Prototype Carbon Fund

1. Prototype Carbon Fund PCF – LESSONS LEARNED The PCF and other World Bank Carbon Funds - Pioneering Greenhouse Gas Emission Reductions Training Workshop: Project Formulation for the Clean Development Mechanism Hanoi, Vietnam September 30- October 2, 2002 Eduardo Dopazo Prototype Carbon Fund edopazo@worldbank.org www.prototypecarbonfund.org

2. First, have a look at the PCF Annual Report! • First PCF Annual Report is now available. • The report is a good source of information on what we have learned to date. • Get you copy here or from the PCF website. • Chapters: • Projects and Portfolio Development • Carbon Finance • Carbon Asset (methodology) • Contracting Carbon (legal agreements) • Knowledge Management • Capacity Building

3. Key Lessons for CDM Countries • CDM strategy development is only a first step. Learning by doing (i.e. projects) is the way forward. • There is a very significant “implementation gap” between market projections and future CDM projects. • Successful CDM projects require a minimum national framework (legal & institutional). • Key prerequisites for successful projects: • Host country commitment • Project sponsor / owner commitment • Project reasonably well prepared (feasibility study, underlying finance)

4. CO2 / Carbon prices on past transactions CO2 / Carbon prices on past transactions

5. Impact of Carbon Finance (at $3/t CO2e) on Quality and Quantity • Methane-capture projects: carbon finance can turn “dogs” into “cash cows” • “Traditional” renewables: boost return by 0.5-2.5% • Makes marginal deals bankable • Often reduces Government subsidy otherwise required • Improves project’s access to capital markets through: • Secure contracted flow of foreign exchange from reliable counterpart • Improved quality of cash flows as well as volume • Payment of carbon finance in dollars to lender mitigates country risk • Advance payments can be critical to financial closure • Sponsor can borrow against contract (like PPA)

6. Impact of Carbon Finance (at $3/t CO2e)on Project Financing Waste-to-Energy project : Chennai, India, MSW • Gasification of solid waste • 15 MW plant, 95 GWh/year, $38m cost • ERs from: • Power generation displacing fossil fuel (40%) • Methane capture & conversion (60%) Project IRREquity IRR • Without carbon finance 14% 16% • With carbon finance >19% > 25%

7. Impact of Carbon Finance (at $3 / t CO2e)on Project Financing Project (not equity) IRR Note: data are preliminary

8. Lessons from Some Early Projects • Latvia – waste management • Baseline timeline & EU accession • Legal quality of AAUs & ERUs • Risks, delivery, and payment schedule • Uganda – off-grid hydropower • Risk-based scenario analysis • Role of subsidy/ODA • Morocco – on-grid wind power • Power expansion planning and dispatching • Chile – hydropower • Legal agreements and Kyoto Protocol ratification • Costa Rica – small power projects • Small projects and standardization • Power sectoral baseline

9. What Doesn’t Work: • Insufficient state of project preparation. • Underlying projects must be well prepared (feasibility study, risk assessment, financing). • The project must be viable. A credible and viable project sponsor must have been identified. • Project or project sponsor is not viable. • Unviable sponsor or project exposes PCF to unacceptable risk. • The sector must be competitive if a project is to be viable. • Claimed baseline contradicts other information. • Baseline claim must be credible and consistent with government policy etc. • Investment decision must not have been made before PCF involvement.

10. What Else Doesn’t Work: • Project contradicts good public governance. • Project must be comply with government sector policy. • Project must be consistent with World Bank sector and country assistance strategy. • Project contradicts social and environmental safeguards. • World Bank due diligence must show that project meets World Bank safeguard policies. • Project must meet domestic social, environmental and development requirements and policies.

11. And What Does Works? • A credible project sponsor to mobilize financing. • Early involvement of credible technical, financial, and economic specialists to establish that all project selection criteria are in place. • Pool of in-house resources to bring to completion projects that are technically sound and sustainable. • Upstream due diligence on carbon asset and financial risk. • Early review of credibility of baselines and determination of project additionality.

12. e.g: Chile Hydroelectric Project • What PCF encountered: • An excellent project sponsor with strong knowledge of the core business. • The project met all host country requirements for this type of projects. • Financial analysis and due diligence was prepared in advance of PCF involvement. • Credible baseline and additionality determination. • Local authorities were aware of the requirements for this type of projects and showed strong support. • Good public and private understanding of CDM projects at host country level. Result: The project was prepared and negotiated in record time.

13. What PCF is doing to help? • Project sponsors are now asked to be more pro-active in delivering financing and in preparing technical assessments. • PCF team, World Bank Institute and World Bank Operations and Regional Offices will continue to provide support to Bank and third-party projects • Lessons learned are being integrated into training modules.

14. Prototype Carbon Fund PCF – LESSONS LEARNED The PCF and other World Bank Carbon Funds - Pioneering Greenhouse Gas Emission Reductions Training Workshop: Project Formulation for the Clean Development Mechanism Hanoi, Vietnam September 30- October 2, 2002 Eduardo Dopazo Prototype Carbon Fund edopazo@worldbank.org www.prototypecarbonfund.org