CDM PROJECT FINANCING

Pim KieskampSenior Climate Change Adviser

Renewable Energy, Energy Efficiency and Climate Change Program (REACH)

Asian Development Bank

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Requirements (energy) Requirements (energy) projectsprojects

old present GEF CDMdesign

financial analysis

economic analysis

environmental impact assessment

minimal (more or less)

(indirectly)

social impact assessment

(more or less)

(indirectly)

contribute to sustainable development

(indirectly)

stakeholders involvement not really

GHG reduction (appreciated)

documentation documentation of GHGof GHG

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• So, main striking characteristics of CDM is stringent documentation of baseline and monitoring

• Why is that? Because Annex I countries have to comply with KP target and they want to do that in the most cost effective way.

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Kyoto Protocol:Kyoto Protocol:OverviewOverview

Present day

2012 (BaU)

Assigned Amounts

Domestic Actions

Joint Implementation

Emission TradingAnnex I

Emission Trading

Clean Development Mechanism

Domestic Actions

2012 with KP

- 5%

1990 level

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Baseline and CERsBaseline and CERs

CO2 emission

year

Reduced emissions

Project implemented

Business as usual:baseline

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Costs/burdenCosts/burden

Ordinary project preparation requirements PLUSOrdinary project preparation requirements PLUS• Project preparation to satisfy sustainability Project preparation to satisfy sustainability

requirements (e.g., civil society participation)requirements (e.g., civil society participation)• BaselineBaseline• MVPMVP• ValidationValidation• Certification of reductionsCertification of reductions• On-going monitoring, verification, etcOn-going monitoring, verification, etc

To be born by project partners To be born by project partners

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• For many projects in Asia, financing is becoming the single-most important factor for their successful implementation

• Companies are finding it difficult to provide the equity needed for projects

• Commercial lenders are cautious in providing new loans particularly to projects involving unfamiliar technologies

• Technologies, equipment & processes relevant for CDM are available commercially, many of which offer viable economic returns; yet, not many of such projects are being implemented in Asia compared to what can be potentially achieved.

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Financing modalitiesFinancing modalities

Self Financing:

• Company uses internal funds to finance investment.

• Funds come from existing cash reserves.

On Balance Sheet Financing:

• Firm takes out a loan to finance the investment.• Firm reflects loan on its balance sheet.

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Finance

Equity finance Debt finance

Share issue

Retained earnings Reserves Borrowing

External finance

Internal finance

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On Balance Sheet Financing Model

Loan

Construction Payment

Heat/Power

Biomass fuel supply

Other Power Off-takers

ConstructionServices

ENERGYPLANT

FINANCINGINSTITUTION

EPCCONTRACTORFACILITY SITE

OWNER

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Project Finance Model

Power Salesto the Grid

OtherInvestors

Biomass Fuel Supply

Fuel Payment

Loan Repayment Loan Funding

PPA Assignment

CompletionGuarantee

ConstructionGuarantee

Construction Services

Other FuelSupply Sources

ENERGY PLANT COMPANY

FINANCING INSTITUTION

EPC CONTRACTORFACILITY SITEOWNER

Fuel Supply Power Payment

Fuel Payment Power Sales

Dividends

Equity

Construction Payment

Heat/Power

Energy Payment

Equity

Dividend

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Scope Financing options/SchemesSystem

Solar home systems

Small wind power systems & hybrid solar/wind/diesel systems that have no associated distribution network

Pico- and micro-hydropower

Size of project < 1 MW

Should develop innovative financial mechanisms; seek assistance for capacity building.

Self-financing On-balance sheet Micro-credit Grant/subsidy RESCO/ESCO Leasing First-cost subsidies & lower import duties Mortgage financing Vendor credit Dealer credit Financial bundling

Small-scale/Non-grid

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Scope Financing options/SchemesSystem

Mini-hydropower

Biomass gasifiers & cogeneration systems

Wind/diesel/solar hybrids & other medium-scale renewable energy systems in the range of 1-15 MW

Should use innovative financing mechanisms, while exploiting the benefits of financing schemes applied to conventional energy.

On-balance sheet Equity financing Venture capital Project finance (ltd. recourse) Corporate guarantee Grant/subsidy RESCO/ESCO Leasing Vendor credit Targeted project credit Financial bundling

Medium-scale/Isolated-grid/Grid-connected

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Scope Financing options/SchemesSystem

All (renewable) energy systems with capacity greater than 15 MW

Should operate within the same financing rules applied to conventional energy projects.

