Integrating Carbon Currency into Project Financing

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Integrating Carbon Currency into Project
Financing

• K. Umamaheswaran
• GTZ IS Carbon Procurement Unit, India
• April 2008

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India - CDM Voyage

1. Complicated Development Mechanism
2. Carbon Disclosure Mechanism
3. Cash Development Mechanism

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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Financing.

• Project finance, financing projects based upon a
  financial structure where debt and equity are
  used to finance the project. Debt is repaid using
  the cash flow generated by operation of the
  project, rather than the general assets or
  creditworthiness of the project sponsors.
• Carbon finance, financing of projects based upon
  financial structure where debt, equity, carbon
  emission reductions. Debt is repaid using the
  cashflow generated by operation of the project,
  Carbon Emission Reductions are transferred based
  on pre agreed price.

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Carbon Financing
Depends on project type / CER generation
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Carbon Financing
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Financing Options

• Project Financing
• Project activity physical funding
• Equity - SPV
• Technology / OM,
• Corporate loan
• CDM Financing
• Transaction Costs - CDM Cycle
• PDD, Validation, New Baseline Methodology,
  Registration Charges, Verification

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Financing Options

• 3. ERPA Based Financing
• Transaction Costs - CDM Cycle
• PDD, Validation, New Baseline Methodology,
  Registration Charges, Verification

• 4. Institutional Financing (SPV Model)
• Financial Institutions
• State Level Nodal Agencies
• Technology Developers

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Integrating - Carbon Financing
PROJECT DEVELOPER
ERPA
Equity Partner
Debt
Carbon Credit Buyer
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Upfront Financing
- Case Study
Project Details
200 TPD MSW Project 16250 TPA Compost
Under Construction
Capital Investment 6.2 Crores
Annual OM 3.2 Crores
3 Compost Projects Single project developer
CDM Transaction Cost by Project Developer
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Upfront Financing
- Case Study
Project Details CDM Transaction Details
200 TPD MSW Project 16250 TPA Compost 29,815 annual 318,885 CERs till 2012
Under Construction Under Validation
Capital Investment 6.2 Crores CER Contract Value 9.83 Crores
Annual OM 3.2 Crores Annual CER Revenue 1.96 Crores
3 Compost Projects Single project developer Upfront 20 of Total Deal 1.9 Crores
CDM Transaction Cost by Project Developer 3 Separate Projects
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Risks - Influencing Transaction

• Regulatory
• Regulatory clearances of the Project
• Dynamics of CDM Regulatory Process (Validation,
  Registration)
• Institutional
• Creditworthiness of Project Owner
• Stability of the political and investment climate
  of the project parties
• Technology
• Creditworthiness of the technology
• Penetration of the technology
• Project Proponent technical expertise
• Miscellaneous Risk
• Environmental and social compliance additional
  benefit
• General Market Risks

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What buyers are looking for?

• Risk Free projects
• National Institutional risks DNA / tax /
  sharing etc.,
• Non-delivery of CERs
• Projects with financial closure / Investment
  risk issues
• Easy and ready to implement
• High net worth and corporates (proven
  credibility)
• Technology Proven
• Regulatory scenario - additionality
• Low cost High Volume CERs

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Challenges - I

• Lack of experience of Integrating Carbon Finance
• Carbon Revenue not conceived in early Stage
• Transparency in Carbon Market ????
• Bilateral investment for project funding ?
• CER Transaction Lacking compared to China and
  Brazil
• Legal issues not addressed properly

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Challenges - II

• Carbon Revenue Accounted in India ????
• RBI regulations - Not conducive with ERPA based
  Upfront
• Financial Institutions CF Model ????
• Time Lines Lengthy
• Credential - Project Developer
• Guarantee

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Challenges - II

• Monitoring and Verification, significant barriers
  - Small and scattered REEEP projects
• Targeting SME Sector - Lack of funding
• High Potential Sectors yet to be tapped
• Waste Management System
• RM of Power Plants
• Biodiesel

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Way Ahead

• Integration of GHG emissions reduction activities
  in development assistance and national
  development programmes
• Response Government's role critical as a
  facilitator with different Bilateral
  /multilateral organizations in organizing Carbon
  trade fairs or Expos
• To create a equal platform for small, medium and
  large sellers

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GTZ CPU Offers...

1. Project Identification
2. Technology Assistance
3. Upfront Financial Models
4. Carbon Financing Priority
5. Structuring Financial Contracts
6. Legal Assistance
7. Sustained Delivery of emission rights

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CDM Projects Criterion

• Project should generate 200,000 CERs till 2012
• Minimum annual generation 40,000 CERs
• Approved methodology
• Projects credibility on timely and sustained CER
  delivery
• Strong possibilities of project commissioning and
  operation
• Environmental and social compliance and
  additional benefit
• Project implementation regulatory clearances
• Project developer business credentials and
  project operation
• Price expectation per emission credit

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Thanks for your attention

• K. UmamaheswaranCarbon Procurement Unit
  (CPU)Gurgoan, New Delhi
• 91 98104 22689 umak_at_gtzis-cpu.com
• www.gtzis-cpu.com

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Time to Act.
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Transaction..

• Project Developer Strategy ?
• When How to Sell the emission credits
• Basic Criterion
• Project Investment ???
• Project Technology ???
• Funds for Future Business Development

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Transaction Mechanisms

• Forward Contract
• Option 1 Fixed Pricing
• X Euro / CER
• Upfront Financing (Part / Full)
• Pledge ERPA to Raise Money
• Option 2 Market Linked Pricing
• X of EUA / Secondary CER price, on the day of
  CER delivery
• Upfront Financing (Partial Initial Vintage)

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Transaction Mechanisms

• Spot Contract
• Sales after CER Generation
• Fixed price
• Payment on Delivery of CERs
• No Risks