Carbon Financing for RE Projects

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1 MENA Carbon Forum 2009 Cairo, Egypt How to overcome the barriers to unlock the CDM potential in RE Sector Nikolaus Wohlgemuth

2 Overview 1 About First Climate 2 Carbon Financing Background & Overview 3 Carbon Financing How does it work? 4 Carbon Financing Impact on Renewable Energy Projects 5 Summary and Findings 2

3 First Climate 10 Years Experience in the Carbon Market A leading carbon asset management company Early 2008: First Climate established through merger of 3C and Factor Factor Consulting + Management AG (founded in 1999 in Zurich, CH) 3C Group (founded in 2003 in Frankfurt / Main, Germany) Assets under management (2008): EUR 235 million Turnover (2008): EUR 35 million offices on 5 continents 100+ employees Member of International Emissions Trading Association (IETA), International Carbon Reduction and Offset Alliance (ICROA) and Carbon Markets and Investors Association (CMIA) 3

4 Global Player: Offices on 5 Continents Washington, D.C. Paris Luxembourg Frankfurt Zurich Berlin Warsaw Offices Partnerships San Francisco Santiago de Chile Kolkata Singapore Hanoi Beijing Sydney 4

5 First Climate's Core Competencies Integrated Carbon Asset Management Carbon Investment Advisory Sales & Trading Carbon Asset Development Project Finance Climate Neutral Services 5

6 Overview 1 About First Climate 2 Carbon Financing Background & Overview 3 Carbon Financing How does it work? 4 Carbon Financing Impact on Renewable Energy Projects 5 Summary and Findings 6

7 Carbon Finance Background Financing through the Clean Development Mechanism (CDM) Origin: Kyoto- Protocol of the United Nation Framework Convention on Climate Change (UNFCCC) Kyoto-Protocol: Industrialised countries (Annex 1 countries) with quantified emission reduction targets, on average, 5% below 1990 levels in Emerging markets and developing countries (Non-Annex 1 countries) without emission reduction targets! Emission reductions by Annex 1 countries mainly through domestic actions, but Kyoto-Protocol allows flexible mechanisms for financing emission reductions abroad: Clean Development Mechanism (CDM) Joint Implementation (JI) International Emissions Trading 7

8 Carbon Finance CDM Principles Kyoto-Protokoll, Art. 12: The purpose of the Clean Development Mechanism shall be to assist developing countries in achieving sustainable development [ ] and to assist industrialised countries in achieving compliance with their quantified emission limitation and reduction commitments under the Protocol. 8

9 Carbon Finance CDM Principles $ Tradable unit: Certified Emission Reduction (CER) 1 CER equals 1 metric tonne of CO2-equivalent (CO 2 e) Typical CDM project categories: renewable energy, energy efficiency, methane avoidance, industrial gases, aforestation/reforestation, fossil fuel switch 9

10 Carbon Finance Investors / Buyers Investors / Buyers: Governments of Annex 1 countries Companies with a compliance under the EU-ETS Banks & Investment funds Companies in the voluntary market Carbon Funds: Funds open (public) for investors: ~80, increase by ~15 since end of 2007 Mainly carbon credit purchasing funds, only few project financing funds New funds coming up! large amount of capital still waiting to be invested into emission reduction projects! 10

11 Carbon Finance Where does the capital flow to? Registered CDM projects at UNFCCC Buyers: increasing demand for projects from MENA Source: UNFCCC, April

12 Renewable Energy CDM Projects All Projects Renewable Energy Projects Biomass Energy Biogas Hydro Wind Solar Total RE Registered projects Total Percentage of total April % 6.2% 25.7% 14.4% 0.6% 62.4% Percentage of total April % 6.7% 25.5% 12.8% 0.5% 62.0% Source: CDM pipeline, April 2009 Important: all these projects are realised because of the Carbon Finance Component! Additionality: the project would not have been implemented without the CDM. Not business as usual! Other (non RE) 38% Solar 1% Wind 13% Biomass Energy 16% Biogas 7% Hydro 25% 12

13 RE potential in the MENA Region 2005, Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, Germany, Concentrating Solar Power for the Mediterranean Region 13

14 RE potential in the MENA Region 2005, Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, Germany, Concentrating Solar Power for the Mediterranean Region 14

15 Overview 1 About First Climate 2 Carbon Financing Background & Overview 3 Carbon Financing How does it work? 4 Carbon Financing Impact on Renewable Energy Projects 5 Summary and Findings 15

16 How does it work? emissions baseline (BAU) without CDM project certified emission reductions = CERs emission reduction monitored emissions with CDM project year 1 crediting period time after project registration at UNFCCC and implementation the project starts generating emission reductions for each year of the crediting period (e.g. 10 years) the emissions reductions need to be monitored, verified and certified by the UNFCCC after issuance the certificates can be delivered to the buyers account how does the financing mechanism look like? 16

