Financing ERPAs: A Case Study of the Nova Gerar Landfill Gas Project Bruce Usher, CEO EcoSecurities Group Limited Carbon

1. Financing ERPAs: A Case Study of the Nova Gerar Landfill Gas Project Bruce Usher, CEO EcoSecurities Group Limited Carbon Finance Risk Mitigation Workshop Public-Private Infrastructure Advisory Facility & CDCF-Plus 19 November 2003 Paris Offices in Oxford, New York, Los Angeles, Rio de Janeiro, Sydney, The Hague

2. Nova Gerar (“New Generation”) is a joint venture between SA Paulista and EcoSecurities SA Paulista, a Brazilian engineering and waste management company, with the concession to manage the Marambaia and Adrianopolis landfills on the outskirts of Rio de Janeiro SA Paulista’s core business is in traditional heavy construction sectors such as highways, railways, airports, ports, industries and sanitation. SA Paulista manages the largest domestic waste transfer station in South America (Transbordo Ponte Pequena) responsible for 60% of all domestic waste from Sao Paolo EcoSecurities, a multinational environmental finance company, specializing in greenhouse gas mitigation 28 employees devoted exclusively to the GHG market, currently working on 32 CDM projects Exclusive cooperation agreement with Standard Bank in Africa, Russia and the Middle East

3. What is Nova Gerar? The objective of the Nova Gerar joint venture is to develop the landfill gas collection system on the landfills managed by SA Paulista, called Marambaia and Adrianopolis. This involves investing in a gas collection system, leachate drainage system, and a modular electricity generation plant at each landfill site (with expected final total capacity of 12 MW), as well as a generator compound at each site. The generators will combust the methane in the landfill gas to produce electricity for export to the grid. Excess gas, and all gas collected prior to a grid connection will be flared. Combustion and flaring combined reduce emissions of 11.8 million tons of CO2 equivalent over 21 years.

4. Currently, 76% of the total waste generated in Brazil is disposed in ‘rubbish dumps’ with no management, gas collection, or water treatment whatsoever.

5. Marambaia is a typical case, where the previous operators have deposited waste for more than 15 years without any environmental licensing or following any environmental regulations.

6. The remaining 24% of waste is disposed in ‘controlled’ landfills and subject to regulation by the environmental authorities. Current Brazilian legislation, though, does not require that landfills collect and dispose of landfill gases. Adrianopolis is one of the first in Brazil designed to collect and utilise all the gas generated.

7. Methane Production at Marambaia and Adrianopolis

8. Project Description Waste production (households, industry etc) Waste collection, sorting and transportation Landfill Landfill gas production Fugitive emissions Landfill gas collection Flaring On site use of electricity produced on-site Electricity generation Electricity to grid End use

9. NovaGerar Project has Two Phases Phase 2, refers to electricity generation in both landfills. Modular electricity generation plants will be installed in the Marambaia and Adrianopolis landfills to start producing and selling electricity in early 2005. Marambaia plant capacity starting with 1MW expected to produce electricity until 2010. Adrianopolis plant capacity, starting with 2MW will evolve towards 12 MW in 2016 by the addition of 1 MW units and is expected to produce electricity beyond 2021. Phase 1, to be initiated in December 2003 refers to the flaring of the biogas generated in the Marambaia and Adrianopolis landfills. Flaring will generate emissions reductions of 2.5 millions tons of CO2 equivalent from 2004 to 2012. Nova Gerar is negotiating an ERPA with the World Bank to purchase all of the emissions reductions generated by the Nova Gerar project up to 2012, and a right of first refusal for emissions reductions generated beyond that date. The World Bank is purchasing the emissions reductions as trustee for the Netherlands Clean Development Facility (NCDF), a CDM project facility.

