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									 Standard Bank – EcoSecurities


 Carbon Emissions Conference:
- a financial markets perspective


Financing Emission Reductions:
     a Bank’s perspective

           Colin King

        8 February 2005
 Outline of the Presentation


Introduction
Assessing Risk and Risk Structuring
Challenges for Developing Country Developers
Economics of Emission Projects
Case Studies
Opportunities in South Africa and Markets for CDM Projects
The Standard Bank-EcoSecurities alliance
Conclusion
What is the opportunity?

    The owners of more environmentally sustainable assets in
    energy, natural resources, and environmental technology
    have the potential to develop, capture and sell rights to the
    positive environmental performance they engender.

    The monetization of these environmental benefits is a
    rapidly growing business opportunity.
An additional value from “clean” sector projects




                                $$$
                           conventional
                             revenue
          Clean energy
                              stream
          or forestry
          investment


                             Carbon
                             credits
Capturing Emission Value Requires New Components in the
Project Finance Process


• Emission Trading Assets require investment in additional
aspects of analysis
• Generally, best undertaken in the stages prior to project
financing and groundbreaking
• Relevant documentation, verification requirements and
transaction negotiations all require specialised services
• For many parties, outsourcing will be the answer
 Outline of the Presentation


Introduction

Assessing Risk and Risk Structuring
Challenges for Developing Country Developers
Economics of Emission Projects
Case Studies
Opportunities in South Africa and Markets for CDM Projects
The Standard Bank-EcoSecurities alliance
Conclusion
Assessing Risk :



 • How do commercial banks assess and respond to risk
 when appraising carbon and energy projects?


 • What are the risks and rewards from a financier‟s
 perspective?
Assessing Risk : (…Continued)


 What Risks?

 Generic project risks:


 • Demand (off-take)              • Political risk
 • Technology                     • Environmental
 • Construction                   • Force Majeure
 • Operations & Maintenance       • Funding mismatch
 • Supply (fuel, water, spares)   • Collections
Assessing Risk : (…Continued)

 What Risks?
 Specific Carbon Market project risks:
 • Currently, there is no „spot‟ market for CERs – they are bought forward into
 a project i.e. purchasing with the hope/expectation that the project will deliver
 credits
 • Set volume delivered over a number of years is bought (a vintage stream)
 i.e. you can‟t choose the volume you want to purchase, nor the year of
 delivery
 • While there are standardised contracts, the contracting process is time
 consuming – it also requires specific expertise and partners who are CDM
 Consultants and Designated Operational Entities
 • A portion of risk payment (upfront unrecoverable payment is usually made)
 • The purchase is for physical delivery (not financially settled)
Assessing Risk : (…Continued)

 What Risks?
 Specific Carbon Market project risks:
     •   Registration risk – the possibility that a project is not registered
         as a CDM project in the UNFCCC database
     •   Political / Country risk – the possibility that the host country DNA
         does not issue the letter of approval or that the country
         establishes barriers for the CER transaction
     •   Project risk – the possibility that the project does not generate
         the expected amount of CERs. There are basically three reasons
         for non-performance on a project:
           •   “Force majeure”
           •   Financial risk
           •   Performance risk
Risk Structuring:

How to improve the risk profile of carbon & energy transactions?

Overriding principle: Risks to lie with party best able to manage them!


• Combine Grant funding with DFI financing and Commercial bank debt
    • Grant funding assumes first loss position
    • DFI’s assume the riskier elements of quasi equity and/or subordinated debt
    • Commercial lenders provide the senior debt


    • Allows grant funds to have largest impact using multiplier effect
Risk Structuring : (…Continued)

Combine Grant funding with DFI financing and commercial
bank debt

                       High Fixed
     Commercial
     Lenders
                                           Tier 3
                                         ZAR
     Development       Low Fixed         400m
     Finance                                        Hybrid instruments for
     Institutions + High Participating     Tier 2
                                                    project long term
                                         ZAR
                                         350m       financing

     Grant
                     Zero Return           Tier 1
                                         ZAR
                                         350m
 Outline of the Presentation


Introduction
Assessing Risk and Risk Structuring

Challenges for Developing Country Developers
Economics of Emission Projects
Case Studies
Opportunities in South Africa and Markets for CDM Projects
The Standard Bank-EcoSecurities alliance
Conclusion
 Challenges for Developing Country Developers


