Kyoto and Beyond: Opportunities for Flemish Business in Carbon Finance

1
Kyoto and Beyond Opportunities for Flemish
Business in Carbon Finance

• Veronique Bishop
• Carbon Finance Business
• The World Bank
• Presentation to Export Flanders
• May 26, 2005

2
Outline

• Kyoto Protocol basics
• Impact of carbon finance on your projects
• Key issues
• Working with the World Bank

3
Kyoto Protocol Basics

• Entered into force Feb 16
• OECD countries will need 5.5 btCO2e
• Gap may be met by
• Domestic measures 50
• EU Emissions Trading Scheme
• Trading via 3 KP mechanisms
• Clean Devt Mechanism
• Joint Implementation
• Intl Emissions Trading

4
EU Targets under Kyoto
5
Structure of the Carbon Market

6
Volume Traded Through Projects Growing (in
million tCO2e)
(Jan-Apr)
7
CDM, JI by sector of CDMJI 150m t CO2e
traded Jan. 2004 - April 2005
8
CDM, JI by host country of CDMJI 150m t CO2e
traded Jan. 2004 - April 2005
9
Impact of Carbon Finance

• Emission reductions are calculated relative to a
  baseline
• Key elements
• CO2 reduced by displacing fossil fuels
• Mitigation of methane, nitrous oxide, other GHGs
• CO2 sequestered eg through agroforestry
• Impact depends on technology, ER price
• Price depends on
• Risk and risk-sharing
• Supply and demand within market segment

10
Carbon revenues depend on price fossil fuel
displaced
Fuel Displaced Generic Emissions Factor (tCO2e/MWh) Carbon Revenue at US4/tCO2e (US/MWh)
Gas 0.40 1.60
Coal 0.85-1.0 3.40-4.00
Diesel 0.75-1.50 3.00-6.00
ER cash flows improve IRRs by 0.5 2.5
11
Carbon prices Project-based (weighted average
prices from Jan. 2004 to April 2005 in U.S. per
metric tonne of CO2e)
12
Impact by Technology
13
Impact by project
Sector Country/Project Incremental IRR . Discounted Payback Per.
Landfill CH4 Brazil Nova Gerar 32.70 0.3
Landfill CH4 South Africa Durban 32.60 0.5
Landfill CH4 Argentina Olavarria 13.30 0.7
Energy Eff. Indonesia Indocement 12.80 1.1
Coalmine CH4 China Jincheng 8.00 1.5
BiomassCH4 Bulgaria Svilosa 5.00 3.6
Biomass Hungary Pannonpower 2.00 4.9
ForestryBio Brazil Plantar 4.70 1.8
Forestry Romania Afforestation 0.60 6.2
Hydro Ecuador Abanico 2.10 6.8
Hydro Peru Poeches 0.70 12.4
Wind Philippines Northwind 0.40 20.0
Wind Colombia Jepirachi 0.70 23.1

14
Impact of Carbon Finance

• Revenue boost
• 3 to 5 per MWh for renewables, EE
• Up to 20 per MWh /60/tcm for CH4 mitigation
• High quality cash flow
• OECD - sourced
• Investment-grade payor
• - or - denominated
• Eliminate FX risk
• Financial engineering helps tap capital

15
Issues in executing projects

• Lack of access to financing
• High capital cost, long payback period
• Risk ( risk aversion)
• Tariffs
• Collections
• Borrowing against revenue streams
• Loan cost tenor
• Availability of risk mitigation instruments
• A solution carbon finance

16
Kyoto Protocol Constraints

• CDM, JI
• Complex uncertain eligibility rules
• Lead time
• Underlying financing
• Industrial gases lack sustainable development
  impact
• Small, poorer countries are bypassed
• Post 2012?
• IET
• Sellers must meet prerequisites
• Buyers want AAUs to be backed by real emission
  reductions

17
World Bank solutions

• CDM, JI
• Benchmark new methodologies
• Help Host Countries develop project pipelines
• Catalyze underlying financing
• Demonstrate greening of industrial gases
• Seek clarity govt commitments beyond 2012
• Defray KP registration risk
• IET
• Green Investment Schemes to fund RE/EE investment
• TA to help sellers meet prerequisites

