cdm projects-mus's csr activities

Various Barriers Various Barriers Associated with CDM Associated with CDM

ProjectsProjects

May 26th, 2006

Clean Energy Finance Committee

TBLI 2006

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1. What is CDM

a)Clean Development Mechanism(CDM): a mechanism to monetize environmental value of pro-environmental projects.

b)CDM thus gives additional revenues to Greenhouse Gas(GHG) mitigation projects.

c) In addition, CDM status often helps with financing. A project is more attractive to equity and debt investors with CDM status.

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2. Certified Emissions Reductions (CERs)a)Represents GHG mitigation contribution

of a project. Measured in tonnes of CO2.

b)CERs can be sold in exchange for hard currency.

c)Reduction before 2008 (1st year of Kyoto Protocol commitment period) can be included.

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3. CDM Process

a) Project Design Document (PDD). ・ Core document in the CDM process ・ Includes preliminary calculation of CERs. ・ Must be prepared in accordance with an approved methodology. ・ Can be produced by the developer but often outsourced to CDM professionals.

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3. CDM Process (Continued)

b) Initial approval (Validation). ・ Host country government. ・ CDM Executive Board.

c) Project implementation.

d) CER issuance based on actual reduction.

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3. CDM Process (Continued)CDM Steps

Project

Design

Document

Validation Registration Monitoring Verification CertificationCER issuance

and registration

Host

Country

Confirmation

Designated

Operational

Entity

Project implementation

• Conducted by project participants

• Provides basis for verification

• Assurance by a DOE

• Certifies the amount of verified reduction

• Issuance of Certified Emission Reductions (CERs)

• To be recorded at EB registry

• Conducted by a DOE (Different DOE except for small projects.)• Determines that the monitored emission reduction has in fact occurred

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4. Barriers• CDM is one of the best mechanism that

provides incentive to GHG mitigation projects existing today.

• However, there are many barriers associated with the CDM.

• Such barriers can be categorized into10 types among 11 stakeholders.

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5. Barriers: conceptual schema

Project Developer

Trading partner Host govt.

Financing party

Technology supplier

Investor country government

Trading partner

Financing party

Technology supplier

①②

③

④⑦

⑧

⑨

⑩

Host country External

Raw material supplier

⑤

Other

⑥

Note 1: External trading partner includes CER buyer　　 Note 2: “Other” can include geographical, social and cultural considerations not listed in 1 – 5

(from Mitsubishi Research Institute)

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6. Barrier Analysis

○ Barriers associated with Project Developer● Barriers associated with Project Developer’s counter party

Barrier category Specific BarrierAwareness level of pro-environmental projects ÅõL ow Motivation ÅõSmall scale and potential ÅõProfitability ÅõL ack of financing ÅõL ack of know-how, technologies, skills andcreditworthiness ÅõCreditworthiness of project developer ÅõCompliance risk ÅõGovernment regulations ÅúBounty system ÅúL aw, accounting and taxation system ÅúGovernment approval risk ÅúCreditworthiness of project developer ÅõInstability of demand ÅúUnstable product price ÅúUncertainty of industry, market, operation level ÅúDistribution risk ÅúCreditworthiness of project developer ÅõCreditworthiness of raw material supplier ÅúInstability of supply and price ÅúQuality ÅúOn time delivery ÅúCost overrun on construction ÅúUncertainty of industry, market and operation level ÅúUncertainty of raw material and energy supply ÅúCreditworthiness of project developer ÅõProfitability ÅõFund-raising capability ÅõDeterioration in financial standing ÅõAwareness level of pro-environmental projects ÅúL iquidity Åú

Ö@ Host Government - Project Developer

Within Project Developer

ÖA Trading Partners within the Host Country - Project Developer

ÖB Raw Material Supplier - Project Developer

ÖC Host County F inancing Party - Project Developer

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6. Barrier Analysis (Continued)

○ Barriers associated with Project Developer● Barriers associated with Project Developer’s counter party

Barrier category Specific BarrierCreditworthiness of project developer ÅõSkilled labor ÅõAccessibility ÅúHigh cost ÅúCreditworthiness of technology supplier ÅúUnpredictable events related to the technology ÅúUncertainty of industry, market, operation level ÅõCompliance risk ÅõSocial acceptability, cultural and custom issue ÅúLocation ÅúLoss of employment ÅúUnpredictable events related to technology ÅúCreditworthiness of project developer ÅõSkilled labor ÅõAccessibility ÅúHigh cost ÅúCreditworthiness of technology supplier ÅúExchange Rate risk of host country ÅúUnpredictable accidents related to technology ÅúCreditworthiness of project developer ÅõProfitability ÅõDeterioration financial standing ÅõExchange Rate risk of host country ÅúL iquidity ÅúCreditworthiness of project developer ÅõUncertainty of project implementation ÅõCompliance risk Åõ

