the use of the kyoto protocol and its clean development mechanism (cdm) to

LAWEA 2008 Michael Stavy, Consulting Energy Economist

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The Use of the Kyoto Protocol and its Clean Development Mechanism (CDM) to Help

Finance Latin American Wind Plants

Thurs., 6 Nov 08; 9:00-10:30amGuadalajara, MX


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The PresenterMichael Stavy

Consulting Energy Economist432 N. Clark ST STE 204Chicago, Il 60654 USA

312-832-1631www.michaelstavy.com


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Download Lecture Handouts

• Download lecture handout with details and footnotes

• Provide webpage, username and password at end of presentation


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The Disclaimer

While I prepared this presentation and I believe that it contains correct

information, I make no warranty expressed or implied, nor do I

assume any legal responsibility for the accuracy, completeness or usefulness of any information

presented. Presentation © 2008 Michael Stavy


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The Global Problem


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• Increase in GHG emissions is causing an increase in the earth’s surface temperature

• Global warming is an observed scientific fact

• An increase in temperature will change life as usual (LAU)


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Life as UsualParc Montsouris, Paris 14th


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A European Coal Plant Life as Usual will not continue


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Solutions to Global Warming


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• Suffer• Adjustment• Mitigation• The Protocol is an attempt at

mitigation• Windpower is a mitigating

technology• Protocol mitigating “Galbraithian”

technostructure


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The Kyoto Protocol


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The Carbon Unit

• Protocol measures GHG in metric tons (tm) of carbon dioxide (CO2), the major GHG.

• Other GHG emissions (i.e. CH4, N2O, HFC, PFC, SF6) are standardized into tm-CO2 by their global warming potential (GWP).


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The Carbon Unit

• Main GHG from burning fossil fuels (coal, natural gas, oil) to generate electricity is CO2

• Assigned Carbon Emission Allowance Unit (AAU)

• AAU = 1 t-CO2

• AAU only issued by UNFCC Secretariat


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Protocol Basics

• Tries to change the human economy so that it will produce the required output with less carbon

• A treaty among sovereign nations• UNFCC Secretariat administers

Protocol for signatory nations• Protocol only applies to signatory

nations and their citizens


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Protocol Basics

• All Latin American (LA) countries signatories

• USA not a signatory• Annex I countries are the developed

countries• Non-Annex I are the developing

countries • All LA countries are non-Annex I


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Protocol Basics

• Only certain Annex I countries (Annex B countries) have emission caps (ceiling on emissions) during the first commitment period

• Only citizens of signatory countries can trade Protocol carbon units

• No matter what the Annex B domestic architecture, Protocol trading is sovereign government to sovereign government


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Protocol Cap

• Maximum t-CO2/yr a country allowed is its yearly cap

• Base Year 1990-t0

• Emissions measured from base year

• First Commitment Period 2008-2012

• Period by which Annex B countries must reduce their carbon emissions by, on average, 5.2% from t0


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Protocol Cap

• Protocol allows countries next to each other to cap emissions under a joint emissions bubble

• European Union Emission Trading Scheme (EU ETS) is one such bubble


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Kyoto Emission Control Architectures

Three major architectures are

1. Cap and command-RPS

2. Cap and trade-the EU ETS 3. Carbon tax


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Clean Development Mechanism-CDM

• Designed to help developing countries (non-Annex I) emit less carbon during first Commitment Period

• Joint Implementation (JI) mechanism is a parallel program for Annex I countries that are not in Annex B. Not relevant to LA

• CDM projects only venued in non-Annex I countries

• All LA counties can have CDM projects


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• CDM projects generate Certificated Emission Reduction allowances (CER) from their avoided carbon emissions

• Administered by UN CDM Board• Each LA country must have own National

Authority (NA) to regulate domestic CDM program and to certify its domestic CER to UN CDM Executive Board

• CDM projects must meet the additionality principal


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• Additionality principal requires CDM projects have carbon reductions that would not take place without CER revenue

• LA wind plants that would have been built without the CER revenue are not eligible for CDM status


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• LA wind plants usually earn CER from their avoided carbon emissions compared to carbon content of its venued county’s electric grid

• Many LA electric grids (Mexico, Brazil, Costa Rico, etc) hydro powered resulting in a low carbon content for grid electricity

• Other emission bases can be used


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• CDM wind projects helped financially by selling the CER “generated”

• CER are bought by an Annex B country in order for Annex B country to be in compliance with its Protocol cap


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• Most CER are sold in EU ETS carbon market

• Another large buyer is the Government of Japan

• There is not a significant Japanese

C & T market!

