innovative financing for solar water heating: carbon & renewable energy certificate trading...
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Innovative Financing for Solar Water Heating: Carbon & Renewable Energy
Certificate Trading
Examples and Lessons from Selected International Experiences
Green Power and Solar Thermal Energy Symposium
Washington DC, Oct. 5th, 2005
Steven KaufmanGreen Markets International, Inc.
Presentation Overview
International carbon reduction trading, the Clean Development
Mechanism (CDM), and solar water heating
Example CDM solar water heating experience: Kuyasa Project, Cape
Town, South Africa
International Renewable Energy Certificate (REC) trading, and
RECs for solar water heating
Example solar water heater REC experience: Australia
Lessons for program design and market participation
Innovative Financing for Solar Water Heating
Green Markets International is a non-profit organization working to expand the use of renewable energy for climate protection and development.
Conducting REEEP-supported initiative, focusing on financial and commercial innovations for solar water heating in the Caribbean region and Brazil:
Developing model business plans for SWH ESCO and fee-for-service operations
Building stakeholder knowledge of carbon trading and helping to develop SWH CDM projects
Exploring international REC trading possibilities
International Carbon Markets
Fueled by mandatory requirements of the Kyoto Protocol, international trade in greenhouse gas reductions is now a large and rapidly growing market.
Governments and private companies in industrialized countries with emission reduction obligations have already committed over a billion dollars for emission reductions from projects outside their borders.
The international carbon market has the potential to provide an important boost for renewable energy projects and markets in many parts of the world.
The Kyoto Protocol & Carbon Trading
Under the Kyoto Protocol, three mechanisms enable cross-border trading in greenhouse gas (GHG) emissions reductions:
International Emissions Trading (IET)Trading blocks of emissions credits between emissions-capped industrialized countries, called Annex 1* countries
Joint Implementation (JI)Project-based trading among Annex 1 countries
Clean Development Mechanism (CDM)Project-based trading between Annex 1 and non-Annex 1 countries
Certified Emission Reductions (CERs), created in the CDM process, can be used by Annex 1 countries to meet their reduction commitments during 2008-2012, and can accrue for project activities that commence before 2008.
*Countries with emissions caps under the Kyoto Protocol are technically “Annex B” countries, though they are called Annex 1 here, referring to Annex 1 of the UNFCCC. In practice, these terms are commonly used interchangeably.
Eligibility Requirements for the CDM
CDM Projects Must: Be implemented in a non-Annex 1 country that is a party to the
Kyoto Protocol
Be additional to what would occur in the absence of the project activity
Support sustainable development in the host country
Obtain approval of host country’s Designated National Authority for the CDM
Result in real, measurable, long-term climate change benefits
CDM Projects Must Not: Divert Official Development Assistance (ODA)
Involve nuclear power
CDM Project Cycle & Transaction Costs
EstimatedStep Cost - $US
Project Identification, Project Idea Note Development 20,000Baseline Study & Monitoring Plan 20,000Project Design Document Preparation 25,000Stakeholder Consultation & Host Country Approval 10,000Validation by an Operating Entity 30,000Registration Fee 30,000Transaction Negotiation & Contracting 20,000Project Monitoring (Periodic) variesInitial Verification by Operating Entity & Certification 15,000Periodic Verification 10,000Approximate Total: >180,000
Note: Actual costs can vary considerably depending on various factors.
Challenge for Small-Scale Projects
Transaction costs can be proportionally much higher for small-scale projects, since many of the costs are fairly fixed and do not vary much based on project size
Parties to the climate convention recognized that small-scale projects often have substantial sustainable development benefits, and that high transaction costs could prevent small-scale projects from participating in the CDM
Parties to the convention instructed the CDM Executive Board to develop simplified modalities and procedures for small-scale projects.
CDM Simplifications for Small-Scale Projects
Simplified modalities and procedures for small-scale projects include:
Simplified Project Design Document
Simplified, pre-approved methodologies for baseline setting and monitoring plans
Ability to bundle project activities at various stages in the CDM cycle
Simplified requirements for environmental impact analysis
Lowered project registration fees
Shorter review period for project registration
Same Designated Operational Entity can validate and verify & certify emissions reductions for a specific small-scale project
Small-Scale CDM Project Definitions
Project activities defined as “small-scale” for CDM participation include:
Renewable energy systems with less than 15 MW capacity
Energy efficiency projects less than 15 GWh/year
Other projects emitting less than 15 kilotonnes CO2/year
Small-Scale CDM Project Categories with Approved Methodologies*
Project Type Project Activity Category
I. TYPE I: I.A. Electricity generation by the userRENEWABLE I.B. Mechanical energy for the userENERGY I.C. Thermal energy for the user [Note: this category is applicable for solar water heating]PROJECTS I.D. Renewable electricity generation for a gridII. TYPE II: II.A. Supply side energy efficiency improvements – transmission and distributionENERGY II. B. Supply side energy efficiency improvements – generationEFFICIENCY II.C. Demand-side energy efficiency programmes for specific technologiesIMPROVEMENT II.D. Energy efficiency and fuel switching measures for industrial facilitiesPROJECTS II.E. Energy efficiency and fuel switching measures for buildings
II.F. Energy efficiency and fuel switching measures for agricultural facilities and activitiesIII. TYPE III: III. A. AgricultureOTHER III. B. Switching fossil fuelsPROJECT III. C. Emission reductions by low-greenhouse gas emitting vehiclesACTIVITIES III. D. Methane recovery
III. E. Avoidance of methane production from biomass decay through controlled combustion
*As of February 15, 2005 and outlined in Appendix B of the simplified modalities and procedures for small-scale CDM project activities
CDM Participation & Transaction Costs
Non-SSC SSCCost Item: CDM Project CDM Project
Project Identification, Project Idea Note Development 20,000 15,000Baseline Study & Monitoring Plan 20,000 5,000Project Design Document Preparation 25,000 20,000Stakeholder Consultation & Host Country Approval 10,000 7,000Validation by an Operating Entity 30,000 8,000Registration Fee 30,000 5,000Transaction Negotiation & Contracting 20,000 15,000Project Monitoring (Periodic) varies variesInitial Verification by Operating Entity & Certification 15,000 5,000Periodic Verification 10,000 5,000Approximate Total: >180,000 >85,000Note: Actual costs vary considerably depending on various factors.
