mdg carbon facility: what it is and how it operates presented by marina olshanskaya tuesday, 25...

MDG Carbon Facility: what it is and how it operates

Presented by Marina OlshanskayaTuesday, 25 September

RBEC Energy and Environment Community of Practice Meeting24-26 September 2007, Bratislava

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RBEC Energy and Environment CoP Meeting

Presentation Overview

• Carbon market: latest update

• MDG Carbon Facility Services

• MDG Carbon Facility Business model & offer

• MDG Carbon roles for COs

• MDG Carbon Due Diligence (group work)

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Current status of carbon market: volume

• Market capitalization reached $ 30 bln

• Near 3-fold increase in 2005-2006

• CDM/JI – 18% of the total market volume

• Voluntary markets: insignificant share, but rapid growth

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Current status of carbon market: location of CDM/JI projects (share of volume)

• China continues dominating CDM market, with India and Brazil coming 2nd and 3rd

• RBEC non-Annex I countries remain largely unrepresented

• RBEC Annex I countries more equally represented with Russia, Ukraine and Bulgaria on the top of the list

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Current status of carbon market: prices

• Average prices for primary CERs in 2006 - US$10.90 (€8.40), a 52% increase over 2005

• ERUs average price in 2006 increased to US$8.70 (€6.70), a 45% year-on-year rise

• But ERUs remained cheaper than CERs on average

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More information on carbon market

• State and trends of the carbon market 2007, World Bank at www.carbonfinance.org

• Pointcarbon, www.pointcarbon.com• Prices and carbon market news

service (free)• JI/CDM Monitor (subscription

available - let Marina know if interested)

• Climate-L: news and announcement list service on climate change policy and issues

• UNEP Riso Centre: www.cd4cdm.org • Publications and CDM/JI pipe-line

EUA price last 30 daysEUA price last 30 days

http://www.iisd.ca/email/climate-L.htm http://www.iisd.ca/email/climate-L.htm

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UNDP’s Challenges in Developing Carbon Projects

• As a technical assistance agency, UNDP does not have the mandate to trade carbon emission reductions and take on carbon market risks

• UNDP will need to mobilize some working capital to meet start-up costs;

• MDG Carbon supports commercial project developers and operates on a full cost-recovery basis. This is a major departure from UNDP’s traditional business model;

• MDG Carbon fee policies must be supported by an ongoing, rigorous and transparent financial modeling process.

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Overview of the MDG Carbon Facility Partnership with Fortis

Fortis

Project Proponents

UNDP

2 Year Agreement

(15M tCO2)

??? Payment of Cost Recovery Fee

III. Payment for Credits

II. Delivery of Carbon Credits

I. Project Development Services

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Services Offered by the Facility

Project Year

Milestone Services Offered by Facility include

Year 1 CDM/JI registration;agreement of CER/ERU sale

- project identification and initial screening - preparation of project documentation - due diligence

Year 2 Project commissioning

- basic oversight and technical assistance on implementation

Year 3 1st year of credit issuance

- monitoring support and pre-verification of credits

MDGCF services

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UNDP - Project Development Services

Part 1:Due

Diligence

Part 2:Project

Documentation

Part 3:Establish

Monitoring System

• Five Tools

• Carbon Layer

• Technical Feasibility

• Finance & Legal

• MDGs and Environment

• Country risk

• Two step process

• Initial screening

• In depth evaluation

• Preparation of documentation

• Approval by host country and

CDM Board

• Review by 3rd party auditors

• Implementation and oversight

of monitoring system in project’s

first year

ERPA 1st Credit

Issuance Registration

Part 1:Due

Diligence

Part 2:Project

Documentation

1st installment:

71K

2nd

installment: 142K 3rd

installment: 72K

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Fortis

Project Proponents

UNDP

2 Year Agreement

I-II-III Payment of

Cost Recovery Fee

III. Payment for Credits

II. Delivery of Carbon Credits

I. Project Development Services

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Fortis – Carbon Banking Services

• 15 million credits

• Key feature: one price across the portfolio,

irrespective of project characteristics

• Benefits for project proponents

• Fixed price protects against market

downside

• Advance payment for UNDP’s Cost-

Recovery Fee

• Fortis as a solvent counterparty

FeaturesCarbon Market Price

ECX CFI Futures Contracts2006 - 2007 YTD

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

03/0

1/06

28/0

2/06

26/0

4/06

22/0

6/06

17/0

8/06

12/1

0/06

07/1

2/06

05/0

2/07

02/0

4/07

29/0

5/07

Pri

ce p

er t

on

ne

(EU

R)

