Gold Standard for Large Projects Some thoughts from a commercial point of view International Confere

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Gold Standard for Large Projects?Some thoughts
from a commercial point of viewInternational
Conference Climate Protection as Development
OpportunityHamburg, June 7, 2004

• Bernhard Zander
• Vice President
• KfW Carbon Fund Project
• Tel [phone]
• bernhard.zander_at_kfw.de

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Outline of the Presentation
Basic facts about KfW
1
KfW Carbon Fund The concept
2
The Gold Standard Some thoughts from a commercial
point of view
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Basic facts about KfW
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KfW BankengruppeAt a glance

• Name KfW
• Shareholders Federal Republic 80, federal
  states 20
• Headquarters Frankfurt am Main
• Branch offices Berlin, Bonn
• Foreign offices Brussels and 28 offices in
  developing and emerging countries
• Liable equity EUR 10.4 billion
• Balance-sheet total EUR 314 billion
• Rating AAA / Aaa
• Employees 3,600 (as of Dec. 31, 2003,
  liable equity only KfW, not
  the group)

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KfW Bankengruppe New brand structure

Consultancy for the federal government on the
privatisation of state enterprises,other
advisory services
Promotion of housing, environmental and climate
protection, education, infrastructureand the
social sector
Export and project financing, investment
andcorporate financing
Promotion of SMEs, business founders and start-ups
Promotion of developing and transitioncountries
Investment Finance in Germany and Europe
Financial Cooperation
Export and Project Finance
Advisory and other Services
KfW IPEX-Bank at first as a brand name from
Jan. 2008 as a legally independent 100
subsidiary of KfW Bankengruppe
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KfW BankengruppeNew commitments in 2003 by areas
of business
Total EUR 72.3 billion
as per Dec. 31, 2003
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KfW Bankengruppe KfWs climate protection
activities

• Investment finance in Germany
• Environmental Investments / Renewable Energies
  Programme
• Housing Modernisation Programme / CO2-Reduction
  Programme
• Participation in pilot schemes
• Hessen Tender
• Hamburg Competition
• Initiative KfW CO2-neutral
• Compensation of own CO2 emissions
• Participation in the CDCF of The World Bank
• KfW participates with USD 2.5 million in the
  Community Development Carbon Fund (CDCF) of the
  World Bank providing carbon finance to
  small-scale CO2 reductions projects in the
  developing countries.
• KfW Carbon Fund
• Instrument to utilize the flexible Kyoto
  mechanisms.

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The KfW Carbon FundThe concept
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KfW Carbon FundFramework Conditions

• Kyoto-Protocol Marrakech Accord
• Project-based Mechanisms- Joint Implementation
  JI
• - Clean Development Mechanism CDM
• No Emissions Trading

• European Emissions Trading System (ETS)
• Linking Directive for JI and CDM

• GHG Emissions Trading Law (TEHG) / National
  Allocation Plan (NAP)
• Specific CO2-emission limits (caps) for 2,400
  installations in Germany
• Affected companies need to develop Carbon
  Strategies

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KfW Carbon FundObjectives

• Objective
• Cost-effective purchase of emission certificates
  for German/European enterprises, which can be
  converted into EU Allowances
• Purchase of Compliance Tools (CERs, ERUs,
  project based EUAs, no AAUs)

• Overall goals
• Promotion of investments in climate protection
  Transfer of modern climate protection technology
• Contribution to sustainable development (CDM)
• Reliance on Kyoto institutions and procedures
  (EB, DoEs, national authorities)

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KfW Carbon FundFund Concept

• Setting-up a Purchase Programme (Buyers Pool)
• KfW acts as a trustee in its own name for account
  of participating companies/institutions on the
  basis of Agency Contracts
• Long-term Purchase Contracts (fixed amount, fixed
  price)(Emissions Reductions Purchase Agreement
  (ERPA)) are concluded with suppliers of
  certificates
• Additional flow of income for climate protection
  projects
• Improved cashflow and return on investment
• Increased attractiveness to equity providers and
  lenders (bankability)
• No direct Financing Function
• Financing of project investments through the
  capital market
• Possibly additional financing or credit
  enhancement through ERPA as part of the
  securities package

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KfW Carbon FundExample Structure of Project
Partnership
Community of Fund ParticipantsEnterprises, etc.
ECA- Guaranteeas required

