Transcript No Slide Title

CDM Projects:
Risks and Contracts
Sao Paulo, Brazil, November 22, 02
charlotte streck
pcf
Purpose of our ERPA
• Record agreement
• Identify responsibilities
• Establish rights
• Manage Risk
Assessing Risk
• How does PCF identify and assess risks?
–
–
–
–
–
PIN: Risk screen
PCN: Risk matrix
Preparation: Baseline study, Validation, ESR
Appraisal: Assess full range of risks
Structuring: Mitigate risks
Defining, Assessing, and
Reporting Risk
• PCF establishes a risk profile for the project
as soon as it signs an Letter of Intent
• Project Concept Note
– Profiles risk by class, defines specific risk and
proposed mitigants
– Contains results of “upstream” risk assessment
(environment and social or “safeguards” policy risks,
sponsor and financing risk, unique carbon asset risk)
Sources of Risk I
• Project Risks
– Construction risk (built/operated on schedule?)
– Performance risk (e.g. resource risk)
– Counterparty risk (will offtakers pay on time?)
– Financial and business risk (is capital structure viable, debt
serviceable? Is parent company sound? Will product sell?)
Sources of Risk II
• Baseline Risk
– Eligibility--will ERs be Kyoto-compliant?
– Baseline design--is the baseline robust? Will its
assumptions remain valid over time?
– Performance--actual performance will determine
level of ERs generated
Sources of Risk III
• Market/Price Risk
– Will there be a market for project-based ERs?
– Will contract price meet market price?
• Policy/Compliance Risk
– What if the Kyoto Protocol doesn’t enter into
force?
– What if host country does not ratify or comply?
Market and Policy Risk are closely linked
Risk Allocation
• Principle: Assign risk to the party best able to
bear it
• PCF primarily assumes:
– Kyoto
– Baseline
– Market
• Investors/creditors assume most project risks
• PCF mitigates against project risk
• Country risk is shared
Assessing Risk Risk Matrix
Risks/
Factors
PROJECT
RISKS:
Technology
Resource
Completion
Env/Social
Transmission
Potential
Impact
Delay in plant
commissioning,
delivery of ERs
Financial
sustainability
Baseline Risk
COUNTRY RISK
Macro stability
Kyoto Protocol Risk
Risk Assessment
PCF
Mitigation
=>Evaluate technology and Sponsor
experience
=>Evaluate resource risk (Baseline study)
=>Conduct Env. & Social Review
=>Evaluate grid reliability, transco contract
=>Limit upfront pmt
=>Require EIA
=>Evaluate financial projections/assumptions;
=>Sensitivity analysis on key parameters
Project generates fewer
ERs than expected
=>Baseline study to evaluate.
=>Stable investment climate; “A” rating
=>WB evaluates country risk
=>WB evaluated KP risk
=>conservative ER
projections
Mitigating Risk
• Baseline risk:
– Baseline study, assessment of “carbon asset” risk
– Reasonable but conservative estimate of ERs
– Rigorous monitoring
• Market risk:
– Purchase of call options
– Conservative pricing
– Seniority through:
• Legal seniority
• Overcollateralization – purchase less than 100% of ERs
• Structural seniority – purchase early vintages
• Policy/compliance risk:
– LoA/Host Country Agreements in JI countries
Mitigating Risk II
• Project Risk:
– Seniority: also protects against project risk
– Sharing of ERs: provides incentive to perform
– Capitalization of costs: PCF costs deducted from payment
– Payment on delivery (“commodity” model)
• PCF faces reinvestment risk only.
– Limitation on up front payment (extraordinary
circumstances, 25% limit)
– Price discounted to reflect risk
Exercising Seniority in PCF Projects
Theoretical maximum ER output
Anticipated ERs from Validated Baseline
Volume
of ERs
PCF Takes
First ERs
up to its
Agreed
Annual
Volumes
ERs Available for Parallel Purchase
PCF’s Contracted Annual ER Purchase
Year 1
Time in Years
2012
Exercising Seniority in PCF Projects
Parallel
Purchaser
Contracts rest
up to Validated
Asset Level
Theoretical maximum ER output
Anticipated ERs from Validated Baseline
Volume
of ERs
PCF Takes
First ERs
up to its
Agreed
Annual
Volumes
ERs Available for Parallel Purchase
PCF’s Contracted Annual ER Purchase
Year 1
Time in Years
2012
Exercising Seniority in PCF Projects
Parallel
Purchaser
Contracts rest
up to Validated
Asset Level
PCF Sweeps
any annual
surplus
Theoretical maximum ER output
Anticipated ERs from Validated Baseline
Volume
of ERs
PCF Takes
First ERs
up to its
Agreed
Annual
Volumes
ERs Available for Parallel Purchase
PCF’s Contracted Annual ER Purchase
Year 1
Time in Years
2012
Shortfall Make Up Rights for PCF
Parallel
Purchaser
Contracts rest
up to Validated
Asset Level
Theoretical maximum ER output
Anticipated ERs from Validated Baseline
Volume
of ERs
PCF Takes
First ERs
up to its
Agreed
Annual
Volumes
Year 1
Year 2
Actual Year Two Production
Falls below PCF Annual
Contracted Volumes
2012
Shortfall Make Up Rights for PCF
Parallel
Purchaser
Contracts rest
up to Validated
Asset Level
Theoretical maximum ER output
Anticipated ERs from Validated Baseline
Volume
of ERs
PCF Takes
First ERs
up to its
Agreed
Annual
Volumes
PCF is made whole in next year before
Parallel Purchasers Get ERs
Year 1
Year 2
Actual Year Two Production
Falls below PCF Annual
Contracted Volumes
2012
Elements of ERPA
Parties: PCF Trustee – Project Entity
Content of ERPA:
• Obligations of the Parties
– Purchase of ERs: Price – Exclusive Right /
[Transfer]
– Additional obligations of the PCF Trustee
– Additional obligations of Project Entity
• Events of Default
• Remedies
• Conditions of Effectiveness
Purchase of ERs
• Purchase of an agreed amount of ERs
• Agreed payment of $US [___] per ton of CO2
• Payment on delivery [annually]
• Delivery: Submission of certificate issued by an
independent third party
• Biennial certification possible [payment
annually/biennally]
• All ERs /Minimum Amount of ERs /Additional ERs
Recovering of Costs
• Project preparation costs
• Initial validation, verification,
certification, periodic certification,
supervison
Deduct from payment:
Estimate [not more than ____]
Obligations of the Trustee
• Pay the installments of the purchase price
(net of costs)
• Arrange for the initial verification, and
periodic verification and vertification
• Others (e.g. exchange of information)
Obligations of the Project Entity
• Carry out the project with due diligence
• Monitoring and data collecting according to the MP
• Grant the PCF the exclusive right to arrange for
initial and periodical verification and certification
• Grant the validator, verifier and certifier access to the
project
• [Facilitate] transfer of ERs
Events of Default
Project Entity
• Failure to deliver ERs
• Significant delay in project construction
• Other project financial not in place by a certain date
Trustee
• Failure to pay purchase price in time
• Failure to arrange for validation, initial and periodic
verification, and certification
Questions ?
Risk Mitigation in PCF
Transactions
Conclusions
• Carbon finance can:
– Improve IRRs (at zero cost to project)
– Help secure financing, reduce project risk
• PCF assumes most carbon-related risks in carbon
purchase transactions
• Price depends on residual risk
• Building carbon finance into projects can make them
bankable
• We are here to help, as part of your team.
www.carbonfinance.org