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					Programme of Activities: Challenges and
Opportunities
IV Seminario Internacional:
Mercado del Carbono

Presented by Alberto Carrillo Pineda
South Pole Carbon Asset Management Ltd.
Lima, Perú, October 22nd, 2009
Introduction


   The programmatic approach under the CDM has been
   received with great optimism among stakeholders in the
   carbon market for a number of reasons:
       Potential to increase the contribution of the CDM to the global
        mitigation efforts
       Possibility of achieving economies of scale
       Potential to capitalise policy instruments and programmes
        aimed at reducing emissions
       Potential to reach a number of actors that otherwise would
        have very limited access to the carbon market (e.g.
        households, small industry, etc.).
       Potential to increase the number of projects in regions and
        countries underrepresented in the carbon market (e.g. Africa)
  However...


            The programmatic CDM has taken too long to take off
            and realise its large potential...
                                                                                               EB 47 - Modification of procedures
                                                                                              and guidelines for the registration of
                                                                                                              PoAs
 EB 32 - Fist adoption of procedures
and guidelines for the registration of
                 PoAs

                            2007                               2008                                        2009
              Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep


                               Since EB 32                 CDM                         PoA
                            # of projects that
                            started validation
                                                           3425                         14
                            # of projects that
                                requested                   784                          1
                               registration
                         # of projects that got
                               registered
                                                            530                          1
Abstract


    Aim of this presentation


       Drawing from the market experience accumulated
        by South Pole and other market participants,
        introduce the audience to the main administrative,
        financial and operative challenges to be potentially
        faced when implementing Programmes of Activities
        (PoAs) under the Clean Development Mechanism
        (CDM)
       To discuss what has been done and what needs to
        be done in order to overcome such challenges
Content




           Challenges inherent to the nature of a
            Programme of Activities
           Regulatory and operative challenges
           Economic and commercial challenges
           Conclusions
Content




           Challenges inherent to the nature of
            a Programme of Activities
           Regulatory and operative challenges
           Economic and commercial challenges
           Conclusions
Challenges inherent to the nature of PoAs
Challenges inherent to the nature of PoAs


    -Logistics of implementation
       Documentation
         – Centralised data storage
         – Access to user information (e.g. For monitoring)
       Sampling / Monitoring
         – Usage / adoption patterns
         – Guidelines on sampling not yet available. Will have to be
           followed during verification once they have been issued by EB
         – Remote sensing
       Maintenance / Follow up / Replacement
         – Intensive field work
         – Disposal?
    -Ownership of carbon credits
Challenges inherent to the nature of PoAs (cont.)


    -Capacity building / education
    -Incentive scheme
         Free supply
         Discount
         Grant
         Subsidized loan
    -Mid and long-term management
       Effectiveness off programmes in the long term is still
        uncertain
    -Selection of appropiate coordinating entities
Challenges inherent to the nature of PoAs (cont.)

                     $

   Carbon                    Energy saving            $       Development                    $
                                                                                                  Power Utility
  developer                     agency                           bank
                   CERs
  Develops and               Coordinating entity
 purchase CERs                                                                                              Pays back
                                                                                 Provides                    through
                                                                              subsidized loan               power bill



                                                                    Commercialisation of fridge
   OEM                                   Retailer                                                  Household

                 Commercialisation
                    of fridges
                                                                          Freight
                                               Delivery of new
                                            fridge and collection        company
                                                                                                  Destruction of
                                                 of old fridge
                                                                                                    old fridge


                                                                                                  Destruction
                                                                                                    facility
Content




           Challenges inherent to the nature of a
            Programme of Activities
           Regulatory and operative
            challenges
           Economic and commercial challenges
           Conclusions
Regulatory and operative challenges


    The main regulatory and operative challenges faced by
    PoAs can be summarised as follows:


         DOE liability for erroneous inclusion of CPAs
         Programmes with multiple methodologies
         Revision of methodologies
         CPA start date
Regulatory and operative challenges


    The main regulatory and operative challenges faced by
    PoAs can be summarised as follows:


         DOE liability for erroneous inclusion of CPAs
         Programmes with multiple methodologies
         Revision of methodologies
         CPA start date
Regulatory and operative challenges

  DOE liability for erroneous inclusion of
                    CPAs




                                                                               Inclusion
  Project         PoA DD                                                                 Monitoring
                                      Host Country                                 of
   Idea             &                  Approval
                                                   Validation   Registration                 and
                                                                                further
   Note           CPA DD                                                                 Verification
                                                                                 CPAs


  = services provided by South Pole

                                                        can be done by any DOE



                                                                                     Needs to be done by a
                                                                                       DOE which hasn’t
                                                                                         performed PoA
                                                                                     validation or inclusion
                                                                                           of any CPA
Regulatory and operative challenges

