State and Trends of the Carbon Market 2003 by 0XJKdI

VIEWS: 2 PAGES: 34

									The Global Carbon Market
and Carbon Economics
  Workshop on the Carbon Market and Brazilian Carbon
                    Transactions
            October 26th, 2005, Sao Paulo

                   Ken Newcombe
Carbon finance basics
• Carbon finance is a revenue stream in foreign exchange tyically paid
  on delivery of emissions reductions into compliance registries.
• North-South CDM trade lowers the cost of compliance for OECD
  and mobilizes new resources for financing infrastructure and land
  management for developing countries
• Basic incentive to trade – difference in marginal cost of
  abatement:
   – OECD: $10-50 per tonne CO2e (short run marginal abatement
     cost)
   – LDCs: <$5 / tCO2e
• Barriers to trade: project and country risk, regulatory risk and
  uncertainty, closing window of opportunity
                Understanding the impact of carbon finance on
                project financing and financial sustainability
 Construction Capital for underlying climate friendly project
                       World Bank Emissions Reductions Purchase Agreement is bankable
                       and additional revenue commitment helps bring projects to financial closure

                                         = annual payments under carbon purchase agreement
Cash
                                         = annual payments under power purchase or other
in                                       source of revenues to underlying project
       Debt
                                                                                  Carbon Revenues for
                                                                                  10-21 years
       Equity                       Operation

                 Construction

        Yrs 0      1    2   3   4    5     6   7 8 …………………………………….15-20


Cash
out
                                Carbon sales revenues are commonly
                                in the range from 10-50% of total
                                revenues for power and waste
                                management projects
 Kyoto Protocol basics
• OECD shortfall of ~ 5.0-5.5 billion tCO2e
• May be met by:
  – Domestic measures: ~ 50%
  – EU Emissions Trading Scheme
  – Trading via 3 Kyoto mechanisms:
     • “Clean Development Mechanism”
     • “Joint Implementation”
     • “Internationall Emissions Trading”
• Entered into force Feb 16
 Structure of the Carbon Market
Project-Based                             Allowance
Transactions                               Markets

             Clean          Intl Emissions Trading
          Development
           Mechanism
                                       EU Emissions
                                      Trading Scheme
          Joint Implem.

                                                       UK ETS
Voluntary                                New South Wales
                                         Certificates
                 Other
 Retail        Compliance                      Chicago Climate
                                                  Exchange
  Project-based ER Volumes
  (million tCO2e)
120

100

80

60

40

20

 0
      1998     1999   2000   2001   2002   2003   2004     2005
                                                         (Jan-Apr)
  Project-based ER Contracts: >$1b
  (nominal U.S.$ m)
600


500

                Known      Estimated
400


300


200


100


 0
      1998    1999      2000    2001   2002   2003   2004     2005
                                                            (Jan-Apr)
   Prices Depend on Risks
   (weighted average prices from Jan. 2004 to April 2005 in
   U.S.$ per metric tonne of CO2e)
$8.00



$6.00



$4.00



$2.00



$0.00
            ER             VER             CER                ERU
     Allowance Markets
     Exploding (in million tCO e)
                              2

40

35

30

25

20

15

10

 5

 0
        2002       2003           2004      2005
                                         (Jan.-March)
     Main Buyers: Europe
     % of volume purchased Jan.04 - Apr.05


                                          USA   Australia
                                          4%      3%
                            Japan                    Canada
                             21%                        5%
World Bank = 22 %
(attributed pro-rata to                                  New Zealand
carbon fund                                                  7%

participants)



         Gov. Netherlands
               16%

                                                          Other EU
                                                            32%


                                    UK
                                    12%
Project-based transactions by
sector (% of volume purchased Jan.04 - Apr.05)
                                           Landfill Gas
                          Other              Capture
                      N2O  7%                 10%
                      4%

                                                      Hydro
                                                       12%


           HFC
           25%
                                                          Wind
                                                           7%



           Forestry                                  Biomass
          (LULUCF)                                     11%
             4%
             Energy               Animal
            Efficiency            Waste
                2%                 18%
Why is WBG involved?
Poverty reduction + sustainable devt:
• Catalyze climate-friendly
  investment in client countries
• Help OECD countries address CO2
  shortfalls & diversify risk
• Inform buyers, regulators, public
• Bonn, Gleneagles commitments
World Bank Carbon Finance
              ~$937 million under management
                     Prototype Carbon Fund                $180 m

                     Community Development Carbon Fund.   $128.6 m
                                                          to date


                     Bio Carbon Fund                      $ 51.3 m
                                                          to date

                     Netherlands CDM Facility             $ 180 m

                     Italian Carbon Fund                  $ 80 m
                                                          to date
Netherlands         Netherlands Europe and CentraI Asia
  ECAF              Facility (with IFC)                   ~$ 40 m

