Emission reduction value in

financing clean energy projects

By Jan-Willem Martens EcoSecurities

2 EcoSecurities

• EcoSecurities leading greenhouse gas advisor (Environmental Finance survey, 2001, 2002, 2003, 2004)

• Five offices around the world, 27 people

• Currently working on over 70 CDM projects in more than 50 countries

• Active in sale of CERs

3

EcoSecurities Group

Oxford

Rio de Janeiro

Den Haag

Los Angeles

New York

4Overview

1. Introduction

2. Market Developments – Who is selling, who is buying ?

3. Project Transaction Issues

4. How can CDM help project finance?

5. How can CDM and ODA go together

6. Country competitiveness

7. Conclusions

5

Who are the players in the CDM market?

6What determines the CDM cash flow?

• CDM project revenues

• Price of the Certified Emission Reduction (CER)

• CER market price

• Availability of buyers

• Perceived contribution to sustainable development

• Credit sharing and taxing CERs in the host country

• Number of CERs

• Actual production the installations (MWh delivered)

• Carbon Emission Factor (CEF)

• CDM project cost

• PDD development

• New or existing methodology

• Host country approval

• Validation/verification

• Registration

7

How does the CEF influence the

number of CERs generated?

• As the CEF is the carbon emissions per actual production quantity (tCO2/MWh)

of a grid and renewable energy has an emission factor 0 so the quantity of CERs is determined by:

Production (MWh) * CEF (tCO2/MWh) = CERs (tCO2)

• CDM cash flows can provide a substantial contribution to the overall project in counties with a ‘high’ CEF.

Lower CEF Attractive CEFCountry CEF Country CEFMalaysia

Thailand

Philippines

Indonesia

0.610

0.611

0.623

0.710

Vietnam

Singapore

China

India

0.835

0.922

1.027

1.055

8

Division of CDM project types

Division is based on an analysis of 130 PDDs for CDM projects

22%

17%

17%11%

8%

6%

5%4%

2%

2%

2%

4%

Hydropower

Landfill gas

Biomass

Efficiency

wind

Fuel switch

Geothermal

Anaerobic digestion

biofuel

cement

HFC-23 destruction

other

Source: EcoSecurities December 2004

9

Division of CO2 emission reductions from CDM

projects

Total amount of Results based on a selection of 130 CDM project proposals

29%

16%15%

10%

6%

6%5%

4%

3%

2%

1%

3%

N2O reduction

HFC-23 destruction

Landfill gas

Hydropow er

Geothermal

Eff iciency

Biomass

Fuel sw itch

flare gas recovery

w ind

Anaerobic digestion

Other (< 3Mt)

Source: EcoSecurities December 2004

10Funnel Effect for CDM projects

100 JI/CDM project ideas

20 JI/CDM PDDs

10 validation

5 JI/CDM

11Carbon Market Volumes 2004

12CER prices 2004

13Types of Buyers

Equity Investment

Purchase of emission reductions

Individual buyers

1.

Buyer invests in individual CDM/JI projects

2. Buyer purchases

emission reductions from individual CDM/JI

projects Intermediaries

3. Buyer invests in an

external CDM/JI Equity Investment Fund

4. Buyer participates in an external CDM/JI

Purchase Facility

14List of governments buying JI and CDM

tCO2e Governments

Austria 14 Mt Canada 20 Mt Belgium 24 Mt Denmark 20-25 Mt Finland 2.5 Mt Italy 11 Mt Spain 100 Mt The Netherlands 100 Mt Japan 95 Mt

Total ~ 490 Mt

Project Transaction Issues

16Who is carrying the risks?

• Registration risk – this is the risk related to getting the project registered under the CDM.

• Performance risk – Risk related to project performance (including political risk)

• International CER Transfer risk - When will the CDM registry be finalised? When will the ITL be finalised?

17Different ways to structure carbon finance

1. Contract form “guaranteed delivery”

2. Contract form “No guaranteed delivery”

3. Contract form with “floor price”

4. Contract form X% of the EUA market price

5. Sales of CERs on the EU Spot market (is it possible: Yes, no unilateral CDM, but obligation to report Annex I counter-party to CDM EB?)

18

How does risk influence the price of a

CER?

Production price

Credit risk

Delivery risk

Political risk

Counterparty risk

Margin

EUA price

Liquidity risk

19

Country Competitiveness

20

Does Geography Matter in CDM transactions?

• For most commercial buyers, price and risk sensitivity outweighs geographic strategy

• For government buyers, there are geographic preferences

• Denmark is targeting Malaysia, Thailand, South Africa and Central America

• PCF funds looking for a global approach with sectoral distribution

• Forthcoming DBJ fund is expected to be “Asia weighted”

• Does this mean ASEAN or India/China

• For multinational “buyer/sellers” internal CDM opportunities are very attractive

• However, exposure to a country does not equate desire for exposure to 3 rd Party CDM CERs from that country

• Expectation should be for MNC’s presenting their own CDM projects to host nation DNAs – 3 rd party project finance will give way to balance sheet corporate finance as the dominant paradigm

21

How do buyers assess attractiveness of

projects?

• Likelihood of Project Approval at host country and EB level

• Credit sharing and taxing CERs in the host country

• Credibility of Counterparty

• Price, price, price and price

• Who covers upfront costs prior to ERPA?

• Divisions of risk between buyer and seller

• Underlying project risks (technology risk, political risk, market risk, etc)

• Will seller deliver even if it experiences underperformance?

• Willingness to give buyers options for residue at;

• Same price or discount to market price

22

What can countries do to improve their

position?

• Assuming the DNA office is competent and knowledgeable, keep individuals in position as long as possible

• Continuity is key

• Domestic capital for asset finance (either project or corporate) must understand that these cash flows are bankable

• CDM enhances project economics, still requires underlying capital and domestic is the most realistic source

• CDM alone cannot overcome other cross border investment biases but can create interest in new opportunities from unconventional sources

23

Thank you!