Clean Development Mechanism Clean Development Mechanism in Caucasus and Central Asiain Caucasus and Central Asia

Jan-Willem van de VenPPC Officer Energy Business Group

European Bank for Reconstruction and Development

EAP Task Force and PPC 1 April 2005, Chisinau, Moldova

ObjectivesObjectives

To inform on CDM activities in the EECCA region, and especially the Caucasus and Central Asia;

To inform on EBRD Carbon Finance activities in the region, and;

To identify key barriers to development of CDM in the region, and identify further PPC EAP TF activities.

Structure:Structure:Introduction to the Clean Development Mechanism

Results “CDM in Caucasus and Central Asia” PPC project until now, including:

– Initial assessment of CDM potential:

– Selection and development of a CDM pilot project

– Regional Workshop for Project Developers/Investors

Main Barriers Identified

EBRD activities to enable the CDM potential.

Discussion on areas for further EAP – PPC activities

What is the rationale for CDM?What is the rationale for CDM?CO2 emission reduction targets are mandatory for industrialised Countries and EU Companies, due to respectively Kyoto Protocol (2008-2012) and EU Emission Trading Scheme (2005-2007, 2008-2012).

To meet the targets countries and companies need to invest in domestic / on-site emission reductions measures or buy Carbon Credits

Carbon Credits is tradable right to emit one tonne of CO2 or certified proof of having reduced one tonne of CO2.

Carbon Credit costs vary between countries / companies and projects

Trading allows to achieve low cost emission reductions for Buyers and the Sellers benefit from a new revenue stream for climate-friendly projects.

CDM a simple ideaCDM a simple idea

A project investment leads to GHG emission reductions compared to a baseline (which is what would happen without the project).

This emission reduction performance, monitored and certified, can be sold to countries and companies with a shortage of rights to emit GHG.

The additional Carbon Credit revenue makes the project happen.

Example CDM Wind Power ProjectExample CDM Wind Power Project

Carbon Credits

“Certified Emission Reduction”

(Emission Reduction Purchase Agreement)

electricity (Power Purchase

Agreement)debt

equity

Calculation of CERs

2002 2008 2012

Baseline

Monitored project emissions

CERs

2002 2008 2012

Baseline

Monitored project emissions

CERs

What are Certified Emission Reductions What are Certified Emission Reductions ((CERsCERs)?)?

CDM Project Cycle and involved PartiesCDM Project Cycle and involved Parties

ProjectDevelopment

CDM ExecutiveBoard

Validator(Operational Entity)

CER Purchaser

Host Country

Project Identification

Project DesignDocument PDD

IssuedCERs

Project Sponsor

Letter of Approval

Monitoring Reports

Project Operation

Project IdeaNote PIN

Consultant(Optional)

1. Potential (GDP, GDP/capita, GHG emissions, carbon intensity)

– Large potential for GHG emission reduction projects at low costs in the region

– Low level of efficiency in energy supply and consumption

– Large difference between countries (size of economy, carbon intensity)

Ranking: Kazakhstan, Uzbekistan, Turkmenistan

2. Host country capacity (ratification/DNA, political support)

– Policy and institutional setting still in development

– Awareness of the CDM benefits

– Few project developers and investors active

Ranking: Azerbaijan, Armenia are most advanced; Kazahkstancomes second

Country Ranking (1): Country Ranking (1): AnalysisAnalysis CAPCAP--SDSD

Country Ranking (2): Country Ranking (2): RatificationRatification KyotoKyoto

Source: UNFCCC

Armenia - 2003 (Ac) Yes

Azerbaijan - 2000 (Ac) Yes

Georgia - 1999 (Ac) Yes

Kazakhstan 1999 -

Kyrgyz Rep - 2003 (Ac)

Tajikistan - -

Turkmenistan 1998 1999 R

Uzbekistan 1998 1999 R

Signatures Ratification / Accession

DNA established

3. General investment climate (FDI, governance, reform) Ranking: Kazakhstan (with large lead), Armenia, Azerbaijan

4. The current activities and strategic interest of EBRD in the country

Ranking: Kazakhstan, Armenia, Georgia

5. Available CDM project pipeline and project leadsMissions of CAP SD to Kazakhstan and Armenia, which also led to the fact that most project leads originated from those two countries.