10. How attractive is carbon financing in Landfill Gas projects?

11. Nova Gerar Pro-Forma Cash Flows PHASE I: FLARING 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Projected ERs Marambaia sold to World Bank (tCO2/yr) 86,708 79,622 72,791 66,313 60,285 54,737 49,659 45,024 40,802 Projected ERs Adrianopolis sold to WB (tCO2/yr) 38,292 75,738 127,209 168,687 214,715 265,263 310,341 354,976 409,198 TOTAL Projected ERs sold to World Bank (tCO2/yr) 0 125,000 155,360 200,000 235,000 275,000 320,000 360,000 400,000 450,000 Net price of carbon (U$/tCO2) $3.78 $3.78 $3.78 $3.78 $3.78 $3.78 $3.78 $3.78 $3.78 $3.78 $3.78 Gross Carbon Sales (U$) $0 $472,500 $587,262 $756,000 $888,298 $1,039,500 $1,209,600 $1,360,800 $1,512,000 % of carbon sales due to Municipalities 10% 0 0 (47,250) (58,726) (75,600) (88,830) (103,950) (120,960) (136,080) (151,200) % of Carbon Credits due to EnerG (US$) 0 (132,141) (164,235) (211,425) (230,680) (249,180) (265,792) (271,832) (271,832) Net Carbon Sales (US$) 0 0 340,359 423,027 544,575 657,618 790,320 943,808 1,088,968 1,240,168 Other Costs (16,000) (118,168) (118,308) (118,510) (118,669) (118,851) (119,056) (119,238) (119,420) FLARING CASH FLOW, with Carbon 0 (16,000) 222,191 304,719 426,065 538,949 671,469 824,752 969,730 1,120,748

12. Nova Gerar Financing USES WORKING CAPITAL: $250,000 CAPITAL INVESTMENT Phase 1 Flaring: $620,000 for flaring equipment and gas plant works Phase 2 Electricity Generation (8 MW) $350,000 for grid connection and telemetry system $4,800,000 for power generators SOURCES SENIOR LOAN SECURED BY ERPA: $1,220,000 LEASING: Modular power generators will be leased as needed.

13. Monetisation of the ERPA

14. Lender Risks: The List is Long Project Specific Risks Operational construction operating performance underproduction of CERs Counterparty buyer breaks ERPA contract seller breaks ERPA contract PPA contract broken bankruptcy by developer fraud Carbon Financing Risks • Political • Kyoto Protocol ratification • Host country approval • CDM • Country Risk • Sellers are located in developing countries • Currency risk • Timing risk • Gray Market

15. Real Risks versus Perceived Risks: The List is Shorter Project Specific Risks Operational construction operating performance underproduction of CERs Counterparty buyer breaks ERPA contract seller breaks ERPA contract PPA contract broken bankruptcy by developer fraud Carbon Financing Risks • Political • Kyoto Protocol ratification • Host country approval • CDM • Country Risk • Sellers are located in developing countries • Currency risk • Timing risk • Gray Market

16. Mitigating Risks Operational Risks – classic project finance issues for mature technologies Counterparty Risks – mitigate with strong deal structure and documentation ERPA survives bankruptcy by developer (risk is low for RE projects) ERPA payments flow into a debt reserve account or directly to the lender ERPA is fixed price, hard currency contract coming from developed country buyer Political Risks Kyoto Protocol, Host country approval and CDM – mitigate with contingent documentation or with VER structure (World Bank PCF) Hedge with third party option Country Risk Country risk insurance (if necessary given very low risk of impact) Timing Risk confirm completion of CDM approval process and ERPA documentation prior to loan disbursement. Gray Market Risk – not a risk, but an opportunity

17. Constraints • Complexity • lack of standardization under Kyoto Protocol and CDM mechanism • documentation and back office procedures • Deal Size • “Trash to cash” LFG projects are the most attractive emissions reduction projects, but are still relatively small (financing <$10 mm) • Market Structure • CDM has multiple, conflicting objectives (GHG reduction + sustainable development) • Conflicts created through participation of non-profits and multilaterals (crowding out, competitive issues) • Time pressure, or lack thereof • No incentives for early participation / creation of liquidity.

18. Real Opportunity High yield / low risk investments: Developed country project finance type risk Mezzanine, developing country type returns High value-added financial service – complex, differentiates banks, rapid growth Requires financial institutions with both local & international expertise Compare to derivatives market in 1980’s

19. Financing ERPAs: Conclusions • CDM is moving from concept to reality, creating an arbitrage opportunity for aggressive financial institutions to earn emerging market yields with developed market risks • Risks are overstated: most risks are not real and/or can be mitigated • Market constraints are understated

20. Financing ERPAs: A Case Study of the Nova Gerar Landfill Gas Project Bruce Usher, CEO EcoSecurities Group Limited Finance Risk Mitigation Workshop Public-Private Infrastructure Advisory Facility & CDCF-Plus 19 November 2003 Paris Offices in Oxford, New York, Los Angeles, Rio de Janeiro, Sydney, The Hague