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This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from South Pole Carbon Asset Management Ltd. This material was used by South Pole Carbon Asset Management Ltd during an oral presentation; it is not a complete record of the discussion.

EAPIC18 September 2008

This report is solely the property of South Pole Carbon Asset Management Ltd. No part of it may be circulated, quoted, or reproduced for distribution without prior written approval from South Pole Carbon Asset Management Ltd.

Driving Sustainable Energy Development in Africa through the CDM

EAPIC 2008, 16-18 September, Nairobi, Kenya1

CONTENTS

• Overview of the Carbon Markets

• CDM in Energy in East Africa

• Some Case Studies


UNDER THE CDM, COUNTRIES CAN USE CREDITS EARNED FROM REDUCING EMISSIONS ABROAD TO MEET THEIR CAPS

• Switzerland finds it costly to reduce emissions

• Cheap GHG emission reduction projects can be implemented in South Africa

• CDM (‘Clean Development Mechanism’) allows industrialised countries to invest in emission reduction projects in developing countries as an alternative to more costly emission reductions at home. CDM credits are called ‘CERs’ and can be used to meet a country’s cap

• Switzerland buys credits (‘CERs’) from project developers in South Africa

CERs

Revenue

CDM project

Hypothetical example


THERE ARE SIX GHG’S CONTROLLED UNDER THE KYOTO PROT OCOL, EACH WITH VARYING IMPACTS ON GLOBAL WARMING

310

21

1Carbon dioxide (CO2)

Methane (CH4)

Nitrous Oxide (N2O)

Hydrofluorocarbons (HFCs)

1,300HFC-43-10mee

1,300HFC 134a

2,900HFC 152a

11,700HFC 23

Perfluorocarbons (PFCs)

7,400PFC compounds C5-18

6,500PFC-14

23,900Sulphur Hexafluoride (SF6)

Greenhouse gas chemicalGlobal warming potentialtCO2eq*

1

2

3

4

5

6

Examples

Burning of fossil fuels

Organic waste decomposition

Fertilizer production

Refrigerator systems

High voltage insulation

Gas insulated switchgear

EAPIC 2008, 16-18 September, Nairobi, Kenya

ENERGY INDUSTRIES, WASTE HANDLING AND DISPOSAL AND PREVENTION OF FUGITIVE EMISSIONS ACCOUNT FOR MOST PROJECTS

4

Percent of CDM projects by scope (as of 1 Aug 08)

Energy industries

Waste handling & disposal

Fugitive emissions

Agriculture Manu-facturing industries

Other

6568

20

55

Including…

• Renewable energy

• Natural gas

• Waste heat recovery

• Energy efficiency

• Waste water treatment

• Landfill gas

• Methane recovery from biomass decay

• Gas recovery from oil wells

• Pipeline leak reduction

• Coal bed methane capture

• Methane recovery from manure and agricultural residue

• Fuel switch

• Cogeneration

• Energy efficiency

• HFC avoidance

• N20 avoidance in fertilizer production

• Transport efficiency

• Forestry


CARBON TRANSACTIONS GROWING EXPONENTIALLY AND EXPEC TED TO REACH USD100BN IN 2008

5

24

50

70

13

25

88

6

00 0 3

1

9

2004

1

11

2005

5

31

2006

64

2007

100

2008f

Others

CDM

European market

Value of global carbon transactionsUSD bn


MOST AFRICAN COUNTRIES HAVE SIGNED THE KYOTO PROTOC OL AND HAVE SET UP DNA’S WHILE VERY FEW HAVE REGISTERED PR OJECTS

6

Registered projects

Registered DNA

Signed Kyoto Protocol

Have not signed Kyoto Protocol

# Number of projects

14

1

1

1

4

42

South Africa

Tanzania

UgandaNigeria

Egypt

TunisiaMorocco


AFRICA GENERATES A DISPROPORTIONATELY SMALL AMOUNT OF GREENHOUSE GAS EMISSIONS

7

Source: World Mapper, http://www.worldmapper.org/images/largepng/299.png

Greenhouse gas emissions by country


BUT WILL BE DISPROPORTIONATELY AFFECTED BY THE IMPA CTS OF GLOBAL WARMING

Human vulnerability

8

Flood riskDrought and human conflict risk

Increased malaria from increased temperatures

Melting

glaciers

Sea level rising and coastal flooding

Source: CARE International & Maplecroft, “Humanitarian Impact of Climate Change”


AFRICA IS LAGGING BEHIND OTHER DEVELOPING REGIONS I N TERMS OF CDM PROJECTS

9

143

355

248

105

126

729

106354 1314

2718 5

1,133

India

China

Brazil

MexicoSouth Africa

Number of CDM projects by region (as of 1 Aug 08)

#Number of countries with projects

19 18 7 4 2

Asia and Pacific

Latin America & Carribean

Africa Middle East

Other Total

50


A NUMBER OF BARRIERS TO CDM EXIST IN EAST AFRICA WH ICH SHOULD BE ADDRESSED

10

RecommendationBarrier

• Conduct sustained awareness campaigns in order to sensitize stakeholders from public and private sectorAwareness and

information

• Build technical capacity of project developers – project owners, technical and financial services providers, and key actors from public institutions