CDM process is complex
    •   Lack of clarity at international level (CDM Executive Board)
    •   Documentation and project baselines produced on an ad hoc basis
    •   Room to streamline (standardisation of documents & baseline benchmarks
        internationally)
    •   Transaction costs high
Policy Risk evident
    •   Fear market is not real
    •   Signals from host nations and investor nations not clear enough
    •   Project Developers generally unwilling to risk so much in absence of any clear
        indications from host nation of potential eligibility
 Challenges for Developing Country Developers (…Continued)


Institutional
      •   Inability to secure Host Nation Approval
      •   Lack of clarity/transparency as to process & lead agency
      •   Often no clear indication of host nation priorities
      •   Sustainable development objectives, projects and technologies
      •   Developers taking risk, and developing in the dark
Support
      •   Lack of an Enabling Environment
      •   Institutional capacity to support project development (projects office)
      •   Limited engagement of financial community domestically
      •   Limited Operational Entity capacity in country
      •   No ability to support developer in identifying buyers and contracting
 Outline of the Presentation


Introduction
Assessing Risk and Risk Structuring
Challenges for Developing Country Developers

Economics of Emission Projects
Case Studies
Opportunities in South Africa and Markets for CDM Projects
The Standard Bank-EcoSecurities alliance
Conclusion
Monetizing carbon credits increases project IRR‟s

                               % IRR    % IRR     IRR Increase     % IRR
   Country    Project Type
                                 w/o    w/cer's    [% points]    Increase
   Romania District heating      10.5    11.4          0.9           9
   Costa Rica Wind                9.7    10.6          0.9           9
   Jamaica Wind                  17.0    18.0          1.0           6
   Morocco Wind                  12.7    14.0          1.3          10
   Chile      Hydro               9.2    10.4          1.2          13
   Costa Rica Hydro               7.1     9.7          2.6          37
   Guyana     Bagasse             7.2     7.7          0.5           7
   Nicaragua Bagasse             14.6    18.2          3.6          25
   Brazil     Biomass             8.3    13.5          5.2          63
   Latvia     Methane            11.4    18.8          7.4          65
   India      Methane            13.8    18.7          4.9          36
   Source: World Bank, July 2001
The Economics of waste to energy projects
are especially attractive
Wind farm project:                 Waste to energy project:
20 MW installed capacity           2 MW installed capacity
50,000 t CO2 ER‟s p.a.(10 years)   >50,000 t CO2 ER‟s p.a.(10 years)
Project costs: US$20m (+)          Project costs: US$3.5m

Carbon value:                      Carbon value:
@ $3/ t CO2        = $1.72m        @$3 /t CO2         = $1.72m
@ $5/ t CO2        = $2.87m        @$5 /t CO2         = $2.87m

Proportion of project costs:       Proportion of project costs:
@ $3/ t CO2        = 8.6%          @ $3/ t CO2        = 49.1%
@ $5/ t CO2        = 14.35%        @ $5/ t CO2        = 82.0%
Certified Emission Reductions (CERs) Can Help Improve
Project Annual Debt Service Coverage Ratios (DSCRs)
Sale of CERs involve minimal costs – therefore is essentially Free Cash Flow
This cash flow can be readily applied to Debt Service
    •   Direct Payments on Annual Debt Service Requirements
    •   Funding Debt Service Reserve Accounts
    •   Using Forward ERPA Sales as Collateral
    •   Funding an Account to supplement variations in EBITDA
Applying Carbon Cash Flow to Debt Service Can Result in more favorable
Capital Structures (Higher D:E ratios)
    •   Higher DSCR (More Debt Carrying Capacity) means less Equity
        Requirement – Thereby Increasing ROE
    •   Allows Project to be Financed Because Increases DSCR past
        Predetermined Threshold set by the Lender
Either Way, Both Project Developer and Project Lender are Better Off.
 A Wind Project Example

