Financing Low Carbon City Development Geoff Sinclair Standard Bank
Standard Bank in the carbon market 2 Traders & funds CDM project Compliance buyers Finance Project Transactional Structured Origination Primary Structuring Purchase Distribution Trading Structuring Trading Primary Secondary Structured Structuring EUA/CER Swaps Repo Financing Risk Management Cross Commodity
Emerging Markets Presence 3
Overview of the Carbon Market 4 Countries with emissions caps Assigned Amount Units (AAUs) Governments domestic legislation EU ETS CERs Kyoto Protocol Clean Development Mechanism Voluntary offsets Japan scheme ERUs Joint Implementation Regional/ state schemes
Financing against project commodity outputs 5 Sale of power and reactive power under PPA Utility Incorporation of Carbon Credits into Normal Finance Instruments Securitising carbon credit contracts in USD and EUR Project Finance Structured Trade Finance Corporate Finance Etc. Energy Project Sale of carbon credits under ERPA Compliance Buyer
6 Figure 3: Estimated Total Investment in CDM Projects by Stage, 2005-2010 100 90 80 70 lion USD bill 60 50 40 30 20 10 0 2005 2006 2007 2008 2009 2010 Projects entering the CDMPipeline Projects that requested registration Projects registered Projects w ith initial issuance during the year 2010 annualisation
Primary Carbon Pricing 7 PDD stage project sold in early 2008 gained a higher price than a registered project in early 2009 Project owners are exposed to the price of carbon from the very earliest stages of their project
Project-level lending 8 8 Carbon-backed finance and trade Project earns carbon credits Combined financing package incorporating carbon and project finance PF facilities $xx million Forward sell carbon credits SB Client SB plc Carbon-backed facility $yy million Payment on delivery
Structuring Prefinancing against a single project 9 Possible financing solution for parastatals and municipals For government owned projects Project sells carbon credits under a bankable Emission Reductions Purchase Agreement (ERPA) Prepayment given against ERPA forward income stream Prepayment enhances project finance Carbon Credits Standard Bank (Carbon) City (Carbon Project Owner) Term Loan Prepayment Project Finance Government Possible Guarantee of Payment obligations
Structured Portfolio Transaction 10 Carbon Finance Deal of the Year Camco International 5.8 million tonne structured distribution with 15 million advance payment Project 1,2,3,4 9 Project pool Tranche A Tranche B Tranche C Up front payment
Program of activities energy efficiency 11 CERs PoA registration activity Standard Bank enters into contracts to purchase carbon credits from the implementation of energy efficiency projects with various building owners in Singapore These projects will be registered under a PoA financed by Standard Bank. Building owners electing to register their energy efficiency projects under the PoA will sell CERs to SB
Challenges in financing energy efficiency 12 Payoff based on reduction in demand (nonconsumption) Cities able to monetise through capital savings + tariffs Potential long time period for payoff Cities can aggregate and, if necessary, underwrite tenors At a micro level, will households keep doing the activity? Role for regulation and standards; Use of aggregation/portfolio approach Scale Aggregation + Notes/Bonds
Development of Notes for city green finance 13 Note: A short-term debt security, usually with a maturity of 5 years or less Typical structure: Capital repayment + interest Tranches can form basis of notes Use of funds: underlying activity City may also choose to replace CER revenues with energy efficiency savings, white certificates etc Project 1,2,3,4 9 Project pool Tranche A Tranche B Tranche C Depending on which commodity is created the payoff on the note could be a (capital) guaranteed basis + performance bonus Often, cities may be restricted by legislation Up front payment
Using Bonds 14 Bond: A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing Green Bond: A bond whose proceeds is used for green purposes Any bond typically needs an underwriter - World Bank is currently developing green bonds where the WB provides surety over capital repayment + a floating coupon (interest rate) - Potential for cities to participate in a bond programme or to create their own
Green bond example: Energy efficient lighting rollout 15 Use of funds: rollout of CFL lamps across a city with zero or low cost to end user Source of payoff: (1) CERs (2) Reduced lowincome energy subsidies Externalities: Reduced energy poverty Lamps Top-up Payment Distribution CER Sales / Revenues CDM Monitoring Cashflow finance
Using bonds for finance 16 Support Lamps Bond investors Payment Distribution CER Sales / Revenues CDM Monitoring Cashflow finance
Key Issues 17 Devising a viable green development programme Understanding where the payoff comes from (carbon, energy savings, tariffs, avoided capital expenditure) Understanding the role of the City government and legislative constraints Structuring a viable and attractive financing mechanism
18 Geoff Sinclair Head of Carbon Sales & Trading geoff.sinclair@standardbank.com +44 20 3145 6890