  DOE liability for erroneous inclusion of                        DOE performing inclusion of any
                    CPAs                                              CPA is liable for erroneous
                                                                 inclusion for 1 year after inclusion
                                                                  of the CPA and for 6 months after
                                                                         each PoA verification




                                                                               Inclusion
  Project         PoA DD                                                                 Monitoring
                                      Host Country                                 of
   Idea             &                  Approval
                                                   Validation   Registration                 and
                                                                                further
   Note           CPA DD                                                                 Verification
                                                                                 CPAs


  = services provided by South Pole

                                                        can be done by any DOE



                                                                                     Needs to be done by a
                                                                                       DOE which hasn’t
                                                                                         performed PoA
                                                                                     validation or inclusion
                                                                                           of any CPA
Regulatory and operative challenges


    DOE liability for erroneous inclusion of CPAs


                              Traditional CDM           Programmatic CDM


                           Significant deficiencies
                                                            Any error that
                             limited to issues of
       DOE is liable for   fraud, malfeasance or
                                                       disqualifies a CPA from
                                                          inclusion in a PoA
                                incompetence
                                                       1 y after inclusion and 6
                           15 days after the date of
       DOE is liable for                                months after issuance
                            receipt of the request
                                                         (i.e. all the crediting
                                for issuance,
                                                                 period)
                             DOE has to pay the
                                                        DOE has to pay the
                               amount of CERs
           Penalty         estimated to have been
                                                       total amount of CERs
                                                       generated by the CPA
                               issued in excess
Regulatory and operative challenges

  DOE liability for erroneous inclusion of
                    CPAs




                                                                                   Inclusion
  Project         PoA DD                                                                     Monitoring
                                      Host Country                                     of
   Idea             &                  Approval
                                                   Validation    Registration                    and
                                                                                    further
   Note           CPA DD                                                                     Verification
                                                                                     CPAs


  = services provided by South Pole

                                                 •Several DOEs are including CPAs only if they
                                                 performed validation.

                                                 •Inclusion is almost as detailed as traditional
                                                 validation and hence no real economies of
                                                 scale are happening.
Regulatory and operative challenges


    The main regulatory and operative challenges faced by
    PoAs can be summarised as follows:


         DOE liability for erroneous inclusion of CPAs
         Programmes with multiple methodologies
         Revision of methodologies
         CPA start date
Regulatory and operative challenges

 Only at validation stage are project owners allowed to request for approval
  of multiple methodologies
    – Risk of no approval cannot be minimised. In case the request is not approved by the
      EB, the project developer would have lost the money invested in taking the project up
      to validation
 Approval may take more than a couple of months
 Request of approval can only be done by DOEs
    – Requesting approval of multiple methodologies implies an additional external fee
 The combination of methodologies has to be used for each and every
  CPA!!!
    – Not practical
    – e.g. Programm of biodigestors with and without energy use. Each component needs
      a different meth combination




         Project       PoA DD                                  Request for approval of the
                                   Host Country
          Idea           &          Approval
                                                Validation       application of multiple
          Note         CPA DD                                     methodologies to EB


                                                                  = services provided by South Pole
Regulatory and operative challenges


    The main regulatory and operative challenges faced by
    PoAs can be summarised as follows:


         DOE liability for erroneous inclusion of CPAs
         Programmes with multiple methodologies
         Revision of methodologies
         CPA start date
Regulatory and operative challenges


    If a methodology, subsequent to being placed on hold or
    withdrawn, is revised or replaced by inclusion in a
    consolidated methodology, the PoA shall be revised
    accordingly. The changes shall be subsequently documented
    in a new version of PoA (e.g Version 1.1), validated by a DOE
    and approved by the Board.

       It is highly probable that in 28 years, a small-scale
        methodology will undergo at least one revision
       Hence, the project developer will have to incur more than
        once in validation / revalidation fees for the PoA
          – Most widely used SSC-Meths
            • AMS.I.D          Version 14
            • AMS.I.C          Version 15
            • AMS.III.D        Version 15
Regulatory and operative challenges


    The main regulatory and operative challenges faced by
    PoAs can be summarised as follows:


         DOE liability for erroneous inclusion of CPAs
         Programmes with multiple methodologies
         Revision of methodologies
         CPA start date
Regulatory and operative challenges


     CPA start date
         Time gap between CPA start date and PoA registration can be
          considerable. Potential loss of significant carbon income for 1st
          CPA may discourage project owners to be the 1st CPA
         Given that CPAs cannot start before beginning of validation
          (e.g. once CPA-DD has been made) encourages work on
          projects in very early stages increasing the risk of working on
          projects that don’t happen in the end
                                                           Earliest beginning of crediting period
                          Earliest start date of any CPA                for any CPA




                                                                               Inclusion
  Project    PoA DD                                                                      Monitoring
                        Host Country                                               of
   Idea        &         Approval
                                     Validation            Registration                      and
                                                                                further
   Note      CPA DD                                                                      Verification
                                                                                 CPAs