 This Simplistic Example Assumes:
     •   US$82m Capital Outlay            300GWh
     •   75% EBITDA Margins               0.7 tCO2e/MWh Coefficient
     •   $4 Price per CER                 D/E of 50%
     •   $40 Price per MWh                15 yr Term, 7% interest Rate
CER Cash Flow Can Increase DSCR by up to 0.2, or roughly $4m (10%) in
additional debt carrying capacity.
 If CER price is increased to $8 (current forecasts are between $8-$12 in 5 years)
this could mean up to $8m LESS equity investment – a full 20% reduction.
At price of $4 – CER sales represent 19% of annual debt service
At price of $8 – CER sales represent 37% of annual debt service
 In jurisdictions with high carbon coefficients (> 1) or in methane (CH4) projects
these benefits are significantly enhanced
  DSCR Matrix
                                                                                                                          Price per MWh
                                                    $35        $38       $40       $43           $46       $48        $51        $54     $56     $59     $62     $64     $67
                                          5.0%    19.34     20.67      22.00     23.34         24.67     26.00      27.34      28.67   30.00   31.33   32.67   34.00   35.33
                                          7.5%    12.89     13.78      14.67     15.56         16.45     17.34      18.22      19.11   20.00   20.89   21.78   22.67   23.56
       Project Cost   $82,000,000        10.0%     9.67     10.34      11.00     11.67         12.33     13.00      13.67      14.33   15.00   15.67   16.33   17.00   17.67
      Interest Rate        7.00%         12.5%     7.74       8.27      8.80      9.33          9.87     10.40      10.93      11.47   12.00   12.53   13.07   13.60   14.13
         Debt Term           15.0        15.0%     6.45       6.89      7.33      7.78          8.22      8.67       9.11       9.56   10.00   10.44   10.89   11.33   11.78
    EBITDA Margin            75%         17.5%     5.53       5.91      6.29      6.67          7.05      7.43       7.81       8.19    8.57    8.95    9.33    9.71   10.10
         CO2 Costs        $10,000        20.0%     4.83       5.17      5.50      5.83          6.17      6.50       6.83       7.17    7.50    7.83    8.17    8.50    8.83
                                         22.5%     4.30       4.59      4.89      5.19          5.48      5.78       6.07       6.37    6.67    6.96    7.26    7.56    7.85
      Target DSCR             2.0        25.0%     3.87       4.13      4.40      4.67          4.93      5.20       5.47       5.73    6.00    6.27    6.53    6.80    7.07
                                         27.5%     3.52       3.76      4.00      4.24          4.49      4.73       4.97       5.21    5.45    5.70    5.94    6.18    6.42
     Carbon Price          $4.00         30.0%     3.22       3.45      3.67      3.89          4.11      4.33       4.56       4.78    5.00    5.22    5.44    5.67    5.89
            MWh          300,000         32.5%     2.98       3.18      3.39      3.59          3.80      4.00       4.21       4.41    4.62    4.82    5.03    5.23    5.44
                                         35.0%     2.76       2.95      3.14      3.33          3.52      3.71       3.91       4.10    4.29    4.48    4.67    4.86    5.05
                                         37.5%     2.58       2.76      2.93      3.11          3.29      3.47       3.64       3.82    4.00    4.18    4.36    4.53    4.71
     Carbon Coeff.           0.70        40.0%     2.42       2.58      2.75      2.92          3.08      3.25       3.42       3.58    3.75    3.92    4.08    4.25    4.42
                                         42.5%     2.28       2.43      2.59      2.75          2.90      3.06       3.22       3.37    3.53    3.69    3.84    4.00    4.16
                                         45.0%     2.15       2.30      2.44      2.59          2.74      2.89       3.04       3.19    3.33    3.48    3.63    3.78    3.93

