectoral Appraoches, Experiences can be gained

15. Thank you for your attention! Matthias Börner Principal Manager KfW Carbon FundKfW BankengruppePalmengartenstraße 5-9D-60325 FrankfurtTel.: +49-69-7431-3717matthias.boerner@kfw.de