• There is no US market for CER


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EU ETS Specifics

• Study EU ETS because it is the major CER market

• Uses the cap and trade protocol emissions control architecture

• Under EU ETS bubble, the AAU is called European Carbon Emission Allowance (EUA)


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Countries Under the ETS Bubble


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EU ETS Specifics

• EU Directorate administers the EU ETS

• EU Directorate receives AAU from the UNFCC Secretariat

• EU Directorate distributes EUA to EU ETS countries


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EU ETS Specifics

• Each EU ETS country decided which industrial sectors are capped during first commitment period

• We will only look at EU ETS power carbon cap


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EU Cap and Command-C & C

• Each EU fossil power plant given cap-maximum t-CO2/yr that it can emit

• Based on historical emissions

• Plant penalized if actual t-CO2/yr > cap

• Not rewarded if actual t-CO2/yr < cap

• Wind plants emit 0 t-CO2/yr


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• Used for HFC emissions caps under the Montréal Protocol

• US Montréal signatory

• LA countries Montréal Protocol signatories

• Table # 1 below shows C & C emissions data for 3 hypothetical EU fossil power plants


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• Fossil power plant 1 is even with cap

• Plant 2 is below its cap

• Plant 3 is above its cap

• US state Renewable Portfolio Standards (RPS) are C & C architectures


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hypothetical C & C data plant 1 plant 2 plant 3

cap assigned t-CO2/ yr 10,000 10,000 10,000

actual t-CO2/ yr 10,000 9,000 12,000

carbon balance equal/ below/ above 0 1,000 -2,000

t-CO2/ yr below cap 1,000

t-CO2/ yr above cap 2,000

Table # 1 Hypothetical C & C Emissions Data f or 3 EU Fossil Plants


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EU Cap and Trade-C & T

• Basis for C & T is the “command” from C & C

• Used by EU ETS

• Voluntary emissions schemes do no significantly reduce C-emissions--not good for selling LA wind CER

• Each EU power plant is given cap (max t-CO2/yr that it can emit)


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• Each plant must have an EUA for each t-CO2/yr it emits up to its cap

• Assigned cap offset with EUA or, perhaps, by LA wind CER

• Plants get EUA from market purchase, government auction or government distribution


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• Government auctions greatly increase EUA cost-very good for LA wind CER

• Auctions very good for planet Earth • Table # 2 shows C & T emissions data for

same 3 EU fossil power plants• Plant 1 is even on EUA• Plant 2 is long EUA• Plant 3 is short EUA


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• Since plant 2 has < efficiency than plant 3, economy better (in general equilibrium) if allowing EUA trading between plants 2 & 3

• C & T helps reduce EU fossil electricity’s cost advantage by carbon cost of the fossil electricity (€, MX$ or US$ per MWh)


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hypothetical C & T data plant 1 plant 2 plant 3

EUA-given/ traded 10,000 10,000 10,000

actual t-CO2/ yr 10,000 9,000 12,000

EUA balance 0/ long/ short 0 1,000 2,000

EUA f or Sale 1,000

EUA must Buy 2,000

Table # 2 Hypothetical C & T Emissions Data for 3 EU Fossil Plants


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Carbon Cost of Fossil Electricity

• In EU C & T, the carbon content

(t-CO2/MWh) of fossil electricity must offset with EUA, or LA Wind CER

• Carbon cost of fossil electricity depends on its carbon content and the cost of a EUA (CER)

• Higher the EUA price, the greater the carbon cost, the better it is for LA wind CER


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Carbon Cost of Fossil Electricity

• Table # 3 below shows carbon cost for EU coal, natural gas and wind electricity

• Carbon cost of wind is given as a comparison

• Carbon content of fossil electricity from my 2004 Global Wind Power Conference Paper


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hypothetical C & T data Coal Gas Wind

t-CO2/ MWh 0.996 0.372 0

€/ EUA 22.35 € 22.35 € 22.35 €

carbon cost-€/ MWh 22.26 € 8.31 € 0.00 €

MX$/ EUA $ 350.91 $ 350.91 $ 350.91

carbon cost-MX$/ MWh $ 349.50 $ 130.54 $ 0.00

US$/ EUA $32.29 $32.29 $32.29

carbon cost-US$/ MWh $32.16 $12.01 $0.00

Table # 3 Hypothetical C & T Carbon Cost for Coal, Gas and Wind Electricity


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Cost of EUA (CER)