Credits
Project CompanyExample Combined Heating and
Power Plant


Bank
Credits
KfW Carbon Fund


Investor/Project Developer
Equipment

PowerHeat
Power OfftakerHeat Offtaker
Contractor
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KfW Carbon FundStructure of Contracts
Participant 1
Project 1
ERPA
KfW Project Portfolio (KfWCarbon Fund)
Agency contracts
Project 2
Participant 2
Project 3
Participant 3
Project n
Participant x
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KfW Carbon FundProject Selection (I)

• Principle
• Portfolio management by the Fund manager (KfW)
  under the aspects of risk and return in the
  interest of the fund participants

• Objective
• Investment grade project portfolio

• Main criteria
• Delivery risk
• Price per ton of CO2e
• Transaction costs (normally minimum of 50,000
  t/pa CO2e per transaction)

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KfW Carbon FundProject Selection (II)

• Main Risk Considerations
• Counterparty risk relates to the
  credit-worthiness of counterparties
• Performance risk technologyrelates to
  operational and/or commercial aspects of
  technologies utilized
• Performance risk carbonrelates to the
  technology and extent to which generation,
  creditability, volume and ownership of
  certificates is affected by the particular type
  of technology
• Performance risk countryrelates to the
  investment climate in the host country
• Regulatory risk countryrelates to the
  convertibility of certificates from projects into
  compliance instruments and the crediting and
  transferring of such instruments

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KfW Carbon FundFund Volume / Time Schedule

• Target volume 50 Mio (First closing 25 Mio )
• KfW up to 10 million (min. 20 of total
  volume)
• German Goverment 8 million (export promotion
  for RE technology)

• Time schedule
• First Tender (CDM) by mid 2004
• Project selection (First round) until end 2004
• Deadline for participation of buyers end of
  2004

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The Gold StandardSome thoughts from a
commercial point of view
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Gold StandardQuality Standards

• Definition of Technologies
• Additionality
• Sustainable Development

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Gold StandardDefinition of Technologies

• Renewable energy
• Biomass, Biogas, Small Low Impact Hydro
• Energy efficiency
• End-use only, no fossil-fuel switch
• restrictive selection in terms of cost/t of CO2e
• tendency towards smaller projects built in
  selection criteria

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Gold StandardAdditionality

• Technological Additionality No proven
  technology, not commercially viable
• Tendency towards higher risk projects
• Investment Additionality Country risk, project
  economics, lack of local credit, market
  distortions, institutional barriers
• Not very practical, huge burden on
  validatorsor very costly to assess
  (transaction costs)
• Environmental Additionality Use of most
  conservative baseline
• Tendency towards higher prices
• Financial Additionality No ODA for investment
  costs, no ODA for purchase of CERs
• Exclusion of investment costs unnecessarily
  restrictive, will exclude many reasonable
  projects with other economic and social benefits
• Works against countries with limited access to
  capital markets

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Gold StandardSustainable Development

• EIA large projects, environmental risk, public
  consultation
• In principle in line with requirements of
  official and commercial lenders but may be
  costly in relation to transaction size carbon
  buyer should be able to rely on lenders
  judgement
• Sustainable Development local/regional/environmen
  t, social sustainability and development,
  economic and technological development
• difficult and costly to assess, overrules host
  country responsibilities (transaction costs)
• Criteria favor smaller and decentralized projects
  (higher risk)
• Public Consultation stakeholders, local and
  national NGOs
• EB requirement anyway, duplication should be
  avoided also standard for large projects in many
  national EIA procedures and in international
  standards (Worldbank,EU)

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Gold StandardConclusions

• GS generally favors higher cost technologies
• Additionality and sustainability criteria will
  result in higher delivery risk
• Additional GS procedures will increase
  transaction cost
• Commercial buyers have little incentive to pay
  higher prices unless these are compensated by
  lower delivery risk
• Restrictions on use of ODA rule out attractive
  project and support opportunities

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Gold StandardRecommendations

• How to make Gold Standard projects competitive?
• Avoid duplication of existing control and
  evaluation mechanisms as far as possible
• Look for third party subsidies for transaction
  costs (ODA?)
• Rethink ODA issue and use ODA to subsidize
  investment cost and to mitigate delivery risk

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Thank you very much for your attention!

• KfW Group
• KfW Carbon Fund Project
• Tel [phone]
• klimaschutzfonds_at_kfw.dewww.kfw.de