Sizwe Kuzwayo

DNA Carbon Finance Workshop

May 2010, Tshwane

AGENDA

• Who is CEF Carbon

• Climate Change, Kyoto Protocol & CDM

• The CDM project cycle

• Additionality?

• The carbon price vs. risk?

• Project financing

• Why CEF Carbon?

• CEF – research &

development of alternative

energy solutions

• CEF Carbon – subsidiary,

established to develop &

access carbon funding for

eligible projects

– Rising Temperatures

Climate Change: the evidence

Source: IPCC (2001) Climate Change 2001: Working Group 1 Summary for Policymakers

Source: Courtesy of Andrew Goudie, Oxford University Centre for the Environment

The Evidence cont’d

Kyoto Protocol (1997)

UNFCCC(1992)

Project based Emission based

Clean Development Mechanism (CDM)

Art. 12 Kyoto Protocol

Joint Implementation (JI)Art. 6 Kyoto Protocol

International Emission Trading (IET)Art. 17 Kyoto Protocol

Between Annex-I andnon-Annex-I Countries

Trading of AAUs betweenAnnex-I Countries

Voluntary Market

Climate Protection

European Climate Change Program (ECCP)

Trading of EUAs between energy intensive

companies in the EU

EU EmissionTrading Scheme (EUETS)

since 2005

BackgroundElements of Global Climate Protection

Basic Principles of the CDM

Annex 1 Countries

(Developed)

Investor Countries can

provide financing &

sustainable development for

compliance

Non-Annex 1 Countries

(Developing)

Host countries produce CERs

by mitigating CO2 through

emission reduction projects

Kyoto Protocol – Developed countries (JI)

• Cap - reduce GHG

emissions by 5,2% of

1990 levels– (CO2, CH4, N2O, PFC,

HFC, SF6)

• 3 ways to reduce:

– Investing in efficient

technology

– Buy credits from

other developed

countries (JI)

– Buy credits from

developing

countries (CDM)

Kyoto Protocol – Developing countries (CDM)

• No Cap, project based

mechanism

• ER = BE – PE - leakage

• Additional income stream

into a project which

deliberately employs

cleaner ways of

conducting business as

usual

• More than 115 approved

methodologies and

growing

STATUS OF THE CDMMEASURING SUCCESS

2,171 registered CDM projectsTo date: > 5,018 projects

> 2.8 billion CERs expected

to the end of 2012

In

pipeline:

• Africa (44/129) – 2% of

global CER’s

• SA (17/33) 24% of

African volumes

We need more

projects!

Started with

opportunistic projects:

N20, LFG

Although there are

CDM opportunities, CDM

is not pot of gold at end

of tunnel!

• Process not as easy

as it looks!

All CDM projects must be registered with the CDM Executive Board

… by following a well defined process

Project Idea Note

(PIN)

Letter of Endorsement

(LoE)

Designated

National Authority

(DNA)

CDM Executive

Board (CDM EB)

Project Developer

Designated

Operational Entity

(DOE)

Project Developer

Designated

National Authority

(DNA)

Project Design Document

(PDD)

Document DecisionBody

Optional

This ensures the project and the ensuing reductions

meet the relevant requirements of Article 6 of the

Kyoto Protocol, the host country rules and the CDM

EB’s guidelines

Project Registration Validation

Project

Idea

?

Designated

Operational Entity

(DOE)

Host Country Rules

Verification of

actual

reductions

Letter of Approval (LoA)

Types of projects

Is there, does it, is it…..??

• an approved CDM methodology

• meet the Sustainable Development

criteria (ESE)

• Additional

Renewable

Energy

(Wind, Hydro,

Solar, etc)

Waste

Management

(LFGTE, Waste Heat

Capture &

Reutilization, etc)

Energy

Efficiency

(CFL, SWH,

etc)

You possibly

have a CDM

project !!

Some questions???

• Will it reduce GHG emissions?

• What will it be displacing?

• What is the proposed technology?

• What is the project boundary?

A project is additional

if the project activity

results in a greater

GHG emissions

reduction than would

have happened in

the absence of the

project activity

Additionality

Carbon pricing

Source: Point Carbon & Carbon Positive

Risk vs. Price

CDM vs. Project Cycle

Global Trading schemes

Allowances:

• EU-ETS 2007 - 2,061MT = $50 billion

• EU-ETS 2008 - 3,093MT = $91 billion

Project based transactions (2008):

• CDM-Primary - 389MT = $6.5 billion

(down from: 552MT @ $7.4 billion in 2007)

• CDM-Secondary - 1,072MT = $26.2 billion

(up from: 240MT @ $5.4 billion in 2007)

Market size

2006 = $ 30 billion

2007 = $ 60 billion

2008 = $126 billionSource: World Bank

Project Model

Project SPV

Shareholders

Financier CEF Carbon

Possible Public Entity

(Municipality)

Feas

ibili

ty

Fun

din

g

Div

iden

ds

CDM Reg.; CER Revenue

Interest and Repayments CER Off-Take

Debt

Electricity Buyer

Rev

enu

e

Elec

tric

ity

Project Finance

• DFIs, commercial banks, private banks

• Ring-fenced structure – no recourse to

shareholders

• Equity requirement “skin in the game”,

sweat equity not enough

• Risk averse

• Assessed on the basis of cash flows

• Project must be Bankable

Acquiring Project Finance

• Solid Feasibility study with Preliminary

Design

• O&M strategy

• Shareholder Agreements

• Solid ERPA and PPA – reliable

counterparties

• Good Cash Flows

Cautious Financiers

• Reliable Technologies

• Agreements in Place

• Conditions Precedent – EIA, CDM

registration

• Post 2012 uncertainties, growing appetite

for African projects

• Identify and Mitigate Risks

• Debt Equity Ratio

Why CEF Carbon?

• In-house fully integrated Carbon business

– Project finance & project management team

– CDM project development

– CDM technical team (PDD development)

– Carbon trading

• Alternative Energy development mandate from Government

• Schedule 2 status according to PFMA

• Strong, existing CDM project portfolio & established track record

• End to end CDM project development at no cost to the project owner

Why?

Ndolivhuwa!

Sizwe Kuzwayo

sizwek@cefgroup.co.za

CEF Carbon

+27 (0)10 201 4700