17 Emission Reduction Purchase Agreement (ERPA) only few funds take an equity position in the underlying project or provide significant upfront financing for project implementation most buyers pay on delivery of the certificates additional yearly revenue stream to the project, making unprofitable projects financially attractive Contracting: Emission Reduction Purchase Agreement (ERPA), determines: volumes, prices and delivery structure of the transaction general terms and conditions division of project and market risk between seller and buyer upfront payment provisions (if required) Important aspects: timing of the CER sales, pricing of CERs 17

18 The dilemma of timing Question: wait for CER issuance and sell spot? higher CER prices, higher risk enter into a forward contract and sell early? lower CER prices, but guaranteed returns to the project Answer: Timing depends on financing gaps of the project and risk appetite of the seller Most project developers sell in forward contracts lock in guaranteed yearly returns upfront financing can close financing gaps (upfront financing is often discounted from unit price) bankable ERPA could help leverage other finance resources (bank loans) 18

19 Price of CERs Fixed price: Higher planning security Market developments are not taken into consideration Flexible pricing: Purchase price is bound to an index price (CER/EUA) upon date of delivery Less planning security Seller and Buyer share market risks Seller and Buyer can benefit from upside developments Current CER Prices: Project planning: EUR 6 10 Registered projects: EUR Issued CERs: EUR

20 Overview 1 About First Climate 2 Carbon Financing Background & Overview 3 Carbon Financing How does it work? 4 Carbon Financing Impact on Renewable Energy Projects 5 Summary and Findings 20

21 Example: Small-scale Wind Farm Project (grid connected) 15 MW grid connected wind farm Total investment ~ EUR 22.5 mln Emissions reductions through replacing CO2 intensive grid power with CO2 neutral energy, UNFCCC methodology AMS ID Annual emissions reductions: 30,000 t CO2 Crediting period 10 years, CER sales price (forward): EUR 10 / CER Summary of the business Yearly return through electricity sales EUR 4.5 mln Yearly return through sales of CERs: EUR 480,000 Yearly maintenance EUR 50,000 Overall CDM project development cost (10 years)* EUR ~ 250,000 IRR without CERs revenue 14.5% IRR with CERs Revenue 18.5% * Usually covered by the buyer of CERs 21

22 Project Economics Impact of Carbon Finance + Barriers IRR improvement through CER revenues Renewable energy: IRR 1 5 % Share of revenues in total investment Renewable energy and energy efficiency: up to only 20% of investment CERs cannot pay back for the entire investment! ERPA is not known by bank institutions and therefore not accepted as a collateral CER revenues cannot support the project to be financed 22

The Guarantee Vehicle An innovative approach by First Climate for RE Projects (GC)2 3 7 2 Guarantee Carbon Component Buyer ERPA 1 Annual Service Fee 6 Principal + Int.

23 The Guarantee Vehicle An innovative approach by First Climate for RE Projects (GC) Guarantee Carbon Component Buyer ERPA 1 Annual Service Fee 6 Principal + Int. on debt 6 Local Financial Institution Project sponsor 5 4 (Project company or Special Purpose Vehicle) Debt Power Off-taker 1 Power Purchase Agreement (PPA) Local currency 23

24 Overview 1 About First Climate 2 Carbon Financing Background & Overview 3 Carbon Financing How does it work? 4 Carbon Financing Impact on Renewable Energy Projects 5 Summary and Findings 24

25 Summary & Findings Carbon Finance: Interesting co-financing mechanism for renewable energy projects additional revenue stream to projects, including upfront payment options (increase of project IRR: 1-5%) Buyers perspective: Increasing demand for CDM projects in MENA (portfolio diversification), huge funds still available Contribution of carbon finance (emission reduction potential) to an RE project and CDM eligibility need to be assessed carefully and at an early planning stage! Challenging CDM project registration procedure get expert support from specialized companies CDM project development and registration costs can be covered by carbon credit buyers (e.g. through upfront payments) 25

26 Contact Nikolaus Wohlgemuth Regional Manager MENA & Pakistan First Climate (Switzerland) AG Stauffacherstrasse Zürich Switzerland Tel. +41 (0) Fax +41 (0)

The KfW Carbon Fund - Chances for CDM Projects Regional Carbon Forum for the MENA countries Rabat, April

The KfW Carbon Fund - Chances for CDM Projects Regional Carbon Forum for the MENA countries Rabat, April 05 2007 Alexander Luthe / Rainer Suennen KfW Carbon Fund Tel: 0049-69 7431-4216/-2431 or -4218 alexander.luthe@kfw.de