Dec07 Sett Dec08 Sett

Source: European Climate Exchange, as of 6/25/07

MIN

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Business Model: RFP Pricing

RFP Pricing Approach

• Standardized price for all projects across the portfolio

• Fixed purchase price per credit for all credits delivered under ERPA

• Pricing formula• Price determined at ERPA signing as HIGHER of

• Floor component (10 EURO/tCO2)OR

• Rolling component (% discount to EUA Phase 2 Price one year ahead)

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Business Model: RFP Pricing

Pricing Formula Example

• Illustrative FSP Pricing• Floor: €10• Rolling Component: e.g. 50% discount

• Example at two market prices:

EUA Phase 2at €12

EUA Phase 2at €22

Floor Component

RollingComponent

€10.00 €10.00

€6.00 €11.00

MIN

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What Price Will Fortis Pay for Carbon Credits?

MAIN BENEFITS OF FORTIS DEAL: • Standardized price for all projects across the portfolio• Guaranteed minimum price of 10 euros• “Rolling” component to take advantage of market upturns

• Pricing formula

• Has a floor of 10 euros – this is an excellent hedge against market volatility

• Cannot reveal the “rolling” component discount

• But if it was applied today, the price would be substantially higher than 10

euros

• Reveal price when they enter into Letter of Exclusivity

• This is standard practice for commercial confidentiality

• Need to screen the proposal before revealing the price

• Bank will offer to market (for free) credits beyond the 80%

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Business Model: Host Country MoU

• Host Country MOU is entered into with the government, covering all UNDP’s activities regarding MDG Carbon in that country;

• Host Country MOU is an obligatory requirement in every country in which MDG Carbon will operate. This is because MDG Carbon’s Cost Recovery Fee is unique to UNDP and the Host Country MOU effectively ensures UNDP is acting within its financial rules and regulations.

• UNDP signatory to the Host Country MOU should be the RR or his/her designate based on Delegation of Authority from HQ

Key ProvisionsObjectives

• Host country government authorizes UNDP to provide JI/CDM project development services to project proponents on a cost recovery basis

• Host country should refer to this MoU in each Letter of No Objection and Letter of Approval issued to MDG CF Project Proponents

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Business Model: UNDP Documents & Agreements with PP

Information Note

• Informational / marketing• Manage liability from exclusive relationship with FSP

Memorandum of Understanding

• Manage risk and costs in performing due diligence, negotiating Service Agreement

Service Agreement

• Manage risks and ensure payment for services deliveredUNDP’s

Objective

• Sets out UNDP objectives in carbon• Sets out rationale for exclusive FSP, including RFP process• Sets out “one-stop-shop” approach• Overview of UNDP services and payment terms• Establishes PP freedom of choice• Disclaimers on PP risks and securities laws

• Mutual, non-binding intent to enter into Service Agreement• Exclusivity period of [3-6] months• Overview of due diligence activities and early termination• Contingency on FSP’s LoE• PP disclaimers regarding UNDP’s liability for FSP actions

• Details scope and nature of services• Details payment terms and milestones• Limits UNDP liability• Defines Events of Default, including contingency on ERPA

KeyContent/

Terms

Document &

Signatories

• Document is only delivered, not signed• Document later incorporated as annex in MoU and Service Agreement

• Exclusivity agreement in “UNDP language”• Signed by Country Office and PP

• Consists of two core components(i) Cost-sharing agreement(ii) Project document• Signed by Country Office (DoA from BDP) and PP• Government involvement via DNA Letter of Approval

• First contact. Prior to DD screening

• Prior to/beginning of DD evaluation• Parallel to signing of FSP’s LoE

• Prior to PDD development• Parallel to signing of ERPATiming

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Fortis

Project Proponents

UNDP

2 Year Agreement

A) LoEB) Emissions

Reduction Purchase Agreement (ERPA)

Payment of Cost Recovery Fee Payment

for Credits

Delivery of Carbon Credits

A) MoUB) Cost Recovery Service Agreement

Project Development Services

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UNDP - Cost Recovery Fee

Payment ApproachCost Recovery Fee

• Projects lack capital, Fortis advances the costs

• Payment in 3 installments on meeting pre-

defined milestones

• Full cost-recovery for direct costs

• Cost recovery fee based on ongoing,

rigorous modeling exercise

Central SupportRegional Tech AdvisersCountry OfficeConsultantTravel/Other3rd Party CDM CostsTOTAL