                    Spanish Carbon Fund                   $ 220 m

                    Danish Carbon Fund                    ~$ 64 m
  Impact by Technology
Sector                       Fossil fuel Methane
                           displacement mitigation
Renewables                    a
Energy efficiency             a
Biomass cogeneration          a           (a)
Gas flaring reduction         a
Gas venting reduction        (a)            a
Coalmine methane             (a)            a
Landfill gas (to energy)     (a)            a
Impact of Carbon Finance
• Higher annual revenue streams and IRRs
  – ~0.5% to 2% for renewables / Energy efficiency
  – >15% for CH4
  – Much higher for more powerful industrial gases
    (HFC23, N2O, …)
• High quality cash flow and contract value
  – Verified Emissions Reductions (bankable)
  – OECD buyers (investment-grade payers)
  – $ or € denominated
  – Long-term contract with no price fluctuation
    guarantees flow
   Payments abroad eliminates currency
    convertibility and transfer risks
 Value added ER revenues + Financial engineering allow
  access to capital markets and boost project bankability
             (borrowing against ER streams)
Fossil Fuel Displacement
  Fossil Fuel Displacement

Fuel Displaced           Generic        Carbon Revenue
                    Emissions Factor     at US$4/tCO2e
                      (tCO2e/MWh)          (US$/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%
Typical elements of LFG
project
1. Landfill gas recovery and              2. Generation of electricity
flaring                                   for
                                             -Consumption on site
                                             -Sale to the grid




3. Collection and treatment of leachate
Methane Mitigation
Brazil Nova Gerar LFG
Production (two sites)
Tapping Gas at new
Sanitary Landfill


                                   Limits of Gas Capture for ten year
                                    carbon purchase agreement




                 Mining Gas from
                 Old Landfill
Leading Edge of Carbon Finance in Urban Waste
                 Management




                        $8-10/t




                          $2-$4/t
  Methane Mitigation

                     Carbon Revenue* (methane only)
                      US$/tcm CH4         US$/MWh
Biomass cogen,          up to $60          up to $16
landfill methane
Venting reduction,      up to $52          up to $14
coalmine methane


       Impact on IRR can be >15 percentage points
 * at US$4/tCO2e
    Impact by project
                                        Incremental    Discounted
Sector         Country/Project               IRR .    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
Biomass+CH4    Bulgaria: Svilosa             5.00%             3.6
Biomass        Hungary: Pannonpower          2.00%             4.9
Forestry+Bio   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
TIST Tanzania: without
project




  Abandoned land      Fuelwood shortage




 Damaging practices   Decreasing fertility
TIST Tanzania: with project




   Village nurseries          Groups with a purpose




Trees line up houses, paths   Grass grows under trees
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
Securing Underlying Finance
                                  Host
                                 Country
            Ltr. of Approval
                                     Engagements re:
            CF                       • Regulation (e.g. tariffs)
                                     • Kyoto Protocol
                          ERPA         compliance

            ER pmt       ERs



                                 Sponsor/
                                  Project
Securing Underlying Finance
                                     Host
                                    Country
               Ltr. of Approval
                                        Engagements re:
               CF                       • Regulation (e.g. tariffs)
                                        • Kyoto Protocol
                             ERPA         compliance

               ER pmt       ERs



                                    Sponsor/
 Lender?
           Loan ??                   Project
             Carbon Transaction
                 Structure
                                                Host
                                               Country
                            Letter of
                            Approval

                             CF
             ER
                                                    Permits, etc.
             payment
                $$$                ER       ERPA
       SPV                         s
                       Financing Agr.’s
      Lender
                                               Sponsor/
                  Up-front                      Project
                  finance $ $ $
Financing structure eliminates convertibility and transfer risk
    Brazil Plantar Sust.
    Fuelwood
                        6000
    Cash Flows ($000)



                        4000
                                         Loan
                                         Disbursement
                        2000
                                         PCF Payments
                           0
                                         Loan
                        -2000            Amortization

                        -4000
                                Year

ER payments to amortize 100% of commercial loan principal
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% => 16.3%
              Abanico Cash Flows
                          Impact of Carbon Finance in the Project's Debt Service
             $7,000

             $6,000                                                            Loan amortization
             $5,000                                                            Loan disbursement
             $4,000                                                            CERs
US$ ('000)




             $3,000

             $2,000
                                      CF Impact in Annual Debt Service, including interest (%)
             $1,000
                                         33.3%   19.4%         41.4%   44.5%   48.0%   52.1% 57.0%

                 $0

             ($1,000)

             ($2,000)
                        2004   2005       2006   2007          2008    2009     2010    2011       2012
                                                        Year


             CER payments enabled project to meet IIC’s investment criteria
Abanico Project
• Carbon finance enabled project to:
  – Meet IIC’s investment criteria
  – Lower interest rate by 100 bp
  – Expedite financial closure
…In one of L. America’s riskiest countries

								
To top