Forest Carbon Partnership Facility

Transcription

1 Forest Carbon Partnership Facility Portfolio Management and Selection of ER-PINs Tenth meeting of the Carbon Fund (CF10) Bonn June 16-19, 2014

2 Outline Overview of portfolio management: What decisions need to be made at CF10 and what are the parameters? Long Term Financial Plan: How much money is available to select programs into the pipeline? Pipeline simulations

3 ER-PINs (and Early Ideas) Presented at CF10 Africa Asia Latin America CF10 Republic of Congo (Madagascar) Vietnam (Cambodia) (Indonesia) Chile Peru (Colombia) (Guatemala) 3

4 Task at CF10 Two decision points to select ER programs: 1. Selection into CF pipeline based on ER-PIN (concept-stage ideas) sign Letter of Intent (LOI), allocate up to $650,000 not yet expected to meet every MF standard signing an LOI does not automatically mean an ERPA will be signed 2. Selection into CF portfolio based on ER-PD (full proposal) signing of Emission Reductions Payment Agreement (ERPA).

5 Business Process: Next steps after Selection into the Pipeline Selection into the pipeline gives Country a green light to further develop concept. Resolution will identify any issues that need to be addressed before signing an LOI. Country is not expected to be fully compliant with MF before signing an LOI. Chair s summary will identify any issues to consider while developing an ER-PD (i.e., after signing an LOI). Upon signing LOI, $650,000 will be available for Country and World Bank costs for developing an ER-PD and due diligence. Funds will be managed by World Bank and/or FMT. Countries will need to mobilize additional and use existing resources to help advance the ER Program development, e.g. from other development partners, Government s own resources, and from FCPF existing and additional financing through the Readiness Fund 5

6 Building the pipeline: ER-PINs in the pipeline/under consideration Africa In the pipeline CF10 CF11 DRC Ghana Republic of Congo* Madagascar Mozambique** Asia Nepal Vietnam Cambodia Indonesia Latin America Costa Rica Mexico Chile* Peru Colombia Guatemala * Presented at CF9. Revised, and re-presenting at CF10. ** Not presenting an early idea at CF10. 6

7 Outline Overview of portfolio management: What decisions need to be made at CF10 and what are the parameters? Long Term Financial Plan: How much money is available to select programs into the pipeline? Pipeline simulations

8 Sources FY09 FY10 FY11 FY12 FY13 FY14 FY15-17 Totals* Australia BP Technology Ventures Canada CDC Climat European Commission Germany Norway Switzerland The Nature Conservancy United Kingdom United States of America Committed Funding Pledged Funding (Conditional) Contributions to the FCPF Carbon Fund as of June 1, 2014 (US$m) United Kingdom Committed Funding plus Pledges * Amounts may vary due to exchange rate fluctuations. 8

9 Notes re Long Term Sources and Uses Note these figures are financial projections to FY20 so they are necessarily approximations Shared Costs are based on the LTP for the Readiness Fund which assumes a steady operational budget through FY16, with 20% annual cuts thereafter 35% of Shared Costs charged to the CF (as per Charter) from July 1, 2011

10 Carbon Fund Fixed Costs Carbon Fund Fixed Costs ($000s) Actual Actual Actual Actual Actual Budget Projected Fixed Costs FY09 FY10 FY11 FY12 FY13 FY14 FY15-20 Total Carbon Fund Administration ,350 6,676 Marketing to the Private Sector Shared Costs (with Readiness Fund) 2 1,069 1,236 1,282 6,397 9,984 Total Fixed Costs ($000s) ,539 1,888 2,012 10,747 16,735 Total Fixed Costs ($m) Includes meeting costs. Assumes 3 meetings/year through FY17 then reduced frequency in later years. 2. Carbon Fund pays 35% of Shared costs from FY12 onward 10

11 Carbon Fund ER Program Costs ER Program Costs Cost per year ($000s) No of years Cost per project ($000s) No of projects Total Cost ($000s) Program Development - across portfolio 500 Preparation ,850 Preparation (dropped) Validation 9 Supervision ,625 Verification ,250 Country Advisory Support 1,000 TAPs Total ER Program Costs 9 16,095 Assumptions Number of signed ERPAs: 9 Average ERPA term: 5 years Program Preparation costs per Program: $650k Number of dropped Programs: 5 (at $200k each) Number of LoIs: 12 No validation costs Supervision Costs per Program: $625k Verification Costs per Program: $250k 11

12 Carbon Fund Sources and Uses Summary Carbon Fund Sources and Uses Summary ($m) Sources (Pledges US$m) 466 Number of ER Programs 9 Number of LoIs 12 Uses Long Term Fixed Costs (FY10-FY20) (16.7) ER Program Costs (16.1) Total Costs (32.8) Available for Purchase of ERs 433 less Costa Rica (maximum value) (63) Balance Remaining for Purchase of ERs

