Transcript Carbon Finance: Issues and Opportunities for the Private

International Finance Corporation
Carbon Finance:
Issues and Opportunities for the Private Sector
MDL en Centro America
San Salvador, El Salvador
March 27-28, 2003
What is IFC?
• Private sector affiliate of World Bank Group
• Promotes economic development through commercially viable,
private-sector investments
• Largest multilateral source of loan and equity finance for private
enterprises in developing countries
• Catalytic role in stimulating and mobilizing private investment
What does the IFC do?
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Project finance - loans, equity, etc.
– Departments: Power, Oil & Gas, Mining, Chemicals, Agribusiness,
Funds/Private Equity, Communications & Information Technology,
Manufacturing, Regional
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Mobilization of capital
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Capital markets development
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Financial advisory work
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Project development facilities
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Special development initiatives
IFC’s Value Added
• Direct funding with long-term staying power
• Catalyst for other investors and lenders
(+ possible concessional funding for alternative energy projects)
• Honest broker/neutral partner
– Reassuring presence for joint venture partners and host Government
• Risk identification and mitigation
• Potential access to funding for environmental projects
IFC’s Catalytic Role
IFC acts as a catalyst to stimulate and
mobilize private investment:
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IFC investments approved
IFC syndications
Other funding sources
Total project cost
(for FY ending June 2002)
(223 projects)
US$ 4.0 billion
US$ 1.8 billion
US$ 9.7 billion
US$ 15.5 billion
Why does IFC make a special effort to finance
environmental projects?
Because accelerating market acceptance of
environmentally beneficial technologies, products and services
offers one of the best ways to meet IFC’s mission of
improving people’s lives
and
reducing poverty
IFC Renewable Energy Portfolio
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11 projects in 7 countries + 1 regional + 3 global
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Total project cost $860 million
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Financing of $240 million for IFC’s account plus $200 million in
syndicated commercial bank loans
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Hydro – 5 projects in Latin America + Nepal + Turkey
Geothermal and biomass cogen in Guatemala
Financial Intermediaries – Energia Global, REEF
Energy Efficiency (includes distribution)
Potential Transactional Barriers
for Renewable Energy
 Smaller project sizes
 Longer lead times
 Higher ratio of capital
costs to operating costs
 Newer technologies
 Less experienced sponsors
 Unfamiliar to financiers
 Either excess or absence
of concessional funding
 Higher transaction costs
 Higher development costs
 Need for longer-term
financing at reasonable rates
 Higher operating risks
 Higher completion and
operating risks
 Scarce/higher-cost capital
 Over-subsidized or
under-competitive
Financing for GHG Reduction
• Global Environment Facility (GEF)
– UNFCCC
• Carbon Finance/Emissions Trading
– UNFCCC and Kyoto Protocol
IFC/GEF Climate Change Projects
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Photovoltaic Market Transformation Initiative
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Solar Development Group (SDG)
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$21 M for SMEs from Costa Rica to Bangladesh
Hungary Energy Efficiency Co-financing Program
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$65 M worldwide fund ($15 M IFC + $30 M GEF)
Small and Medium Scale Enterprise Program
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$50 M global equity/BDS fund for PV ($6 M IFC + $10 M GEF)
Renewable Energy and Energy Efficiency Fund
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$30 M to accelerate solar power in India, Kenya, Morocco
$17 M partial guarantee facility ($12 M IFC + $5 M GEF)
Commercializing Energy Efficiency Finance Program
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$48-93 M partial guarantee facility ($30-75 M IFC + $18 M GEF)
Why is IFC interested in Trade of
Emission Reduction Credits…..
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IFC specializes in project-based investments
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New source of financing for projects in our pipeline and
portfolio that will reduce GHG Emissions
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Stimulate participation of developing country private sector in
evolving market (non-IFC projects)
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Lower marginal costs to reduce GHG emissions in developing
and transitional countries
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Facilitate transition to private sector intermediation and
provision of value-added financial products
Impacts of Emission Reduction Sales
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World Bank and others have found ER revenues can have an
impact on Project IRR:
For
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example, @ $3/mtCO2e...