Project finance (limited/non- recourse) Venture capital Multilateral lending ECAs Political risk guarantee Bonds issuance Refinancing BOO/BOT

Large-scale/Grid-connected

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Financial models CDM projectsFinancial models CDM projects

So, a variety of financial options for CDM project:So, a variety of financial options for CDM project:• • Full or Partial Equity: Full or Partial Equity: a company finances all or co-a company finances all or co-

finances part of a CDM project in return for full or finances part of a CDM project in return for full or shared financial returns and CERsshared financial returns and CERs;;

• • Financial Contribution: Financial Contribution: a company financially a company financially contributes towards the cost of a CDM project equal to contributes towards the cost of a CDM project equal to some portion of the incremental cost of the project over some portion of the incremental cost of the project over and above the baseline technology, or finances the and above the baseline technology, or finances the removal of market barriers, in return for CERs; removal of market barriers, in return for CERs;

• LoanLoan: a company provides loan or lease financing at : a company provides loan or lease financing at concessional rates in return for CERs; or,concessional rates in return for CERs; or,

• • Certified Emissions Reduction Purchase Certified Emissions Reduction Purchase AgreementAgreement: a company agrees to buy CERs as they : a company agrees to buy CERs as they are produced by the project.are produced by the project.

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Despite the existence of the foregoing Despite the existence of the foregoing mechanisms, there is still a dearth of mechanisms, there is still a dearth of examples of projects that have been examples of projects that have been financed (RE/EE) or will be financed financed (RE/EE) or will be financed (CDM), in a more sustainable way i.e., (CDM), in a more sustainable way i.e., on a purely commercial basis without on a purely commercial basis without full recourse to the sponsors.full recourse to the sponsors.

WHY?WHY?

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CDM:CDM:Project modalitiesProject modalities

• Bilateral: An investor in a Annex I (developed) country invests in a entity in a non-Annex I (developing) country, transferring financial resources and technology

• Multilateral: Investors contribute to a multilateral fund set up by some international agency (e.g. World Bank, ADB, or private bank). This fund invests in a portfolio of projects in developing countries designed to generate CERs and conventional commodities

• Unilateral: An entity in a non-Annex I country invests in a project in its own or another non-Annex I country designed to generate CERs and conventional commodities

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CDMCDMProject modalities: Project modalities:

e.g. bilateral private-privatee.g. bilateral private-private

ANNEX I

Company

Non Annex I

Project

authorizationaudit

CER

$

benefits

Abatement fund 2%

incentives/ authorization

registration

Company

$ benefitsAdmin

OEn / EB

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Without CERs

implemented

With CERs not

implemented

No CDM

Without CERs not implemented;

with CERs implemented

CDM

FIRR

CER income

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Normal project risks:• Country/political risk

• Sponsor risk

• Technical risk

• Environmental risk

• Fuel/feedstock risk

• Financial/legal risk

• Construction risk

• Operation risk

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Apart from the “normal” risks there are:Apart from the “normal” risks there are:• New risks associated with:New risks associated with:

• project preparationproject preparation• project approvalproject approval• baseline & MVP validationbaseline & MVP validation• monitoring & verification of certified monitoring & verification of certified

emissionsemissions

• Additional risksAdditional risks• lack of firm market, price, sales & trade lack of firm market, price, sales & trade

mechanisms/history for CERsmechanisms/history for CERs• unfamiliarity of CDM by financiers who would unfamiliarity of CDM by financiers who would

need to count CERs as part of finance planneed to count CERs as part of finance plan

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So, with it additional costs and additional risks is So, with it additional costs and additional risks is there a future for CDM????there a future for CDM????

Example:Example:• The Netherlands will reduce 100Mt CO2eq The Netherlands will reduce 100Mt CO2eq

through CDM/JI (tender, CDM facilities etc) at through CDM/JI (tender, CDM facilities etc) at average costs of ca 4 US$/ton CO2eqaverage costs of ca 4 US$/ton CO2eq

• This means 400 M US$ for CERs/ERUs. This means 400 M US$ for CERs/ERUs. Contribution to the capital costs may by be 5-Contribution to the capital costs may by be 5-15% (at least for CERs). Consequently an 15% (at least for CERs). Consequently an investment of 4,000 M US$ is needed to investment of 4,000 M US$ is needed to generate the credits for the Netherlands.generate the credits for the Netherlands.

• Note: Should be new and additional (see also Note: Should be new and additional (see also sheet FIRR)sheet FIRR)

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Characteristics of expected CDM Market* AsiaCharacteristics of expected CDM Market* AsiaVolume : Volume : 100 - 200 Mt C year 100 - 200 Mt C yearExport revenues: Export revenues: 1500 - 5000 M US $1500 - 5000 M US $Profit :Profit : 500 - 2500 M US $ 500 - 2500 M US $ Expected beneficiaries Expected beneficiaries

• China, IndiaChina, India

• Indonesia, Philippines, Bangladesh and PakistanIndonesia, Philippines, Bangladesh and Pakistan

* Without USA* Without USA

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pkieskamp@adb.org

+63 2 632 6607

www.adb.org/REACH