13 Outline Overview of portfolio management: What decisions need to be made at CF10 and what are the parameters? Long Term Financial Plan: How much money is available to select programs into the pipeline? Pipeline simulations

14 Key characteristics of ER-PINs to date Accounting Area [million ha, % of country] Forest Area in Accounting Area [million ha, % of Accounting Area] Average Annual Emissions during Reference Period [million tco 2 e/yr] HFLD Adjustment [million tco 2 e/yr] Costa Rica 4.1 (80%) n/a -4.7* ( ) Mexico Ghana DRC Nepal Chile Rep. of Congo 17.7 (9%) 17.7 (100%) 5.9 (25%) 4.6 (77%) 12.3 (5%) 9.8 (80%) 2.3 (15%) 1.2 (52%) 16.5 (22%) 8.4 (51%) 12.4 (36%) 12 (97%) Vietnam 5.1 (16%) 2.3 (45%).7* ( ) Peru 4.2 (3%) 3.4 (81%) n/a n/a n/a 6.0 n/a n/a 5.1 n/a Estimated Program ER (5 years) [million tco 2 e] 14.7** ( ) *** *** 20.6** (12+8.6) Estimated/assumed Program Effectiveness 11% 28% 13% 29% 64% 16% 37% 13% 64% Share of total ERs offered to Carbon Fund 85%**** 28% 100% 29% 100% 70% 100% 50% 52% 19.4*** * Emissions minus Removals ** ERs from reduced emissions plus enhanced removals *** Includes adjustment for High Forest Low Deforestation (per Methodological Framework) ****Adjusted from ER-PIN to align with 5 year program period 14

15 Estimated Performance of Emission Reductions Programs Each ER-PIN has an assumed program effectiveness, i.e., the degree to which Programs are expected to reduce emissions and/or enhance removals (relative to RL emissions) during Ranges from 11-64% Depends, among others, on financing of underlying activities, policy changes, readiness progress, program partners ER Programs offer between 28% and 100% of total ER Volume expected to be generated in Accounting Area to the Carbon Fund until (of 9) offer 100% There is some indication of ER volume from Early Ideas (subject to change) Important accounting rules in the Methodological Framework Uncertainty discount on ER Volume in Accounting Area (max. 15%) Set-aside for Risk of Reversals (10-40%) Set-aside for Title Risk (fraction to be determined via risk assessment) 15

16 Calculation of Emission Reductions (per Carbon Fund Methodological Framework) ER Volume Uncertainty set aside ERs available for sale to other buyers ER Title Buffer Reversal Buffer ERs purchased by CF Subtract the reported and verified emissions and removals from the Reference Level. Set aside a number of ERs to reflect the level of uncertainty associated with the estimation of ERs (percentage of ER Volume in the Accounting Area). CF will buy percentage of the ER Volume If CF Buffer is used, set-aside of ERs in Buffer to deal with risk of Reversals of ERs purchased by the CF (percentage of ER purchased by CF). If ER Program Buffer is used to manage risk of transfer of title to ERs set-aside of ERs in Buffer to deal with risk associated with ERs purchased by the CF (percentage of ER purchased by and transferred to CF) Remaining ERs available for other use, e.g., sold to other buyers 16

17 Portfolio Simulations based ER-PINs to date Assumptions Use estimated ER volume identified in the ER-PIN (at face value ) Reported ER estimates have high uncertainty (i.e., maximum set-aside of 15% on total ER volume from Accounting Area applies) Buffer ERs will be retired at ERPA end (i.e., not paid for) Then vary Buffer amount Price Program effectiveness and assess respective capital requirements 17

18 Portfolio Simulation (1) [ Same Price ] Example 1 Example 2 Example 3 Price (indicative) $5/tCO 2 e $5/tCO 2 e $5/tCO 2 e Reversal Buffer 40% 25% 10% Program Effectiveness 11-64% (as per ER-PIN) 11-64% (as per ER-PIN) 11-64% (as per ER-PIN) Aggregate ER Payments (9 ER programs ) ⁰ ER from HFLD adjustment Average Program Value $264m $330m $396m $35m* $44m* $53m* $29m $37m $44m ⁰ Compare to $433m ($370m net of Costa Rica) for funds available for ER payments Costa Rica, Mexico, Chile, Peru, Ghana, DRC, RoC, Nepal, Vietnam * ER amount offered on basis of adjusted RL: below historical average (net positive) for DRC and Peru; above historical average (net negative) for RoC 18

19 Portfolio Simulation (2) [ Reversal Buffer = 25%, Effectiveness = 20% ] Example 4 Example 5 Example 6 Price (indicative) $3/tCO 2 e $5/tCO 2 e $7/tCO 2 e Reversal Buffer 25% 25% 25% Program Effectiveness Aggregate ER Payments (9 ER programs )⁰ ER from HFLD adjustment Average Program Value 20% (same for all) 20% (same for all) 20% (same for all) $165m $274m $384m $53m* $88m* $123m* $18m $30m $43m ⁰ Compare to $433m ($370m net of Costa Rica) for funds available for ER payments Costa Rica, Mexico, Chile, Peru, Ghana, DRC, RoC, Nepal, Vietnam * ER amount offered on basis of adjusted RL: above historical average (net negative) for RoC, DRC and Peru 19