• UE ETS has no public EUA (CER) markets with transparent prices for long-term contracts or for current (spot) trades

• EUA (CER) prices and volumes not in public domain

• European Climate Exchange (ECX) only provides public access to transparent prices for EUA (CER) futures and options


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Cost of EUA (CER)

• ECX EUA/CER Dec 08 futures

30 Sept 08 month-end settlement prices used as proxy EUA/CER prices

• EUA settlement price: 22.35 €

• CER settlement price: 18.45 €

• EUA-CER spread: 3.90 € or 17.4%


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Cost of EUA (CER)

• 1 € = MX$ 15.70046 (30 Sept 08)

• 1 € = US$ 1.4445 (30 Sept 08)

• Converted proxy EUA (CER) € prices into proxy EUA (CER) MX$ and US$ prices


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EU ETS Reduces Fossil Electricity's Cost Advantage

• Table # 5 below shows the amount by which the after carbon cost of EU fossil electricity is less (more) than EU wind electricity

• Cost of generation is the levelized cost of generation; not the wholesale price (discussed below)

• Cost of carbon is from Table # 3 above


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EU ETS Reduces Fossil Electricity's Cost Advantage

• Total is the sum of the cost of generation and the cost of carbon

• Fossil < wind is amount that fossil electricity total cost is less (more) than total cost of wind electricity

• Hydro column without data requires further study


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hypothetical data coal gas wind hydro

1. cost of generation-€/ MWh 41.00 € 49.00 € 60.00 € 0.00 €

2. cost of carbon-€/ MWh 22.26 € 8.31 € 0.00 € 0.00 €

3. total- €/ MWh (1+2) 63.26 € 57.31 € 60.00 € 0.00 €

4. f ossil < wind-€/ MWh -3.26 € 2.69 € 0.00 € 60.00 €

1. cost of generation-MX$/ MWh $ 653.84 $ 781.42 $ 956.84 $ 0.00

2. cost of carbon-MX$/ MWh $ 349.50 $ 130.54 $ 0.00 $ 0.00

3. total-MX$/ MWh (1+2) $ 1,003.34 $ 911.95 $ 956.84 $ 0.00

4. f ossil < wind-MX$/ MWh $ -46.50 $ 44.88 $ 0.00 $ 0.00

cost of generation-US$/ MWh $61.66 $73.69 $90.24 $0.00

cost of carbon-US$/ MWh $32.16 $12.01 $0.00 $0.00

total-US$/ MWh (1-2) $93.82 $85.70 $90.24 $0.00

f ossil < wind-US$/ MWh ($3.58) $4.53 $0.00 $0.00

Table # 5 The eff ect of the Kyoto Protocol on ETS Fossil Electricity’s

Cost Advantage over ETS Wind Electricity


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Cost of Generating Electricity

• No public domain data (IEA, EIA) on the actual cost of generating EU, MX and US fossil, wind and hydro electricity

• Cost of generating electricity not transparent

• Without transparent costs, the efficient market hypothesis (EMH) does not hold in these wholesale electric markets


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• US, MX and EU costs of generation are converted from proxy € values published a January, 2008 Wind Power Monthly (WPM) article and graphs

• Used WPM 8% cost of capital € values

• Readers can use their own values


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Reliable Cost Data


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Reliable Cost Data


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• Appendix Table #2 below estimates the proxy MX$ and US$ cost of generating coal, natural gas and wind electricity using the WPM € prices

• Used average daily €/MX$ and €/US$ exchange rate for the 366 day period 1 Oct 07 → 30 Sept 08


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• 1 € = MX$ 15.9472 (366 day average)

• 1 € = US$ 1.50393 (366 day average)


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FX rate FX rate

€/ MX$ ↓ €/ US$ ↓0.06271 € 0.6649 €

MX$/ € ↓ US$/ € ↓$ 15.94729 $1.50393

8% coal gas wind

€/ MWh 41.00 € 49.00 € 60.00 €

MX$/ MWh $ 653.84 $ 781.42 $ 956.84

US$/ MWh $61.66 $73.69 $90.24

Appendix Table # 2 Estimated EU, MX and US 2007 Cost of Generation

based on WPM Prices f or coal, gas and wind

2008 average F/ X rate


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CDM Reduces LA Grid Electricity's Cost Advantage

