Transcript State and Trends of the Carbon Market 2003

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
Cash
in
= annual payments under carbon purchase agreement
= annual payments under power purchase or other
source of revenues to underlying project
Carbon Revenues for
10-21 years
Debt
Equity
Operation
Construction
Yrs
Cash
out
0
1
2
3
4
5
6
7 8 …………………………………….15-20
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
Transactions
Clean
Development
Mechanism
Allowance
Markets
Intl Emissions Trading
EU Emissions
Trading Scheme
Joint Implem.
UK ETS
Voluntary
Retail
Other
Compliance
New South Wales
Certificates
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
4%
World Bank = 22 %
(attributed pro-rata to
carbon fund
participants)
Japan
21%
Australia
3%
Canada
5%
New Zealand
7%
Gov. Netherlands
16%
Other EU
32%
UK
12%
Project-based transactions by
sector (% of volume purchased Jan.04 - Apr.05)
Landfill Gas
Capture
10%
Other
N2O
7%
4%
Hydro
12%
HFC
25%
Wind
7%
Forestry
(LULUCF)
4%
Energy
Efficiency
2%
Biomass
11%
Animal
Waste
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
Netherlands
ECAF
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 Europe and CentraI Asia
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
Energy efficiency
Biomass cogeneration
Gas flaring reduction
Gas venting reduction
Coalmine methane
Landfill gas (to energy)
(
(
(
a
a
a
a
a)
a)
a)
(
a)
a
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
Gas
Generic
Emissions Factor
(tCO2e/MWh)
0.40
Carbon Revenue
at US$4/tCO2e
(US$/MWh)
$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
flaring
2. Generation of electricity
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,
landfill methane
up to $60
up to $16
Venting reduction,
coalmine methane
up to $52
up to $14
Impact on IRR can be >15 percentage points
* at US$4/tCO2e
Impact by project
Incremental
IRR .
Discounted
Payback Per.
Sector
Country/Project
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
Trees line up houses, paths
Groups with a purpose
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
ERPA
ER pmt
• Regulation (e.g. tariffs)
• Kyoto Protocol
compliance
ERs
Sponsor/
Project
Securing Underlying Finance
Host
Country
Ltr. of Approval
Engagements re:
CF
ERPA
ER pmt
Lender?
Loan ??
• Regulation (e.g. tariffs)
• Kyoto Protocol
compliance
ERs
Sponsor/
Project
Carbon Transaction
Structure
Letter of
Approval
Host
Country
CF
ER
payment
$$$
SPV
Lender
Permits, etc.
ER
s
ERPA
Financing Agr.’s
Sponsor/
Project
Up-front
finance $ $ $
Financing structure eliminates convertibility and transfer risk
Brazil Plantar Sust.
Fuelwood
Cash Flows ($000)
6000
4000
Loan
Disbursement
PCF Payments
2000
0
Loan
Amortization
-2000
-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 $4m
• rIRR 0.73% => 16.3%
Abanico Cash Flows
Impact of Carbon Finance in the Project's Debt Service
US$ ('000)
$7,000
$6,000
Loan amortization
$5,000
Loan disbursement
$4,000
CERs
$3,000
CF Impact in Annual Debt Service, including interest (%)
$2,000
33.3%
$1,000
19.4%
41.4%
44.5%
2008
2009
48.0%
52.1% 57.0%
$0
($1,000)
($2,000)
2004
2005
2006
2007
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