$39k$71k$52k$53k$30k$41k$285k

ERPA

1st CreditIssuance

Registration

25% $71k

50% $142k

25% $72k

Milestone %age Amount

2020


Initial Project Pipeline - Regional Distribution of Projects

RBA RBAP RBEC RBLAC RBAS TOTAL

2007 Total Number of Projects Initiated 0 3 - 4 3 - 4 3 - 4 1 - 2 10 - 142008 Total Number of Projects Initiated 1 - 3 5 - 8 5 - 8 5 - 8 2 - 3 18 - 30

TOTAL 1 - 3 8 - 12 8 - 12 8 - 12 3 - 5 28 - 44

MDGCF projected pipeline

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UNDP - Team Structure

Country Office RoleMDG Carbon Facility Team

Part 3:Monitoring System

Part 1:Due Diligence

Part 2:ProjectDocs.

RTACO

Conslts

Project 1 Project n

RTACO

Conslts

• Assist in

identifying/

sourcing projects

• Assist in due

diligence and

gathering of

documentsTechnical

Finance & Legal

Execution

• Assist in project

documentation

formulation

• Liaise with local

authorities and

actors

• Oversee

collection of

operational data

• Desk top review

and site visits

Central Support

Carbon Projects

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Roles for Country Offices

Working closely with RTAs

Initiation:• Using GEF projects to remove barriers to private sector

investment in emitting sectors• Where appropriate, capacity development in host country

that leads to project opportunities • Assist host government to ensure efficient and effective

DNA processes and project approvals • Canvassing opportunities for carbon finance

• Identifying projects undertaken through GEF that have the potential for replication with CDM

• Recognising project opportunities that come forward that are better suited to CDM than to GEF

• Assisting Project Proponents to develop an effective PIN

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Roles for Country Offices (cont’d)

Project development:• Facilitating host country Letter of Approval and other requirements

for projects• Assisting RTAs and HO staff to gather necessary due diligence

documents, in particular in assessment of country risk• Providing in-country ‘reality check’ of projects under development• Country level input to MDG assessment

Implementation:• Where necessary and feasible, provide technical assistance to project

design &construct• Where necessary, facilitate government-project interaction• Where necessary, provide oversight of governance of project

Monitoring:• With RTAs, ensure monitoring is undertaken as required in the PDD

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MDG Carbon due diligence

Commercial banks buying ‘product’ (emission reductions) – they need to be sure they are committing to a stable, safe partner in project proponent

requirement for formal due diligence process

MDG Carbon due diligence process that all projects must undergo:

Phase 1: Screening

• CDM eligibility, financial and technical feasibility etc.

• early elimination of ineligible or unviable projects

• low cost to screen

Phase 2: Evaluation

• in depth

• May require additional studies or info collection

• Recommend either for commitment or rejection.

• Risk areas are identified and risk management strategies developed.

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Due diligence Aspects

Due diligence on 5 aspects:

A. Carbon layer

B. Technical feasibility (engineering)

C. Financial/Management/Legal viability

D. Compliance with environmental & social principles + MDG impacts

E. Country risk

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Due diligence aspects in Screening and Evaluation

Carbon layer Technical

feasibilityCountry

risk

Commitment

SC

RE

EN

ING

EV

AL

UA

TIO

N E&S compliance + MDG impacts

Financial and Legal

• Intensity of due diligence varies between screening & evaluation depending on aspect

e.g. carbon layer due diligence performed mainly at Screening while MDG impact assessment requires more effort and is conducted at Evaluation

Due diligence applied in coordination and iteratively

e.g. if Carbon layer assessment reveals low volume of CERs, the underlying financial security is analyzed before continuing with other aspects

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www.undp.org/mdgcarbonfacility/www.mdgcarbonfacility.org/

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Group work: Kazan Biogas Project

• Group 1: Carbon layer (Anita)

• Group 2: Technical feasibility (Dima)

• Group 3: Financial/management/legal (Jamila)

• Group 4: Env & social safeguards + MDG impact (Katalin)

• Group 5: Country risk (Aleksandar)

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Group work: results (5 min per group)

• Key Project strengths and benefits (A-B)

• Key identified risks (C-D)

• Risk management strategies for identified risks

• Overall recommendation (A-D)