Extra Debt Capacity                      47.5%
                                         50.0%
                                                   2.04
                                                   1.93
                                                              2.18
                                                              2.07
                                                                        2.32
                                                                        2.20
                                                                                  2.46
                                                                                  2.33
                                                                                                2.60
                                                                                                2.47
                                                                                                          2.74
                                                                                                          2.60
                                                                                                                     2.88
                                                                                                                     2.73
                                                                                                                                3.02
                                                                                                                                2.87
                                                                                                                                        3.16
                                                                                                                                        3.00
                                                                                                                                                3.30
                                                                                                                                                3.13
                                                                                                                                                        3.44
                                                                                                                                                        3.27
                                                                                                                                                                3.58
                                                                                                                                                                3.40
                                                                                                                                                                        3.72
                                                                                                                                                                        3.53
                                         52.5%     1.84       1.97      2.10      2.22          2.35      2.48       2.60       2.73    2.86    2.98    3.11    3.24    3.37
                                         55.0%     1.76       1.88      2.00      2.12          2.24      2.36       2.49       2.61    2.73    2.85    2.97    3.09    3.21
                                         57.5%     1.68       1.80      1.91      2.03          2.15      2.26       2.38       2.49    2.61    2.72    2.84    2.96    3.07
                                         60.0%     1.61       1.72      1.83      1.94          2.06      2.17       2.28       2.39    2.50    2.61    2.72    2.83    2.94
                                         62.5%     1.55       1.65      1.76      1.87          1.97      2.08       2.19       2.29    2.40    2.51    2.61    2.72    2.83
                                         65.0%     1.49       1.59      1.69      1.80          1.90      2.00       2.10       2.21    2.31    2.41    2.51    2.62    2.72
                                         67.5%     1.43       1.53      1.63      1.73          1.83      1.93       2.02       2.12    2.22    2.32    2.42    2.52    2.62
                                         70.0%     1.38       1.48      1.57      1.67          1.76      1.86       1.95       2.05    2.14    2.24    2.33    2.43    2.52
                                         72.5%     1.33       1.43      1.52      1.61          1.70      1.79       1.89       1.98    2.07    2.16    2.25    2.34    2.44
                                         75.0%     1.29       1.38      1.47      1.56          1.64      1.73       1.82       1.91    2.00    2.09    2.18    2.27    2.36
                                         77.5%     1.25       1.33      1.42      1.51          1.59      1.68       1.76       1.85    1.94    2.02    2.11    2.19    2.28
                                         80.0%     1.21       1.29      1.38      1.46          1.54      1.63       1.71       1.79    1.88    1.96    2.04    2.13    2.21
                                         82.5%     1.17       1.25      1.33      1.41          1.50      1.58       1.66       1.74    1.82    1.90    1.98    2.06    2.14
                                         85.0%     1.14       1.22      1.29      1.37          1.45      1.53       1.61       1.69    1.76    1.84    1.92    2.00    2.08
                                         87.5%     1.11       1.18      1.26      1.33          1.41      1.49       1.56       1.64    1.71    1.79    1.87    1.94    2.02
                                         90.0%     1.07       1.15      1.22      1.30          1.37      1.44       1.52       1.59    1.67    1.74    1.81    1.89    1.96
                                         92.5%     1.05       1.12      1.19      1.26          1.33      1.41       1.48       1.55    1.62    1.69    1.77    1.84    1.91
                                 D/E     95.0%     1.02       1.09      1.16      1.23          1.30      1.37       1.44       1.51    1.58    1.65    1.72    1.79    1.86
                                Ratio    97.5%     0.99       1.06      1.13      1.20          1.27      1.33       1.40       1.47    1.54    1.61    1.68    1.74    1.81
                                        100.0%     0.97       1.03      1.10      1.17          1.23      1.30       1.37       1.43    1.50    1.57    1.63    1.70    1.77
                                               Note: This matrix analyzes coverage ratios for the FIRST annual repayment period only
 Outline of the Presentation


Introduction
Assessing Risk and Risk Structuring
Challenges for Developing Country Developers
Economics of Emission Projects

Case Studies
Opportunities in South Africa and Markets for CDM Projects
The Standard Bank-EcoSecurities alliance
Conclusion
NovaGerar Landfill Gas to Energy Project, Brazil



 Project: Capture of landfill gas currently venting to the atmosphere for
 electricity generation, Rio de Janeiro, Brazil. Expected capacity 10 MW.


  Carbon credits generated: 10.7 M tonnes CO2 over 21 years


  Regulatory status: Approved by Brazilian Government


 Value of carbon: Carbon contract agreed with World Bank Prototype
 Carbon Fund for 2.5 M tCO2 (up until 2012). Price paid €3.33/tCO2.
 Value of contract €8.3 M.
V&M do Brasil, Fuel Switching Project, Brazil



 Project: Switching from coke to sustainably produced charcoal for steel
 manufacture, Minas Gerais, Brazil.


