AIT Key elements of CDM-PDD and CDM- NMB & Additionality Tool Sudhir Sharma Asian Institute of...

AITKey elements of CDM-PDD and CDM-

NMB & Additionality Tool

Sudhir SharmaAsian Institute of Technology, Thailand

4 April 2005

4th Regional Workshop and Training on Capacity Development for the CDMApril 4-5 , 2005, AITCC, AIT, Thailand

AITPresentation Structure

Key elements of Baseline Methodology

CDM – New Methodology: Baseline (NMB)

CDM – Project Design Document (PDD)

Additionality Tool


AITSome Relevant Documents

http://cdm.unfccc.int/Reference/Documents – Guidelines for Completion of the Project Design Document

(CDM-PDD), The Proposed New Methodology: Baseline (CDM-NMB), and The Proposed New Methodology: Monitoring (CDM-NMM).

– Guidelines for completing CDM-AR-PDD, CDM-AR-NMB and CDM-AR-NMM (AR – Afforestation and Reforestation).

http://cdm.unfccc.int/Reference/Guidclarif – Guidance on CDM

* Documents are regularly updated as new decisions/information become available.


AITKey elements of Baseline Methodology

Basis for determining baseline scenario– An explanation how Baseline Scenario is chosen

• Incorporating national/sectoral policies, programs etc.– Demonstrate that “ project activity is not the baseline scenario” –

additionality test. Estimating Baseline

– Formulae/algorithm for estimating baseline emissions.• Project Boundary.• Types of variables used.• Temporal (vintage) and spatial scope of data.

Also includes – Basis of assessing leakage and leakage formulae/algorithm.– Formulae/algorithm for project emissions.

Data sources and assumptions– Data: spatial scope and vintage– How the data is obtained (requirement and sources)?

BM should describe all the above aspects


AIT

Key informational elements of CDM-NMB

Overall structure of the CDM-NMB to highlight key informational elements

Briefly discuss the most observed comments made on the Methodology


AITCDM – NMB: Contents (1)

A. Identification of methodologyi. Title

ii. List of project category to which applicable

iii. Applicability conditions

iv. Potential strengths/weakness

B. Overall summary description

C.Choice and justification of baseline approachi. Approach chosen

ii. Justification of the approach chosen



D.Explanation and justification of the proposed new baseline methodologyi. Explanation of how baseline scenario is determined.

ii. Demonstration of additionality.

iii. How national/sectoral policies are taken into account.

iv. Project Boundary.

v. Formulae for Baseline emissions

vi. Formulae for Project emissions

vii. Leakage.

Main section where the components of Baseline Methodology are defined.



E. Data sources and assumptionsi. Describe parameters and assumptions

ii. List of data used and sources.

iii. Vintage of Data

iv. Spatial level of Data.

Tabulation helps in presentation. Also it helps check whether all the variables have been defined clearly.

F. Assessment of uncertainties

G.Explanation of how the baseline methodology was developed in a transparent and conservative manner


AITIdentifying Baseline Scenario

DEFINE

REFINE

SELECT BASELINE SCENARIO: Baseline Approach

Survey of activities providing similar services as the Project

Define Spatial Scope – local/regional/national

Map tech/practices for Project Activity in Spatial Boundary

Identify policies/regulations that influence choice of Technology/practices

Identify programs for promoting resource conservation Technology/practices in the sector

Drop/Add alternatives to Baseline Scenarios


AITBaseline Approach

The three Baseline Approaches:a. Emissions actual or historical.b. Emissions of most economic options.c. Weighted average of similar projects.

Choose one and only one of the three approaches Justified choice on the following basis (Annex 1,

Report EB10) – Consistent with the context of applicable project types.– Consistent with underlying algorithms and data sources

used in baseline methodology.– One that most closely reflects the process used for

calculating baseline emissions.Tool of additionality does not need to be linked to Approach.