ÖI External Government - Host Government Political risk and unpredicted events Åú

ÖD Technology Supplier in Host County - Project Developer

ÖE Other - Project Developer

ÖH External Trading Partner - Project Developer

ÖG External F inancing Party - Project Developer

ÖF External Technology Supplier - Project Developer

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7. Case Study – Gas power-gen in India

Project Owner


Financing party

Technology supplier


Trading partner

Financing party

Technology supplier

①②

③

④⑦

⑧

⑨

⑩



⑤

Other

⑥

Project Owner


Financing party

Technology supplier


Trading partner

Financing party

Technology supplier

①②

③

④⑦

⑧

⑨

⑩



⑤

Other

⑥

Project Owner


Financing party

Technology supplier


Trading partner

Financing party

Technology supplier

①②

③

④⑦

⑧

⑨

⑩



⑤

Other

⑥

Project Developer


Financing party

Technology supplier


Trading partner

Financing party

Technology supplier

①②

③

④⑦

⑧

⑨

⑩



⑤

Other

⑥

Upgrade to single to combined cycle at 42MW gas power plant in NE India

Power tariff•Lack of confidence in long term stability of power tariff

Credit supply and return on investment•Heavy upfront investment – US$32m for a 42MW plant (payback est. at 4 years)

Technology risks•Water-cooled system needs reliable water supply and creates thermal pollution problem•Air-cooled system can be installed, but no regional expertise in specialized maintenance needs

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8. Case Study –Cement Works Energy efficiency in China

Project Owner


Financing Technology supplier


Trading partner

Financing party

Technology supplier

①②

③

④⑦

⑧

⑨

⑩

External


⑤

Other

⑥

Project Developer


Financing Technology supplier


Trading partner

Financing party

Technology supplier

①②

③

④⑦

⑧

⑨

⑩

Host countryExternal


⑤

Other

⑥

Loss of employment•Technology can only be applied to large plants•Social pressure to maintain smaller plants which provide significant employment in some localities

Heavy investment requirement•Cement must be sold at a higher price tobe viable•Loss of competitiveness leads to non-implementation

Government Policy•Govt. is actively encouraging use of this technology

•Customers unwilling to pay higher price, even for higher quality cement•Business interruption during retrofit leads to loss of business

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9. Main Barriers and Solutions

a) Counted among key barriers are 　　　 financial issues.

b) Key issues are how to increase 　・ Profitability and 　・ Fund Raising-Capacity

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UnfeasibleIncreasing

fund-raising capacity

Raising project profitability

Business-as-usual

UnfeasibleIncreasing

fund-raising capacity

Raising project profitability

Business-as-usual

High

Low

Low

Fund-raisingCapacity

Project Profitability

c) These subjects correspond to the two amber boxes.

9. Main Barriers and Solutions (Continued)

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10. Raising Project Profitabilitya) Return from pro-environmental projects alone is often too

small to implement them.

Monetize their environmental contribution to augment the return.

b) The CDM is a typical example of such approach. However, pro-environmental projects which can benefit from the CDM are likely to be limited, even on the assumption that CDM rules will become less restrictive in the future.

c) Need to create a new scheme that covers the omitted projects under CDM.

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11. Increasing Fund-Raising Capacitya)A large number of worthy pro-

environmental projects, even when their profitability is high enough, are precluded from implementation for lack of funding/financing.

b)Possible solutions are1.Public-Private Partnerships2.Capital Market Avenues

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11. Increasing Fund-Raising Capacity (Continued)

• Public-Private Partnership With partial funding by the public sector and

indirect supports by Governments / International Financial Institutions, risks can be mitigated.

• Capital Market Avenues Create investment vehicles to channel

developed country green money to developing countries’ pro- environmental projects.

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12. Clean Energy Finance Committee1) Established in Feb. 2001 to assist renewable energy

and energy efficiency projects with our firm’s financial expertise.

2) The Committee is a fully-fledged business unit with twenty-eight staffs (twenty-two full-time professionals), speaking twelve languages in total.

3) Networking with local consultants in Hong Kong, Philippines, Indonesia, Brazil and Argentina.

4) A global leader in CDM consultancy: one of the only three private firms in the world with more than three approved methodologies.

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13. Mitsubishi UFJ Securities’ Approach to CDM1) MUS’s services are to assist project developers in

obtaining CERs through 　　・ PDD Production ・ Acquisition of required approvals 2) MUS also helps with the sale of the CERs if the clie

nt so wishes. Not tied to any particular buyer, MUS always looks after the best interest of project developers (CER sellers).

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14. ContactMitsubishi UFJ Securities Co., Ltd.Clean Energy Finance Committee

S. NishidaContact: [email protected]

cdm projects-mus's csr activities

Economy & Finance