Estimated Cost - $US
SSC=Small-Scale
Kuyasa: Sustainable Energy CDM Project Involving SWH
Location: Community of Kuyasa, Cape Town, South Africa
Project Activities: Three Residential Energy Enhancements: - Solar Water Heaters (150 liters avg.) - Insulated Ceilings - CFLs
Number of households: 2,307 existing homes in phase 1, and 4,000 new homes in phase 2
Source: SouthSouthNorth
Kuyasa Solar Water Heating Component
Pre-Project Situation: people heated water on stove tops
CDM Project Baseline: emissions from hot water via electric tank water heaters based on “suppressed demand” for this energy service
Emission Reduction Estimates: based on model output for thermal energy from SWH, electric water heater efficiency of 70%, and coal-fired electricity generation = 1.288 tons CO2/sys/year
Kuyasa Project: Revenue from Carbon Trading
The project is now registered with the CDM, but project participants have not yet completed carbon reduction sales transactions
Participants anticipate generating revenue equal to at least 12% of the project’s capital costs, based on a CO2 price of €8; at higher carbon prices, carbon reduction sales could potentially supply 76% of capital costs at €25 and 100% at €33 (Source: SouthSouthNorth)
Carbon prices have recently been increasing
Carbon Trading Prices
Source: Point Carbon, various others
Carbon Market ProgramApprox. $/TonCO2 (Summer 2005)
Clean Development Mechanism (CDM)
$5 to $10
European Union Emission Trading System (EU ETS)
$20 to $30
Retail and other voluntary markets
$3 to $15
International Trade in Renewable Energy Certificates
There have been a few international REC transactions:
Guatemala hydro RECs to the Netherlands
Symbolic REC contribution to WSSD from ENEL: wind farm in Cost Rica and geothermal in Italy
Probably some voluntary transactions within North America, with more activity to come…
To date, though, experience is very limited.
RECs for Solar Water Heating: Australia
Key Features of Australia’s REC Program for SWH
Regulations adopted in 2001 enable solar water heaters to generate RECs for compliance with Australia’s Mandatory Renewable Energy Target (MRET) which requires 2% of electricity generation by renewables though 2010.
SWH systems must either be installed in a new building, or it must replace an electric water heater or an electric-boosted solar water heater that has been installed for over 1 year.
RECs anticipated over 10 years are credited to SWH system buyers upon registration. Typical SWH systems are eligible for between 10 and 64 RECs depending on the user’s location and system type. A table in the MRET regulations specifies the amount of RECs.
RECs for Solar Water Heating: Australia, cont.
Program Features and Reported Results Registering a Solar Water Heater to obtain RECs costs A$20
(US$15) and must be done within 1 Year of SWH installation
Agents provide SWH REC registration services and buy RECs from SWH owners, which eases market participation
REC prices have reportedly ranged from nearly A$40 (the cost of the fine charged to parties not meeting REC obligations) for the first few years to the mid-A$20’s more recently
Australia’s SWH REC program has boosted Australia’s solar water heating market considerably, especially during the first few years of the program when REC prices were higher
Lessons From Selected International Experiences
Regarding Carbon Trading and REC Rules and Markets The carbon market for Kyoto compliance is large and growing, but
participation can be arduous
SWH initiatives still can benefit from Kyoto carbon markets if scale is sufficient to cover participation costs; simplified procedures also help
Australia’s simple REC rules, upfront crediting, and agents to ease participation give a good boost to the SWH market
Simple rules and procedures, and active intermediaries, could facilitate SWH in US REC markets and emerging carbon markets, such as RGGI (the Northeast’s Regional Greenhouse Gas Initiative)
THANK YOU!
For more information, see:
http://www.green-markets.org/SWH
Green Markets International, Inc.691 Massachusetts Ave., Suite 7
Arlington, MA 02476 USA
Note: Cover Photos Courtesy of SouthSouthNorh