AITBaseline Approach

Guidance on Approach C. – If choosing C – should define

– How is “similar social, economic, environmental, and technological circumstances” are defined.

– How is “performance among the top 20 per cent of category” {defined as GHG emission per unit output} assessed.

– Baseline emissions is – Output weighted average emissions of the top 20 per cent of similar

project activities undertaken in the previous five years; or– Output-weighted average emissions of similar project activities

undertaken in previous five years that are also in the top 20 per cent of all current operating projects; which ever results in conservative estimate


AIT

Evaluating BM using CDM-NMB


AITEvaluating BM: relevance

Applicability of BM– Conditions under which BM is applicable to a proposed

projects.– Includes all the assumptions made. e,g. – Say assumption

of “no law to capture methane from SLF” was made in identifying baseline scenario. The BM is applicable where ever this condition is fulfilled.

– Helps check if methodology developed is suitable for proposed CDM project.

Strength and weakness– Evaluation of methodology vis-à-vis the existing approved

methodologies.


AITEvaluating BM: robustness

Transparency – Replicable based on CDM-PDD and CDM-NMB by reviewers– Clear statement of assumptions

• Made in arriving at baseline scenario• Choosing values/data for variables/parameters

– References for all the information used in developing methodology and its application in CDM-PDD

Conservativeness– Choice of assumptions and data for variables/parameters result in

lower baseline emissions.– Choice of assumptions and data for variables/parameters for

economic analysis result in optimistic outcome.

Assessment of uncertainty in baseline scenario– Related to assumption (e.g., certain policy is in place but is not

implemented stringently)– Related to variables used in baseline emission estimation


AIT

Key informational elements of CDM-PDD


AITCDM: Project Design Document

A. General description of project activityB. Application of Baseline methodology C. Duration of the project activity / Crediting period D. Application of Monitoring Methodology and Plan.E. Estimation of GHG emissions by sources F. Environmental impactsG. Stakeholder’s comments

Annexes

Annex I: Contact Information on Participations in the Project activities

Annex 2: Information regarding Public FundingAnnex 3: Baseline InformationAnnex 4: Monitoring Plan

Need not be filled at submission of NBM


AITGeneral description of project activity

Description should cover– Main purpose of the project activity and its contribution to

SD– Details of project activity – activity level, technology used,

environmental features of technology, process details, etc.– Brief description of additionality of project - A description of

national/sectoral context, relevant policies and implications, sectoral practices, etc.

A&R projects– Eligibility of activity – eligibility conditions– Carbons pools accounted for


AIT B: Baseline methodology

Describe outcome of application of methodology to Project

B.1 Title and reference of the methodology applied to the project activity.

B.1.1. Applicability of methodology to project.

B.2 Description of how the methodology is applied– Report key information and data used in determining baseline

scenario (table form).

B.3 Additionality demonstration

B.4 Project Boundary


AITE. Estimation of GHG emissions by sources

E.1 Estimation of GHG emissions by sources– From project activity and within the project boundary.

E.2 Estimated LeakageE.3 Project activity emissions = E1 + E2E.4 Baseline emissionsE.5 Emissions reduction = E4 – E3 Information to be presented

– Formulae– Data used– Emissions in CO2 equivalent– Estimation of each year of credit period

Even if baseline calculated ex-post, ex-ante estimates of baseline should be reported.


AITConclusions

Important points to remember– NMB – description of the steps/procedure/formulae of a

baseline methodology.– PDD – report application of baseline methodology to the

specific project – submitted as demonstration of the methodology (Annex 3, EB09 Report).

Methodology for estimating area of given 3-D object with six faces:

(i) Measure, length (l), width (w) and height (h)

(ii) Identify the shape of object: the rule

a. If l = w = h: cube

b. Else cuboids

(iii) Calculate area

a) If cube V = l3

b) If cuboids V = l*w*h

Application of Methodology

(i) l = 10 cm; w = 10 cm; h = 10 cm

(ii) Identify Shape

(i) If l = w = h = 10 cm » cube

(iii) Calculate area

(i) Since cube V = l3 = 1000 CCM


AIT

Additionality Tool


AITAdditionality

Marrakech Accord– “A CDM project activity is additional if anthropogenic emissions

of greenhouse gases by sources are reduced below those that would have occurred in the absence of the registered CDM project activity”.