                                                                        = services provided by South Pole
Content




           Challenges inherent to the nature of a
            Programme of Activities
           Regulatory and operative challenges
           Economic and commercial
            challenges
           Conclusions
Economic and commercial challenges


   Some of the most relevant economic and
   commercial challenges that PoAs face today
   are:

      Lack of experience in the market
      Upfront costs associated with the development of a
       PoA
      Coordinating entity selection and taxation issues
Economic and commercial challenges


   Some of the most relevant economic and
   commercial challenges that PoAs face today
   are:

      Lack of experience in the market
      Upfront costs associated with the development of a
       PoA
      Coordinating entity selection and taxation issues
Economic and commercial challenges


   Lack of experience in the market

     - Lack of experience among DNAs, DOEs, CDM
       developers and the EB, which makes it impossible to
       predict the time it will take to register a PoA
     - Only one programme registered so far
     - No availability of stories of success in the long term
     - Limited availability to experienced DOEs
        - Only one DOE has completed validation of a PoA
        - In our experience, of 23 DOEs approached for quotation of
          validation services for a PoA
          -   Only 6 DOEs showed interest/capacity to undertake this project
          -   Only 3 DOEs presented an offer
              - Only 2 offers were serious enough (e.g. in terms of
                 completeness, detailed proposal of services, etc.)
Economic and commercial challenges


   Some of the most relevant economic and
   commercial challenges that PoAs face today
   are:

      Lack of experience in the market
      Upfront costs associated with the development of a
       PoA
      Coordinating entity selection and taxation issues
Economic and commercial challenges


   Upfront costs associated with the development of a
   PoA
      As previously discussed, the potential for economies of
       scale hasn’t been fully realised due to
        – High validation fees from DOEs due to high-perceived risks
          and regulatory uncertainties (e.g. Liability for erroneous
          inclusion of CPAs)
        – Lack of experience in the market
          • So far no single project developer has submitted more than one
            CPA-DD for a PoA
      There is a high risk associated with not being able to
       include enough CPAs into a PoA or not being to reach a
       volume that is high enough to reach breakeven point or
       expected IRR
      There are not many international funds for financing of
       PoAs
Economic and commercial challenges


   Upfront costs associated with the development
   of a PoA
                           Traditional CDM       PoA
                              (000 EUR)*     (000 EUR)**
             PIN               3 - 10          8 - 15
     PDD / CPA-DD / PoA-
                               10 – 30        50 – 150
             DD
          Validation           7 – 27            50

        Administration          N/A             100

         Monitoring             3–6           30 – 100

         Verification          10 - 17         10 - 30
                                                      * SNV, 2009
                                                      ** KfW, 2009
Economic and commercial challenges


   Critical size needed for different type of programmes *

                            Size needed for     Size needed for IRR
       Project Type
                               breakeven              of 15%


                            105,000 – 830,000
     Distribution of CFL                             139,000
                                  CFLs


                            13,500 – 145,000     13,900 – 180,000
      Cooking Stoves
                                 Stoves               Stoves


                              1,100 – 8,000       1,300 – 21,000
   Household biodigesters
                               Biodigesters        Biodigesters

                                                               * KfW, 2009
Economic and commercial challenges


   Some of the most relevant economic and
   commercial challenges that PoAs face today
   are:

      Lack of experience in the market
      Upfront costs associated with the development of a
       PoA
      Coordinating entity selection and taxation issues
Economic and commercial challenges


   Coordinating entity selection and taxation issues

      Tax treatment and other liabilities for PoAs are
       unclear and may vary from country to country.
      Unclear if and which host countries will issue LoAs
       and which restrictions will be imposed on the
       Coordinating Entity
      Unclear how international PoAs will
        –         be approved by host countries
        –         be approved by the EB (what happens if the EB
            rejects the PoA for one country? Will the whole process
            start again?)
Content




           Challenges inherent to the nature of a
            Programme of Activities
           Regulatory and operative challenges
           Economic and commercial challenges
           Conclusions
Conclusions


      Programmatic CDM is promising but still many
       hurdles need to be removed if PoAs are to play a
       significant role in the global mitigation efforts
      Our current learning curve is in very early stages.
       More changes are expected to come based on on-
       going learning
      Costs are expected to go down as project
       developers and DOEs develop a better
       understanding on the risks involved in developing a
       PoA
      More funding mechanisms are needed particularly
       for programms which are not viable on a pure
       commercial schemes
South Pole Carbon Asset Management Ltd.



                      Thank you for your attention

  South Pole Carbon Mexico

  Alberto Carrillo,
  Country Director

  a.carrillo@southpolecarbon.com

  Campeche 290 -402
  Col. Hipódromo Condesa
  Mexico
  06100
  Tel. (55) 5531 9013
   (55) 5564 6793

				
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