• CER income that LA CDM wind plant receives decreases the cost of wind

• Reduces LA grid electricity’s cost advantage

• Table # 6 below shows the amount by which after CER income of LA CDM wind electricity is more (less) than LA grid electricity


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CDM Reduces LA Grid Electricity's Cost Advantage

• Cost of generation is from Appendix Table # 2 above

• CER cost is from Slide # 43 above

• Total is the cost of generation minus the CER income

• LA Grid < wind is the amount total cost of LA grid electricity less (more) than the cost of CDM wind electricity


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hypothetical data coal gas wind hydro

1. cost of generation-€/ MWh 41.00 € 49.00 € 60.00 € 0.00 €

2. CER-€/ MWh 0.00 € 0.00 € 18.45 € 0.00 €

3. total- €/ MWh (1-2) 41.00 € 49.00 € 41.55 € 0.00 €

4. LA grid < wind-€/MWh 0.55 € -7.45 € 0.00 € 0.00 €

1. cost of generation-MX$/ MWh $ 653.84 $ 781.42 $ 956.84 $ 0.00

2. CER-MX$/ MWh $ 0.00 $ 0.00 $ 289.67 $ 0.00

3. total-MX$/ MWh (1+2) $ 653.84 $ 781.42 $ 667.16 $ 0.00

4. LA grid < wind-MX$/MWh $ 13.33 $ -114.25 $ 0.00 $ 0.00

1. cost of generation-US$/ MWh $61.66 $73.69 $90.24 $0.00

2. CER-US$/ MWh $0.00 $0.00 $26.65 $0.00

3. total-US$/ MWh (1-2) $61.66 $73.69 $63.58 $0.00

4. LA grid < wind-US$/MWh $1.92 ($10.11) $0.00 $0.00

Table # 6 The eff ect of CER I ncome on LA grid Electricity's

Cost Advantage over CDM Wind elctricity


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Advantages of CDM to Finance LA Wind Plants

• CER revenue• EU ETS, on a county by county basis,

can accept CER to cover a % of their carbon cap

• EU ETS will only meet its 2008-12 emissions cap with CDM & JI link

• There is an EU ETS market for CER• EU ETS will reduce GHG 20% by 2020


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Advantages of CDM to Finance LA Wind Plants

• Present value (PV) of a stream of future LA CDM CER can be used to directly finance the construction of a CDM wind plant


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Difficulties Using CDM to Finance LA Wind Plants

• EU ETS, on a county by county basis, can restrict the % of their cap that can be covered with CER

• Market price for CER are 3.90 € below the cost of EUA.

• 17.4% EUA-CER spread • Conceptual integrity of certain CER has

been suggested, increasing the risk to CER holders (and writers) and reducing CER market value


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• Other CDM projects that have conceptual integrity do not use wind

• CDM NOX reduction projects reduce carbon emissions but do not use wind

• CER are created over time as CDM wind electricity is generated


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• Writer of PV of a CER revenue stream must have sufficient capital to cover any shortage of CER caused by the usual problems (lack of wind, gearbox failures, cracked blades, etc) at a LA CDM wind plant


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EU ETS Conclusions that apply to Financing LA CDM Wind Plants

• By itself, EU ETS only one driver in lowering the cost spread between EU fossil and wind electricity

• Specific EU Protocol actions against global warming more significant drivers

• Wind feed-in-tariffs in Germany, Spain, etc., very effective in financing EU wind plants


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EU ETS Conclusions that apply to Financing LA CDM Wind Plants

• World’s first wind feed-in-tariff was in California USA under the first Governor Jerry Brown

• EU transmission and siting regulations supported by EU Green Parties have allowed EU ETS wind to develop


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LA Government Policies to Help CDM Wind During “Kyoto-II”

• LA feed-in-tariffs

• Regulations that require wind access to the LA grids

• Smart grids that store wind in hydro

• Kyoto-II starts to list certain LA countries in Annex B

• Additionality principal more clearly defined


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More LAU-Indiana Dunes USA US ladybug wishes you good luck!


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• 312-832-1631

• 432 N Clark ST STE 204, Chicago, IL 60654 USA

06 Nov 08

http://www.michaelstavy.com/

mailto:[email protected]

the use of the kyoto protocol and its clean development mechanism (cdm) to

Documents

protocol cap protocol

protocol carbon units

signatory annex i countries

nonannex i countries

eu ets carbon market

cdm board

protocol basics

kyoto protocol