18
World Banks role

• Help OECD countries address CO2 shortfalls
• Catalyze climate-friendly investment in
  developing and transition countries
• Benchmark methodologies
• Inform buyers, regulators, public

19
How Carbon Funds Work
Technology

Finance
Industrialized Governments and Companies
Developing Countries and Communities
Bank Managed Carbon Fund
Payment on delivery of emissions reductions, not
up-front capital costs
20
World Bank Carbon Finance
Prototype Carbon Fund
180 m
128.6 m to date
Community Development Carbon Fund.
43.8 m to date
BioCarbon Fund
Netherlands CDM Facility 180 m
80 m to date
Italian Carbon Fund
Netherlands Europe and CentraI Asia Facility
(with IFC)
Netherlands ECAF
35 m
200 m
Spanish Carbon Fund
30 m
Danish Carbon Fund
21
Securing Underlying Finance
Host Country
Ltr. of Approval

• Engagements re
• Regulation (e.g. tariffs)
• Kyoto Protocol
• compliance

CF
ERPA
ERs
ER pmt
Sponsor/ Project
22
Securing Underlying Finance
Host Country
Ltr. of Approval

• Engagements re
• Regulation (e.g. tariffs)
• Kyoto Protocol
• compliance

CF
ERPA
ERs
ER pmt
Sponsor/ Project
Lender?
Loan ??
23
Future flow structure Plantar
Brazil
Ltr. of Approval
PCF
ERPA
ER pmts 5 m
ERs
SPV
Financing Agr.
Rabobank
Project
Loan 5 m
ER payments placed in offshore escrow
24
Brazil Plantar Sust. Fuelwood
ER payments amortized 100 of commercial loan
principal
25
Ecuador Abanico Hydro

• 30 MW ROR hydro
• 85 capacity factor
• 33.3m cost
• IRR 15.6

• 800,000 tCO2e ERs
• ERPA 4m
• rIRR 0.73 gt 16.3

26
Future flow structure Abanico
Ecuador
Ltr. of Approval
NCDF
Hidrobanico
ERPA
CER pmt 4.03
ERs
SPV
Financing Agr.
IIC
Project Co.
Loan 7 m
Off-taker
PPA
CER payments placed in offshore escrow
27
Abanico Cash Flows
CF Impact in Annual Debt Service, including
interest ()
33.3
19.4
41.4
44.5
48.0
52.1
57.0
CER payments helped project meet IICs investment
criteria
28
Abanico Project

• Carbon finance enabled project to
• Meet IICs investment criteria
• Lower interest rate by 100 bp
• Expedite financial closure
• In one of L. Americas riskiest countries

29
Uganda ERT
30
Financial engineering solutions

• E. Eur Green Investment Schemes
• Designed for Bulgaria, Romania
• Planned for Czech, Slovak, Latvia
• Dialogue beginning with Russia and Ukraine
• China Greening Industrial Gases
• Channel proceeds of ER sales from HFC23 to
  renewables and other sustainable investment
• Argentina carbon/investment fund
• Govt request for Bank assistance to help develop
  and deliver carbon assets to global market
• Bank seeking participation by bilateral

31
Financial engineering solutions

• Financial engineering of carbon transactions to
  facilitate lending against ERs
• Offshore escrow
• Long-term contracting
• Energy funds
• Senior-subordinated/mezzanine structure
• Risk mitigation instruments
• Direct financing
• Insurance

32
Conclusions

• Carbon finance
• Lowers compliance costs
• Improves returns on climate-friendly projects
• Provides a bankable revenue stream
• Is taking off Kyoto enters into force 1/4/05
• World Bank Groups role
• Support sustainable development
• Prepare the ground for the private sector
• Facilitate carbon market development
• Purchase ERs to catalyze investment

33
Carbon Market Structure
Project-Based Transactions
Allowance Markets
UK Emission Trading Scheme
Kyoto Pre-Compliance
EU Emission Trading Scheme
Chicago Climate Exchange
Not for Kyoto Compliance
New South Wales Certificates
Retail
34
Traded Volumes
60
Kyoto Pre-Compliance
Not Kyoto Pre-Compliance
40
20
0
1996
1997
1998
1999
2000
2001
2002
2003
Q1-Q3
Volume traded in project-based transactions, m
tCO2e
35
www.carbonfinance.org

• Thank you!