Energy efficiency / district heating
Wind
Hydro
Bagasse
Biomass with methane kick
Municipal Solid Waste
2.0-3.0%
0.9-1.3%
1.2-2.6%
0.5-3.5%
up to 5.0%
> 5.0%
IFC-Netherlands Carbon Facility (INCaF)
• Estd. Jan 2002 in partnership with Dutch Government
• €44 M to buy GHG emission reductions
– from eligible projects in developing countries that reduce or avoid
GHG emissions compared to BAU
– under KP’s Clean Development Mechanism for benefit of Netherlands
to use toward national obligations under KP
• Target sectors
– Renewable energy, Energy efficiency, Fuel switching
– Waste management, Landfill gas and CBM utilization
• Location
– All developing countries except Central & Eastern Europe
General Requirements
• Eligible sector and region
• Project likely to close in short-term
• IFC and non-IFC projects eligible
– Non-IFC projects subject to due diligence and E&S review
• Host country approval
– KP ratification
– Endorsement of project
• Independent Audits focusing on:
– Likelihood of project to achieve reductions
– Achievement of actual reductions over time
What does INCaF offer?
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Cash in €
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Forward contracts
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Additional revenue stream (enhancement) for projects
‘Upfront’ payments possible in some cases
Can expect €3-5/mtCO2e
Payments over 7, 10, or 14 years
Periodic certification of actual GHGs reduced
Assistance (incl. financial) at all stages
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Project design & baseline identification
Monitoring & verification plan
Validation and registration
Value Added for RE Projects
• Improves competitiveness of power generation from landfills
and other sources of methane
• Can make some marginal RE projects bankable
• Reduces investor/lender risk
– Provides contracted flow of forex for seller
– Cash flows from sale of ERs can provide security for lenders (e.g.,
improved DSCR)
• Advance payments can be critical to financial closure
– Stricter standards apply
• Transaction costs have to be managed
Current CDM Pipeline
Letters of Intent Signed/Under Negotiation
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Industrial fuel switching – V&M Tubes, Brazil [€15M]
Waste-to-energy – South Asia
3 x 8-10 MW biomass – South America
Biogas – Southeast Asia
25 MW bagasse – Central America
3 x 12-15 MW small hydro – South America
100 MW hydro – South America
2 x 20 MW bagasse – South Asia
Sample Projects Under Review/Discussion
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Waste-to-energy – South Asia
4 x 3-8 MW small hydro – South Asia
70 MW biomass – Latin America
40 MW bagasse – Latin America
Fuel switching – Africa
Transaction Costs
• Key to expanded participation by private sector, and therefore,
success of CDM
• INCaF’s early experience in reducing transaction costs
– Purchase significant portion of ERs generated by project
– Working with sponsors / investors who have contracted with advisors
– Anchor buyer for projects generating large volume of ERs (ability for
other smaller buyers to come in at significantly lesser costs)
– Bundling of smaller projects to take advantage of common sponsor;
sector; baseline – need a theme to wrap around
– Processing with project & contract structuring / streamline Kyoto
Protocol requirements
IFC’s Plans Going Forward
• Establish a JI Facility
• Intermediation: A few small CER (CDM) and ERU (JI) & AAU
transaction structures and vehicles as private sector roles and
activities increase
– Prefer to partner with companies/FIs with long term interest in
emerging markets
• Value-added products
– Use IFC ability to take long term credit risk
– Develop project finance-related products in collaboration with other
FIs to unlock the investment potential of ERPAs
• Consider investing IFC capital in carbon market businesses and
products
Carbon Finance:
Issues and Opportunities for the Private Sector
For additional information on IFC’s carbon finance activities,
please contact:
Sid Embree
Consultant, Carbon Finance
Environmental Finance Group
International Finance Corporation
Washington, DC USA
phone: +1 202 473 1830
fax:
+1 202 974 4404
e-mail: [email protected]
web:
www.ifc.org/carbonfinance