cdm projects: risks and contracts
DESCRIPTION
CDM Projects: Risks and Contracts. Sao Paulo, Brazil, November 22, 02. charlotte streck pcf. Purpose of our ERPA. Record agreement Identify responsibilities Establish rights Manage Risk. Assessing Risk. How does PCF identify and assess risks? PIN: Risk screen PCN: Risk matrix - PowerPoint PPT PresentationTRANSCRIPT
CDM Projects:Risks and Contracts
charlotte streckpcf
Sao Paulo, Brazil, November 22, 02
Purpose of our ERPA
• Record agreement
• Identify responsibilities
• Establish rights
• Manage Risk
• How does PCF identify and assess risks?– PIN: Risk screen– PCN: Risk matrix– Preparation: Baseline study, Validation, ESR– Appraisal: Assess full range of risks– Structuring: Mitigate risks
Assessing Risk
Defining, Assessing, and Reporting Risk
• PCF establishes a risk profile for the project as soon as it signs an Letter of Intent
• Project Concept Note– Profiles risk by class, defines specific risk
and proposed mitigants– Contains results of “upstream” risk
assessment (environment and social or “safeguards” policy risks, sponsor and financing risk, unique carbon asset risk)
• Project Risks– Construction risk (built/operated on schedule?) – Performance risk (e.g. resource risk)
– Counterparty risk (will offtakers pay on time?)
– Financial and business risk (is capital structure viable, debt serviceable? Is parent company sound? Will product sell?)
Sources of Risk I
Sources of Risk II
• Baseline Risk– Eligibility--will ERs be Kyoto-compliant?– Baseline design--is the baseline robust? Will its
assumptions remain valid over time?– Performance--actual performance will determine
level of ERs generated
• Market/Price Risk– Will there be a market for project-based ERs? – Will contract price meet market price?
• Policy/Compliance Risk– What if the Kyoto Protocol doesn’t enter into
force?– What if host country does not ratify or comply?
Market and Policy Risk are closely linked
Sources of Risk III
Risk Allocation
• Principle: Assign risk to the party best able to bear it
• PCF primarily assumes:– Kyoto– Baseline– Market
• Investors/creditors assume most project risks• PCF mitigates against project risk• Country risk is shared
Assessing Risk Risk Matrix
PROJECT RISKS:Technology ResourceCompletion Env/Social Transmission
Delay in plant commissioning, delivery of ERs
=>Evaluate technology and Sponsor experience =>Evaluate resource risk (Baseline study) =>Conduct Env. & Social Review=>Evaluate grid reliability, transco contract
=>Limit upfront pmt=>Require EIA
Risks/ Factors
Potential Impact
Risk Assessment PCF Mitigation
COUNTRY RISKMacro stabilityKyoto Protocol Risk
=>Stable investment climate; “A” rating=>WB evaluates country risk =>WB evaluated KP risk
Baseline Risk
=>Evaluate financial projections/assumptions; =>Sensitivity analysis on key parameters
Project generates fewer ERs than expected
Financial sustainability
=>Baseline study to evaluate. =>conservative ER projections
Mitigating Risk• Baseline risk:
– Baseline study, assessment of “carbon asset” risk – Reasonable but conservative estimate of ERs– Rigorous monitoring
• Market risk:– Purchase of call options– Conservative pricing– Seniority through:
• Legal seniority• Overcollateralization – purchase less than 100% of ERs• Structural seniority – purchase early vintages
• Policy/compliance risk: – LoA/Host Country Agreements in JI countries
Mitigating Risk II• Project Risk:
– Seniority: also protects against project risk
– Sharing of ERs: provides incentive to perform
– Capitalization of costs: PCF costs deducted from payment
– Payment on delivery (“commodity” model)• PCF faces reinvestment risk only.
– Limitation on up front payment (extraordinary
circumstances, 25% limit)
– Price discounted to reflect risk
Exercising Seniority in PCF Projects
Theoretical maximum ER output
Anticipated ERs from Validated Baseline
2012Time in Years
Volume of ERs
PCF’s Contracted Annual ER Purchase
ERs Available for Parallel Purchase
Year 1
PCF Takes First ERs up to its Agreed Annual Volumes
Exercising Seniority in PCF Projects
Theoretical maximum ER output
Anticipated ERs from Validated Baseline
2012Time in Years
Volume of ERs
PCF’s Contracted Annual ER Purchase
ERs Available for Parallel Purchase
Year 1
PCF Takes First ERs up to its Agreed Annual Volumes
Parallel Purchaser Contracts rest up to Validated Asset Level
Exercising Seniority in PCF Projects
Theoretical maximum ER output
Anticipated ERs from Validated Baseline
2012Time in Years
Volume of ERs
PCF’s Contracted Annual ER Purchase
ERs Available for Parallel Purchase
Year 1
PCF Takes First ERs up to its Agreed Annual Volumes
Parallel Purchaser Contracts rest up to Validated Asset Level
PCF Sweeps any annual surplus
Shortfall Make Up Rights for PCF
Theoretical maximum ER output
Anticipated ERs from Validated Baseline
2012
Volume of ERs
Year 1
PCF Takes First ERs up to its Agreed Annual Volumes
Parallel Purchaser Contracts rest up to Validated Asset Level
Year 2Actual Year Two Production Falls below PCF Annual Contracted Volumes
Shortfall Make Up Rights for PCF
Theoretical maximum ER output
Anticipated ERs from Validated Baseline
2012
Volume of ERs
Year 1
PCF Takes First ERs up to its Agreed Annual Volumes
Parallel Purchaser Contracts rest up to Validated Asset Level
Year 2Actual Year Two Production Falls below PCF Annual Contracted Volumes
PCF is made whole in next year before Parallel Purchasers Get ERs
Elements of ERPA
Parties: PCF Trustee – Project Entity
Content of ERPA:• Obligations of the Parties
– Purchase of ERs: Price – Exclusive Right / [Transfer]– Additional obligations of the PCF Trustee
– Additional obligations of Project Entity
• Events of Default
• Remedies
• Conditions of Effectiveness
Purchase of ERs
• Purchase of an agreed amount of ERs• Agreed payment of $US [___] per ton of CO2• Payment on delivery [annually]• Delivery: Submission of certificate issued by an independent
third party• Biennial certification possible [payment annually/biennally]• All ERs /Minimum Amount of ERs /Additional ERs
Recovering of Costs • Project preparation costs• Initial validation, verification, certification,
periodic certification, supervisonDeduct from payment:Estimate [not more than ____]
Obligations of the Trustee• Pay the installments of the purchase price
(net of costs)• Arrange for the initial verification, and
periodic verification and vertification• Others (e.g. exchange of information)
Obligations of the Project Entity• Carry out the project with due diligence• Monitoring and data collecting according to the MP• Grant the PCF the exclusive right to arrange for
initial and periodical verification and certification• Grant the validator, verifier and certifier access to the
project• [Facilitate] transfer of ERs
Events of Default
Project Entity• Failure to deliver ERs• Significant delay in project construction• Other project financial not in place by a certain dateTrustee• Failure to pay purchase price in time• Failure to arrange for validation, initial and periodic
verification, and certification
Questions ?
Conclusions• Carbon finance can:
– Improve IRRs (at zero cost to project)– Help secure financing, reduce project risk
• PCF assumes most carbon-related risks in carbon purchase transactions
• Price depends on residual risk• Building carbon finance into projects can make them
bankable• We are here to help, as part of your team.
Risk Mitigation in PCF Transactions
www.carbonfinance.org