Overview of the MDG Carbon Facility Matt Spannagle Carbon Technical Adviser Millennium Development...

Overview of the MDG Carbon Facility

Matt SpannagleCarbon Technical Adviser

Millennium Development Goals Carbon Facility

Bureau for Development PolicyUnited Nations Development Programme

2 2

UNDP MDG Carbon Facility

Recall:

HFC & N2Oreduction

40%

Renewable Energy23%

CH4

reduction16%

Energyefficiency

7%

Cement & Coalmine/bed, 7%

Fuel switch, 7%

Afforestation &Reforestation, 0.2%

3 3


Recall:

MDG Impact

Number of CountriesLow High

Low

High Objective for UNDP’s Carbon Strategy

CurrentCDM Market*

4 4


Process of selecting Fortis

Internal Approvals

RFP:Expression of Interest

RFP: Review Period

RFP:Evaluation

Period

RFP:Negotiations

with Finalist

Qualifiedfor RFP

Start

15Attended Meeting

ProposalsReceived

12 6Finalists

1Winner

3

ProcessStep

Timing

Number of

Banks

11 December:

• Launch RFP

11 January:

• Participants’ Meeting

31 January:

•Proposals due

• Oct, Nov 5-19 February:

• Selecting 3 Finalists

26 Feb – 5 March:

• Interviews and

ranking of Finalists

26 March:

• Commence negotiations

May:

• Signing of contract

•Launch (June 5)

2006 2007

5 5


Fortis Bank - overall best deal for Project Proponents

Market leader in carbon finance

Early key player and investor - can best manage risk, and offer best prices

2004: awarded “Carbon Trade of the Year” for first ever trade of EU Allowances using a derivates based contract.

2008: awarded “Best Carbon Trader 2008”

One of the largest banks in the world, a counterparty that will honor its contracts to purchase credits

Institutional stability / solvency – a strong solvent partner to the Facility.

In current time of credit uncertainty, Fortis are in a strong position to honor their Facility obligations, including their contracts with Project Proponents.

According to S&P, Fortis is rated AA+

6 6


MDG Carbon Facility Partnership with Fortis

Fortis

Project Proponents

UNDP

2 Year Agreement

Emissions Reduction Purchase Agreement (ERPA)

Payment of Cost Recovery Fee $285k / project

Payment for Credits

Delivery of Carbon Credits 15m credits

Cost Recovery Service Agreement

Project Management Services

Project Due Diligence Services

7 7


Fortis – Carbon Banking ServicesCarbon Market Price

ECX CFI Futures Contracts2006 - 2007 YTD

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Pri

ce p

er

ton

ne (

EU

R)

Dec07 Sett Dec08 Sett

8 8


Fortis – Carbon Banking Services

Pricing Formula Example

• Illustrative FSP Pricing• Floor: €10• Rolling Component: 50% discount

• Example at two market prices:

EUA Phase 2at €12

EUA Phase 2at €22

Floor Component

€10.00 €10.00

€6.00 €11.00

9 9


Fortis – Carbon Banking Services

• 15 million credits, ~36 projects

• Key feature: one price across the portfolio, irrespective of project

characteristics

• Benefits for project proponents

• Fixed price protects against market downside

• Advance payment for UNDP’s Cost-Recovery Fee

• Fortis as a solvent counterparty

Features

1010


UNDP - Project Development Services

Part 1:Due

Diligence

Part 2:Project

Documentation

Part 3:Establish

Monitoring System

•Two step process

• Initial screening

• In depth evaluation

• Preparation of documentation

• Approval by host country

• Validation by 3rd party auditors

• Implementation and oversight

of monitoring system in project’s

first year

ERPA 1st Credit

Issuance Registration

Part 1:Due

Diligence

Part 2:Project

Documentation

1111


PDD

Host country approvalDesignated

national authority

Operational entities

Project owner

Executive Board

Validation

Registration

Financing & implementation

Monitoring

Verification & certification

Issue CERs

Project Idea Note (PIN)

Project idea

Recall

MoU/LoE

MoU/LoE

SA/ERPA

SA/ERPA

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Project Year

Milestone Services Offered by Facility

Year 1 MoU/LoEService agreement /ERPARegistration;

- project identification and sourcing - due diligence

- preparation of project documentation (PDD), arrange for validation

Year 2 Project commissioning

- basic oversight and technical assistance on implementation

Year 3 1st year of credit issuance

- monitoring support and pre-verification of credits

MDGCF services

1313


UNDP - Team Structure

Country Office RoleMDG Carbon Facility Team

Part 3:Monitoring System

Part 1:Due Diligence

Part 2:ProjectDocs.

RTACO

Conslts

Project 1 Project n

RTACO

Conslts

• Assist in

identifying/

sourcing projects

• Assist in due

diligence and

gathering of

documentsTechnical

Finance & Legal

Execution

• Assist in project

documentation

formulation

• Liaise with local

authorities and

actors

• Oversee

collection of

operational data

• Desk top review

and site visits

Central Support

Carbon Projects

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MDG Carbon due diligence

Commitment

SC

RE

EN

ING

EV

AL

UA

TIO

N

No. of potential projects Due

Diligence effort, $$$ & scrutiny per project

Commercial banks buying ‘product’ (emission reductions) – they need to be sure they are committing to a stable, safe partner in project proponent

requirement for formal due diligence process

requirement for formal due diligence process

1515


Due diligence Aspects

Due diligence on 5 aspects:

A. Carbon layer

B. Technical feasibility (engineering)

C. Financial/Management/Legal viability

D. Compliance with environmental & social principles + MDG impacts

E. Country risk

1616


MDG Carbon due diligence

MDG Carbon due diligence process that all projects must undergo:

Phase 1: Screening

• CDM eligibility, financial and technical feasibility etc.

• early elimination of ineligible or unviable projects

• low cost to screen

Phase 2: Evaluation

• in depth

• May require additional studies or info collection

• Recommend either for commitment or rejection.

• Risk areas are identified and risk management strategies developed.

1717


Due diligence aspects in Screening and Evaluation

Carbon layer Technical

feasibilityCountry

risk

Commitment

SC

RE

EN

ING

EV

AL

UA

TIO

N E&S compliance + MDG impacts

Financial and Legal

• Intensity of due diligence varies between screening & evaluation depending on aspect

e.g. carbon layer due diligence performed mainly at Screening while MDG impact assessment requires more effort and is mainly conducted at Evaluation

Due diligence applied in coordination and iteratively e.g. if Carbon layer assessment reveals low volume of CERs, the underlying financial security is analyzed before continuing with other aspects

1818


MDG Impact assessment and project selection

Project-intrinsic MDG benefits

e.g. employment/income,Access to energy

air quality improvement

Project-extrinsic MDG benefits

e.g. invest part of CER income to:

schools or health clinics, HIV education campaigns,environmental restoration

+ = MDG Score

Intrinsic and extrinsic MDG impacts are quantified

Quantification based on “no. of people impacted under each MDG”

PP not required to re-invest CERs into extrinsic benefits but may do so to increase MDG Impact

Maximization of portfolio’s development dividend

1919


What might MDG Carbon projects look like?

• 15 million credits• 28 to 44 projects (mid-point 36) launched in 07-08

• Projects vary by• Size• Technology• Geography• MDG attributes

Pipeline will be developed on an on-going basis

2020


www.undp.org/mdgcarbonfacility/www.mdgcarbonfacility.org/

Overview of the MDG Carbon Facility Matt Spannagle Carbon Technical Adviser Millennium Development...

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