cdm project finance
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CDM PROJECT FINANCING
Pim KieskampSenior Climate Change Adviser
Renewable Energy, Energy Efficiency and Climate Change Program
(REACH)
Asian Development Bank
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Requirements (energy) projects
old present GEF CDMdesign
financial analysis
economic analysis
environmental impactassessment minimal(more or less)
(indirectly)
social impact
assessment
(more or less)
(indirectly)
contribute to sustainabledevelopment
(indirectly)
stakeholders involvement not really
GHG reduction (appreciated)
documentationof GHG
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So, main striking characteristics of CDM is stringentdocumentation of baseline and monitoring
Why is that? Because Annex I countries have tocomply with KP target and they want to do that inthe most cost effective way.
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Kyoto Protocol:Overview
Present
day
2012
(BaU)
Assigned Amounts
Domestic Actions
Joint Implementation
Emission Trading
Annex I
EmissionTrading
CleanDevelopment
Mechanism
Domestic Actions
2012 with
KP
- 5%
1990 level
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Baseline and CERs
CO2emission
year
Reduced emissions
Projectimplemented
Business as usual:
baseline
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Costs/burden
Ordinary project preparation requirements PLUS
Project preparation to satisfy sustainabilityrequirements (e.g., civil society participation)
Baseline MVP
Validation
Certification of reductions
On-going monitoring, verification, etc
To be born by project partners
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For many projects in Asia, financing is becomingthe single-most important factor for their successfulimplementation
Companies are finding it difficult to provide theequity needed for projects
Commercial lenders are cautious in providing newloans particularly to projects involving unfamiliartechnologies
Technologies, equipment & processes relevant forCDM are available commercially, many of whichoffer viable economic returns; yet, not many of suchprojects are being implemented in Asia compared to
what can be potentially achieved.
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Financing modalities
Self Financing:
Company uses internal funds to finance investment.
Funds come from existing cash reserves.
On Balance Sheet Financing:
Firm takes out a loan to finance the investment.
Firm reflects loan on its balance sheet.
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Finance
Equity finance Debt finance
Share issue Retainedearnings
Reserves Borrowing
External
finance
Internalfinance
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On Balance Sheet Financing Model
Loan
Construction Payment
Heat/Power
Biomass fuelsupply
Other Power
Off-takers
Construction
Services
ENERGY
PLANT
FINANCING
INSTITUTION
EPC
CONTRACTORFACILITY SITE
OWNER
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Project Finance Model
Power Salesto the Grid
Other
Investors
Biomass Fuel Supply
Fuel Payment
Loan
Repayment Loan FundingPPA Assignment
Completion
GuaranteeConstruction
Guarantee
ConstructionServices
Other FuelSupply Sources
ENERGY PLANT
COMPANY
FINANCINGINSTITUTION
EPC CONTRACTOFACILITY SITE
OWNER
Fuel Supply Power PaymentFuel Payment Power Sales
Dividends
Equity
ConstructionPayment
Heat/Power
EnergyPayment
Equity
Dividend
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Scope Financing options/SchemesSystem
Solar home systems
Small wind power
systems & hybrid
solar/wind/diesel systemsthat have no associated
distribution network
Pico- and micro-
hydropower
Size of project < 1 MW
Should develop innovative
financial mechanisms; seek
assistance for capacity building.
Self-financing On-balance sheet
Micro-credit
Grant/subsidy
RESCO/ESCO
Leasing
First-cost subsidies & lower
import duties
Mortgage financing
Vendor credit
Dealer credit
Financial bundling
Small-
scale/Non-
grid
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Scope Financing options/SchemesSystem
Mini-hydropower
Biomass gasifiers &
cogeneration systems
Wind/diesel/solar hybrids
& other medium-scale
renewable energy systems
in the range of 1-15 MW
Should use innovative financing
mechanisms, while exploiting the
benefits of financing schemes
applied to conventional energy.
On-balance sheet
Equity financing
Venture capital
Project finance (ltd. recourse)
Corporate guarantee
Grant/subsidy
RESCO/ESCO
Leasing
Vendor credit
Targeted project credit
Financial bundling
Medium-
scale/Isolated-
grid/Grid-
connected
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Scope Financing options/SchemesSystem
All (renewable) energy
systems with capacity
greater than 15 MW
Should operate within the same
financing rules applied to
conventional energy projects.
Project finance (limited/non-recourse)
Venture capital
Multilateral lending
ECAs
Political risk guarantee
Bonds issuance
Refinancing
BOO/BOT
Large-
scale/Grid-
connected
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Financial models CDM projects
So, a variety of financial options for CDM project:
Full or Partial Equity: a company finances all or co-financespart of a CDM project in return for full or shared financial
returns and CERs;
Financial Contribution: a company financially contributestowards the cost of a CDM project equal to some portion of theincremental cost of the project over and above the baselinetechnology, or finances the removal of market barriers, in returnfor CERs;
Loan: a company provides loan or lease financing atconcessional rates in return for CERs; or,
Certified Emissions Reduction Purchase Agreement: acompany agrees to buy CERs as they are produced by theproject.
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Despite the existence of the foregoingmechanisms, there is still a dearth ofexamples of projects that have been financed
(RE/EE) or will be financed (CDM), in a moresustainable way i.e., on a purely commercialbasis without full recourse to the sponsors.
WHY?
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CDM:Project modalities
Bilateral: An investor in a Annex I (developed)country invests in a entity in a non-Annex I(developing) country, transferring financial resourcesand technology
Multilateral: Investors contribute to a multilateralfund set up by some international agency (e.g. WorldBank, ADB, or private bank). This fund invests in aportfolio of projects in developing countries designed
to generate CERs and conventional commodities
Unilateral: An entity in a non-Annex I country investsin a project in its own or another non-Annex Icountry designed to generate CERs and conventional
commodities
CDM
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CDMProject modalities:
e.g. bilateral private-private
ANNEX I
Company
Non
Annex I
Project
authorization
audit
CER
$
benefits
Abatement
fund 2%
incentives/authorization
registration
Company
$ benefits
Admin
OEn / EB
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Without CERsimplemented
With CERsnot
implemented
No CDM
Without CERs not implemented;
with CERs implemented
CDM
FIRR
CER income
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Normal project risks:
Country/political risk
Sponsor risk
Technical risk
Environmental risk
Fuel/feedstock risk
Financial/legal risk
Construction risk
Operation risk
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Apart from the normal risks there are:
New risks associated with: project preparation
project approval baseline & MVP validation
monitoring & verification of certified emissions
Additional risks lack of firm market, price, sales & trade
mechanisms/history for CERs
unfamiliarity of CDM by financiers who would needto count CERs as part of finance plan
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So, with it additional costs and additional risks is there afuture for CDM????
Example:
The Netherlands will reduce 100Mt CO2eq throughCDM/JI (tender, CDM facilities etc) at average costsof ca 4 US$/ton CO2eq
This means 400 M US$ for CERs/ERUs. Contribution
to the capital costs may by be 5-15% (at least forCERs). Consequently an investment of 4,000 M US$is needed to generate the credits for the Netherlands.
Note: Should be new and additional (see also sheet
FIRR)
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Characteristics of expected CDM Market* Asia
Volume : 100 - 200 Mt C year
Export revenues: 1500 - 5000 M US $
Profit : 500 - 2500 M US $Expected beneficiaries
China, India
Indonesia, Philippines, Bangladesh and Pakistan
* Without USA
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pkieskamp@adb.org
+63 2 632 6607
www.adb.org/REACH
mailto:pkieskamp@adb.orgmailto:pkieskamp@adb.org
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