EB09 Report, Annex 3, Para 2– “a proposed new methodology shall explain how a project

activity ….can demonstrate that it is additional i.e. is different from the baseline scenario”

Cop 10 – guidance to CDM – “Recalls that, as indicated by the Executive Board, the use of

the “Tool for the demonstration and assessment of additionality” is not mandatory for project participants”

Environment Additionality


AIT STEP 0: Claiming credits for project with start date prior to date of registration – if not applicable go to step 1 directly

CDM consideration proved: Pass

STEP 1: Identification of alternatives consistent with current laws and regulations- If proposed CDM project only alternative left: NON-ADDITIONAL (NA)

More than one alternative: Pass

STEP 2: Investment Analysis CDM financially attractiveSTEP 3: Barrier Analysis

No barriers: NA

CDM financially not attractive

STEP 4: Common Practice Analysis – credibility check- If similar activity observed with no essential difference: Project NA

CDM faces Barriers

No similar activity or similar activities present but difference in circumstances

STEP 5: Impact of CDM registration - If CDM benefits have no impact: Project NA


AITStep 0

If the crediting period starting prior to the registration of project activity, – only if CDM project activity

• The starting date between 1 January 2000 and 18th January 2005

• submitted for registration before 31 December 2005

– Provide evidence that the incentive from the CDM was seriously considered in the decision to proceed with the project activity.

• This evidence shall be based on (preferably official, legal and/or other corporate) documentation that was available to third parties at or prior to the start of the project activity.


AIT Step 1: Identifying Alternatives Define alternatives including:

– alternatives available to the project participants or similar project developers that provide outputs or services comparable with the proposed CDM project activity.

– The proposed project activity – If applicable, continuation of the current situation

compliance with all applicable legal and regulatory requirements,– GHG laws, environment laws, investment laws, etc. – National and local policies that do not have legally-binding status not

considered except• National/sectoral policies regulation that give comparative

advantages to more emissions intensive options, implemented before 11 December 1997.

If not in Compliance, then show that,– applicable legal or regulatory requirements are systematically not

enforced and that noncompliance is widespread in the country. – If this cannot be shown, then eliminate the alternative from further

consideration;This is Similar to Identifying alternative Baseline Scenario step in

selection of Baseline scenario.


AIT Step 2: Investment AnalysisAny financial returns from project

Other than the CER benefits?

Use simple cost analysisDemonstrate costs and prove no benefits accrue

No

Investment comparison Analysis

Choose: IRR1, NPV, CB ratioOr unit cost of service ($/kWh)

Benchmark AnalysisChoose: IRR2, NPV, CB ratio

Or unit cost of service ($/kWh)

1: Project or Equity IRR; 2: Project IRR, Equity IRR only if one Project Promoter

Choose Benchmark:GBR + Risk Premium, or

Cost of Cap or Req. return Rate, orCompany internal Benchmark

Yes

Indicator of atleast One Alternative > CDM Project

Indicator of CDMProject < Benchmark

Sensitivity Analysis


AITFinancial analysis: some definitions

Net Present Value =

Internal Rate of Return, s.t.

Cost Benefit Ratio =

Ti

ii

rd

vNetCapCost

,1 )1(

Re

0)1(

Re

,1

Ti

ii

irr

vNetCapCost

Benefit

Cost

PV

PV


AITFinancial analysis: some definitions

Unit cost of service: Levelized life-cycle cost– First calculate PV: The annual costs of project development,

operation and decommissioning for each year over the economic life of the project. The resulting series of annual cash flows were discounted by a discount rate, then summed to a net present value.