Technical capacity

• Provide direct support to start-up projects

• Sensitize financial services sectorAvailability of financial services

• Install efficient DNA equipped with sufficient financial and human resources

• Establish a transparent and unbureaucratic project approval process

Institutional capacity

• Streamline climate change and CDM into policy framework

• Include sectoral regulations relevant to different types of CDM projects

Legal / Policy framework

Source: GTZ, “Clean Development Mechanism in Relation to Energy in East Africa”


CONTENTS





THE CDM YIELDS FOUR MAIN BENEFITS

12

DescriptionBenefit

• The CDM assists in reducing global greenhouse gas emissionsReduction in GHG

emissions

• One of the core goals of the CDM is to contribute to sustainable development in developing countries by focusing on projects with strong development benefits

Sustainable development

• Results in an inflow of Euro-denominated foreign investment into developing countriesForeign investment

• Promotes technology transfer of emission reduction technologies from industrialised to developing countriesTechnology transfer


PRIORITY PROJECTS SHOULD FOCUS ON ADDRESSING KEY SUSTAINABLE DEVELOPMENT ISSUES

13

Projects should contribute to broad development goals…

• Eradicate extreme poverty and hunger

• Achieve universal primary education

• Promote gender equality and empower women

• Reduce child mortality

• Improve maternal health

• Combat HIV / AIDS, malaria and other diseases

• Ensure environmental sustainability

• Develop a global partnership for development

… Tailored for an individual country’s prioritiese.g. Ensure environmental sustainability

• Water scarcity and pollution

• Desertification and deforestation

• Degradation of fresh water ecosystems

• Water pollution and aquatic ecosystems

• Land degradation and deforestation

• Threats to biodiversity and ecosystems

• Land degradation and deforestation

• Habitat degradation and threats to biodiversity

• Water availability and pollution

• Water availability and access to safe water

• Livestock, soil erosion and land degradation

• Threats to biodiversity and endemism

Uganda

Ethiopia

Kenya

Tanzania

Source: UNEP, UNDP


CDM CAN ASSIST IN SUSTAINABLE ENERGY DEVELOPMENT

14

4,706Biomass fromforest residues

735

4,001Biofuel fromJatropha

Biomass from residualaaste from wood industries

261Fossil-fuel basedcogeneration

6,230Biomass fromagricultural residues

173Combined Cycle

23,593

3,686

25,488

929

32,154

1,051

Energy generation potentialMWEnergy source

Reduction in emissions‘000 tCO2e

Kenya Ethiopia Tanzania Uganda

Source: World Bank, “Low-carbon energy projects for development in Sub-Saharan Africa”


CONTENTS





CASE STUDY: CARBON CREDITS CAN TURN A MARGINAL RENE WABLE ENERGY PROJECT INTO A PROFITABLE ONE

16

Case study: Zafarana Wind Farm, Egypt

Capex

63

56

18

With carbon credits

Without carbon credits

14

8

With carbon credits

Without carbon credits

NPVUSDm

IRRPercent

CapexUSDm


CASE STUDY: CARBON CREDITS CAN ASSIST IN FINANCING ENERGY EFFICIENCY PROJECTS

17

Case study: Energy efficient street light retrofit, Johannesburg

NPV impact on municipalityUSDm

35

5

11

19

TotalFree energy efficient fixtures

Share of savings over time

Free installation


CARBON REGISTRATION TAKES PLACE IN PARALLEL TO PROJ ECT IMPLEMENTATION AND TAKES UP TO 12 MONTHS

18

# Approximate number of months

Monitoring and verification

Issuance of CERs

Project documen-tation (PDD)

Host country approval (DNA)

UNFCCC regis-tration

Initial scope (PIN)

Project registration CER issuance

Validation (DOE)

CDM development

1 1 3 2 1 1

Project development Feasibility

analysisFinancial closure

Con-cept

Cons-truction

Operation

Develop carbon strategy

Carbon commer-cialisation

Exclusivity agreement

Term sheetTransaction of CERs

ERPA

Due diligence


CONCLUSION: CARBON CREDITS CAN HELP MAKE SUSTAINABL E ENERGY DEVELOPMENT POSSIBLE

• The additional carbon revenue stream improves profitability and increases returns

• Upfront sale or other structuring of carbon credits can be used to subsidise capex or optimise project cash flows

• Inclusion of carbon credits opens up access to debt and equity financing. For example, South Pole’s Gold Standard Fund with Credit Suisse and AIL Structured Finance provides equity and mezzanine debt into renewable energy projects

19

Some of the financial benefits of carbon credits


Thank youfor your attention

JohannesburgJon Kornik1st Floor, Oxford GateHyde Park Lane, Hyde Park2196 JohannesburgPhone: +27 11 280 6620Fax: +27 11 280 [email protected]

BangkokIngo PuhlPhone: +66 2 678 [email protected]

BeijingMarco HirsbrunnerPhone: +86 10 8454 [email protected]

JakartaPaul ButarbutarPhone: +62 21 726 [email protected]

ZurichThomas CamerataPhone: +41 44 633 78 [email protected]

Mexico CityChristian DanneckerPhone: +52 55 11 [email protected]

Taichung (Taiwan)Jules ChuangPhone: +886 919 27 25 [email protected]

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