Ranking: Kazakhstan, Armenia

Country Ranking (3): Analysis CAPCountry Ranking (3): Analysis CAP--SD continued SD continued

Country Ranking (4): Overall Country RankingCountry Ranking (4): Overall Country Ranking

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0,2

0,4

0,6

0,8

1,0

Armen

iaAze

rbaij

an

Georg

iaKaz

akhs

tan

Kyrgy

z Rep

Tajikis

tan

Turkm

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Ind

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1. Coal, oil and gas sector:– Associated gas (oil/gas exploitation)

– Associated gas from coal mining

2. Electricity production:– Energy efficiency, fuel switch

3. District heating:– Energy efficiency, fuel switch, CHP

4. Renewable energy:– Hydro (including small-scale), wind power

5. Waste management:– Land-fill gas recovery and use

6. Other:– Gas storage, industrial boilers, reforestation

InventoryInventory CDM Project (1): CDM Project (1): VariousVarious SectorsSectors

Inventory CDM Project (2):Inventory CDM Project (2): ResultsResults

• 35 project leads (most from Kazakhstan, Armenia and Georgia), investment about EUR 700 million

• Annual emission reduction: 6 million tCO2eq; over total crediting period: 35 million tCO2eq

• At a price of EUR 2-5 / tCO2eq: market value EUR 70-175 million

• Projects in different stage (from very concept to implemented)

• Differences in quality of data

Barriers:Barriers:

• Many projects at a very early stage of development

• Lack of awareness amongst Project Sponsors and Investors/Banks on the projects’ CER generation and sales potential

• Host country CDM procedures not established or not sufficiently communicated with the Project Sponsors

• Limited local consultancy capacity to assist Project Sponsors indeveloping the CDM component, especially concerning validation services

• Lack of Project Sponsors’ money to bridge finance the CDM related costs

• Integrity issues

CDM Market Development and Capacity BuildingCDM Market Development and Capacity Building1. Japan

– NEDO: many feasibility studies; some PDDs. Often no follow-up

– MoU signed (Kazakhstan, JI)

– Japan Carbon Fund

2. PCF / EBRD Uzbekistan

− Andijan District heating system replacement and upgrade (potential ERPA 0,63 mln 210.000 tons CO2)

− Tashkent District heating system replacement and upgrade (potential ERPA 7.00 mln 2.000.000 tons CO2)

3. EuropeAid CC/CDM capacity building (EUR 2x1 million, 3 years):

– Caucasus and Central Asia

4. Canada CIDA project:

– Azerbaijan, Kazakhstan and Uzbekistan

– Support for project development

CDM in Caucasus and Central Asia CDM in Caucasus and Central Asia Scenarios (A): Marginal Market (current situation)Scenarios (A): Marginal Market (current situation)

Current CER prices ( € 3 - € 5 / ton CO2-equiv)

Low level of awareness among project developers

Lack of CDM expertise and upfront financing for transaction costs

Very limited involvement banks/financers

Substantial market risk due to lack of CDM policy and infrastructure in most countries

Expected market volume few million tCO2eq (EUR 5 Expected market volume few million tCO2eq (EUR 5 ––20 million)20 million)

CDM in CDM in CaucasusCaucasus and Central and Central AsiaAsiaScenariosScenarios (B): Significant CDM (B): Significant CDM MarketMarket

Higher CER prices

Increased level of awareness among project developers

Availability CDM expertise and upfront financing for transaction costs

Stronger involvement banks/financers

Reduced market risk by CDM policy and infrastructure development

Market volume 20Market volume 20--50 million tCO2eq (EUR 40 50 million tCO2eq (EUR 40 –– 250 250 million)million)

CDM Activities EBRDCDM Activities EBRD• Information dissemination like CDM Workshop 18 – 19 October, Tbilisi,

Georgia and http://www.ebrd.com/carbonfinance

• Match maker buyer and sellers, example two district heating projects in Uzbekistan as seller and with the PrototypeCarbonFund as buyer

• CDM Project Support Facility ( € 350,000, first tranche € 120,000) for the Early Transition Countries, providing bridge financing for PDDs, Validation and Registration to Project Sponsors.

• CDM project developments:

• Armenia: two mini-hydro projects (supported by The Netherlands)

• Kyrgyz Republic: energy efficiency in glassworks (supported by CDM PSF for ETC)

• Multi-lateral Carbon Credit Fund (MCCF) under development. MCCF will be eligible to buy CERs from the CDM projects. Launch anticipated 2005.

CDM PSF ETCCDM PSF ETCThe CDM Project Support Facility is designed to assist project sponsors in the ETCs to monetise their GHG emission reductions.

Provides follow-up on the energy efficiency audits

Funds Available: €120,000 (pilot phase only) from the ETC multi donor fund, Consultants selected, contract to be signed April 2005

Eligible countries: Armenia, Azerbaijan, Georgia, Kyrgyzstan, Moldova and Uzbekistan have ratified the KP.

The facility offers the following services:

– Module A – Consultancy services related to the preparation and development of the CDM project: Project Design Document (baseline study), Letter of Approval from the Host Country and Assistance in selling the carbon credits.

– Module B – Validation and registration services in relation to the Module A deliverables

CDM Projects ArmeniaCDM Projects Armenia

PDD Developed with a local Project Sponsor for two mini-hydro projects, 14 MW in total.

Avoided emissions 0.415 tons CO2/MWh, 35 GWh/year results in about 14,000 tons CO2 / year (EUR 70,000/year)

Loan from EBRD Direct Lending Facility

Request for Letter of Approval made

Validation can start once Letter of Approval obtained

DiscussionDiscussion