  Carbon credits generated: 15 M tonnes CO2 over 21 years.


  Regulatory status: Approved by Brazilian Government.


 Value of carbon: 5M tonnes sold to the Dutch government at
 US$3+/tonne, another 400,000 tonnes of 2002-03 vintage reductions
 sold to Toyota Tsusho, a Japanese trading house.
Holcim Cement Project, Costa Rica



 Project: Energy efficient process, co-firing with alternative fuels, higher
 proportion of mineral components i.e. lower clinker factor


  Carbon credits generated: 627 kg CO2 to 542 kg CO2/t cement, 0.5 M
 tCO2 2005-2011


 Regulatory status: Approved by Costa Rican government.


 Value of carbon: Contract negotiations on-going with Dutch
 Government as part of CERUPT. Price €4.3/tCO2.
 Outline of the Presentation


Introduction
Assessing Risk and Risk Structuring
Challenges for Developing Country Developers
Economics of Emission Projects
Case Studies

Opportunities in South Africa and Markets for
CDM Projects
The Standard Bank-EcoSecurities alliance
Conclusion
Opportunities in SA

 Mining sector (coal mine methane, coal bed methane, co-
 firing, clean-coal technology)
   Landfill gas sector (methane capture, gas-to-power)
   Pulp and paper (sinks, fuel switching)
 Energy sector – power, oil and gas (including energy
 efficiency and DSM programmes)
 Renewable energy sector (bagasse, solar, wind, fuel cells,
 biofuels, etc.)
     What are the Markets for CDM Projects?
The CDM links Emerging Market Opportunities with Developed Market
Demands

Origination Market (project finance)
 •   Carbon trading represents a new component of traditional project finance for infrastructure & energy
     projects with green credentials
 •   Projects will be found in clean energy, energy efficiency and waste management
 •   Successful carbon transactions enhance project debt:equity ratios or give the client better
     debt service coverage ratios than they might otherwise enjoy

Secondary market (commodity trading)
 •   Trading in Credits in Emission Capped Jurisdictions in the EU, Canada, Japan . . . .
 •   Strong linkages to other traded energy products (electricity, coal, gas, oil)
 •   Potential Development of “synthetic” green energy exports
 •   Investment opportunities
 Outline of the Presentation


Introduction
Assessing Risk and Risk Structuring
Challenges for Developing Country Developers
Economics of Emission Projects
Case Studies
Opportunities in South Africa and Markets for CDM Projects

The Standard Bank-EcoSecurities alliance
Conclusion
  The Standard Bank – EcoSecurities alliance


Objective: to work together to offer carbon trading deals to Standard
Bank’s client base and beyond

To become the Premier provider of Financial Services for Green assets
that can gain from Emissions Trading

A series of leads and deals already originated around the world
Who are EcoSecurities?


     EcoSecurities has been rated as
     the world’s leading greenhouse
           gas advisory firm.

          Environmental Finance Magazine Reader survey:
                          December 2001, 2002 and 2003
What will Standard Bank and EcoSecurities offer?

 Project Baselines Analysis and Monitoring and Verification Protocols
 Project Design Document Development
 Negotiations with 3rd party validators
Negotiations with Government for export agreement of Carbon
Credits
 Sourcing Buyers for carbon credits and structuring origination
transactions
 Enhanced Debt and Equity Project Finance using Green House Gas
(GHG) values as a Cornerstone
 More Sophisticated Trading & Derivative Services
 Outline of the Presentation


Introduction
Assessing Risk and Risk Structuring
Challenges for Developing Country Developers
Economics of Emission Projects
Case Studies
Opportunities in South Africa and Markets for CDM Projects
The Standard Bank-EcoSecurities alliance

Conclusion
 Conclusions: Points to remember
• Most projects involving cleaner energy technologies will create this additional
  carbon value - essentially free cash flow


• It is imperative that we develop the CDM project documentation before the
  project becomes operational – otherwise it is not eligible for participation in
  these mechanisms


• Skilled carbon/financial advisers and arrangers can manage virtually the entire
  process for clients – either as part of conventional commercial/financial
  relationships or strictly on a carbon project development basis
Conclusion:




              QUESTIONS?

								
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