– Convert to annuity: Convert PV into a uniform series of annual cash flows using the same discount rate.

– Estimated levelized cost: Divide the uniform annual cash flow by the estimated annual production.


AITStep 2: Investment analysis

Government Bond – of appropriate maturity – source: government treasury

Risk premium – Equity market risk premium: equity research/market

analysis groups – most appropriate for Equity IRR– Premium on loans for sector or project types – banking and

financial institutions.

Required rate of return – Lending banks/financial institutes

Weighted average cost of capital – company specific


AITStep 2: Investment analysis

Sensitivity analysis: Factors in investment analysis– Fixed

• Investment cost, debt-equity ratio, risk premiums, etc.• Terms of loan (interest rate, payment schedule, etc)• Capital subsidy, interest subsidy, sales tax or other tax breaks, etc.• Depreciation, tax laws, • Salvage value of equipment

– Variables • Inputs costs, maintenance and operation costs, etc.• Revenue streams – price of outputs, output, etc.• Discount Rate – for NPV calculations – subjective value based on

cost of money and risk perceptions.• These values should be varied to check robustness of estimates• Present the range of values that the variables can take – good

practice.


AITStep3: Barrier Analysis

Determine whether the proposed project activity faces barriers that:– (a) Prevent the implementation of this type of proposed project

activity; and– (b) Do not prevent the implementation of at least one of the

alternatives.Not enough to just identify barriers to project

Investment barriers (other than the economic/financial barriers in Step 2 above)– Debt funding is not available for this type of innovative project

activities. – No access to international capital markets due to real or

perceived risks


AITStep 3:Barrier Analysis

Technological barriers– Skilled and/or properly trained labor not available – no education/training institution to provide the needed skill– Lack of infrastructure to supply spare parts

Risk perception– Lack of familiarity due to lack sufficient commercial

demonstration.– Lack of risk sharing mechanism from vendors– Market conditions in the sector

Information – availability of sufficient and good quality information to

make informed decision.Documentary proof – existing studies, studies undertaken by promoters while making decision, written expert judgment, etc.


AITStep 4: Common Practice Analysis

Analysis of any other activities implemented previously or currently underway similar to the proposed project activity.

Projects are considered similar if – In the same country/region – Rely on a broadly similar technology, – Are of a similar scale, – and take place in a comparable environment ( regulatory

framework, investment climate, access to technology, access to financing, etc.)

DO NOT INCLUDE Other CDM project activities

DEMONSTRATE THE DIFFERENCES


AITStep 4: Common Practice Analysis

E.g – Grid connected Wind Project in India– Existing capacity already 1200 MW.– Difference could be based on

• Most capacity in one or two states

• Initial projects were captive power projects – the avoided cost higher than the price distributor pays.

• Financial incentives available to projects have decreased – capital subsidy, sales tax benefits, accelerated depreciation benefit.


AITStep 5: CDM Impact

How CDM Benefits help overcome the economic and financial hurdles (Step 2) or other identified barriers (Step 3), e.g,– CER benefits increase the IRR above threshold– CER revenues enables access to Debt funding which lowers the overall

cost of funds for implementing the project.– Foreign participant with technology experience as partner and guarantor

of performance due to CER benefit.• CER procured by foreign funder to meets its own requirement and,

hence, its willingness to participate.• Helps access dollar loan to fund technology procurement.• Provides technical training for staff for operation and management.

– Foreign participant has access to cheaper capital through decreased exchange rate risk due its participation.

Key: List how CER/ CDM benefit helps address investment analysis (in step 2) and barriers listed (in step 3) for project.


AIT

AIT Key elements of CDM-PDD and CDM- NMB & Additionality Tool Sudhir Sharma Asian Institute of...

Documents

Transcript of AIT Key elements of CDM-PDD and CDM- NMB & Additionality Tool Sudhir Sharma Asian Institute of...