20 Indicative key characteristics of Early Ideas (CF10) Indonesia Cambodia Colombia Guatemala Madagascar Accounting Area [million ha, % of country] Forest Area in Accounting Area [million ha, % of Accounting Area] Average Annual Emissions during Reference Period [million tco 2 e/yr] Estimated Program ER (5 years) [million tco 2 e] 16.7 (9%) 4.1 (25%) 35.9 (45 with degradation) 1.9 (11%) 1.6 (84%) 6.6 (6%) 4.8 (73%) 7.8 (72%) 3.3 (42%) 20.6 (35%) 4.0 (20%) tbd

21 Program Portfolio Risk Management Key measures to manage risk of ER Program under-performance or failure and minimize its potential impact on the overall Program portfolio: Stage 1 - ER Program portfolio selection process Select ER Programs on the basis of certain ER Program selection criteria, including country/regional diversification and quality criteria Key determinants of program performance (in addition to the criteria defined by CFPs) include Sustainability (alignment of ER objectives with other development objectives and incentives) Effectiveness (availability and targeting of underlying investments that generate ERs) 21

22 Program Portfolio Risk Management (cont.) Stage 2 - ERPA signature process Enter into ERPAs only for ER Programs that finalized or significantly advanced on certain program implementation risk aspects, including o Benefit Sharing Plans o Safeguards Plans o Reversal Management Mechanism o Ability to transfer Title to ERs, etc. Determine the Contract ER volume conservatively (taking into account additional Buffer volumes) Consider the use of Call Options (Buyer s right, but not obligation, to purchase additional ERs) and Put Options (Seller s right, but not obligation, to sell additional ERs); with a preference for Call Options (if negotiable) 22

23 Program Portfolio Risk Management (cont.) Stage 3 - ERPA implementation process Provide for reasonable exit strategies, including Fulfilment of certain conditions within specified time period for ERPA sale and purchase obligations to become effective; otherwise: early exit through ERPA termination. Allow for certain remedies in case of Events of Default (e.g., contract ER volume reduction, termination, etc.) Use of Call Options (if negotiated) to offset under-performance or failure of other ER Programs 23

24 Key Messages (1) Including RoC and Peru as HFLD countries does not jeopardize the goal of net emission reductions below historical levels for the portfolio. Peru and Vietnam do not change the averages much; there is room for 8-9 ERPAs (per discussion at CF9). Reference Level is an essential feature of an ER Program. Values presented in ER-PINs are only early indications; some fundamental questions remain in several cases A comprehensive assessment at ER-PD stage will be essential Most countries construct RL on basis of roughly data; at ER-PD stage more recent data can and needs to be included A price signal Provides guidance to REDD+ countries and helps in ER Program design Helps manage expectations Makes portfolio management more predictable 24

25 Key Messages (2) Long program preparation reduces effective ERPA period Estimated ER potential is based on period If Facility was extended, larger ER volumes would be possible Multiple verification events are difficult during a short ERPA term and confidence in estimates decreases Timeframe for program implementation is challenging Current optimistic timeline: 3-4 years of implementation. Short implementation periods imply selecting more Programs with smaller volumes; decreases ambition of Programs during FCPF lifetime. Fewer programs increase risk of under-delivery by Over-programming risks more countries delivering than can be accommodated in the portfolio; need to manage country expectations. If aiming for larger volumes per Program, consider extending CF beyond

26 FMT Recommendations for CFPs Consideration Support a total of LOIs for an eventual portfolio of 8-9 ERPAs (as per CF9) ER-PD development takes time! New programs can be added if/when new capital becomes available ER volumes tend to be smaller; it will take time for programs to get traction and become effective; expected effectiveness may be optimistic Portfolio can be managed more efficiently: allocate ERs based on better estimates in ER-PD Note: Aggregate value of LOIs can exceed capital as they set a maximum value Provide full amount of $650,000 for ER-PINs selected into the pipeline Time to make revisions prior to CF11 is very limited The portfolio (based on simulations and assumptions) could support the current set of HFLD countries No additional HFLD countries are expected going forward 26

27 Task to CFPs: Required CF10 Outcomes Which of the 4 ER-PINs do CFPs agree to select into the pipeline at CF10? For those selected, what is maximum volume in the LOI? Maximum volumes could be determined on the basis of estimated ERs Provide strong feedback and indicate interest in Early Ideas Think critically about the vision for the pipeline and portfolio at CF10 to facilitate selection of remaining ER-PINs at CF11 27

28 THANK YOU! 28