Programme of Activities: Challenges and Opportunities

Programme of Activities: Challenges and Opportunities IV Seminario Internacional: Mercado del Carbono Presented by Alberto Carrillo Pineda South Pole Carbon Asset Management Ltd. Lima, Perú, October 22nd, 2009

Introduction The programmatic approach under the CDM has been received with great optimism among stakeholders in the carbon market for a number of reasons: • Potential to increase the contribution of the CDM to the global mitigation efforts • Possibility of achieving economies of scale • Potential to capitalise policy instruments and programmes aimed at reducing emissions • Potential to reach a number of actors that otherwise would have very limited access to the carbon market (e.g. households, small industry, etc.). • Potential to increase the number of projects in regions and countries underrepresented in the carbon market (e.g. Africa)

However... The programmatic CDM has taken too long to take off and realise its large potential...

Abstract Aim of this presentation • Drawing from the market experience accumulated by South Pole and other market participants, introduce the audience to the main administrative, financial and operative challenges to be potentially faced when implementing Programmes of Activities (PoAs) under the Clean Development Mechanism (CDM) • To discuss what has been done and what needs to be done in order to overcome such challenges

Content • Challenges inherent to the nature of a Programme of Activities • Regulatory and operative challenges • Economic and commercial challenges • Conclusions

Challenges inherent to the nature of PoAs vs

Challenges inherent to the nature of PoAs • Logistics of implementation • Documentation • Centralised data storage • Access to user information (e.g. For monitoring) • Sampling / Monitoring • Usage / adoption patterns • Guidelines on sampling not yet available. Will have to be followed during verification once they have been issued by EB • Remote sensing • Maintenance / Follow up / Replacement • Intensive field work • Disposal? • Ownership of carbon credits

Challenges inherent to the nature of PoAs (cont.) • Capacity building / education • Incentive scheme • Free supply • Discount • Grant • Subsidized loan • Mid and long-term management • Effectiveness off programmes in the long term is still uncertain • Selection of appropiate coordinating entities

Challenges inherent to the nature of PoAs (cont.) $ Carbon developer Energy saving agency Development bank Power Utility $ $ CERs Develops and purchase CERs Coordinating entity Pays back through power bill Provides subsidized loan OEM Retailer Household Commercialisation of fridge Commercialisation of fridges Freight company Delivery of new fridge and collection of old fridge Destruction of old fridge Destruction facility Fridge replacement programme

Regulatory and operative challenges The main regulatory and operative challenges faced by PoAs can be summarised as follows: • DOE liability for erroneous inclusion of CPAs • Programmes with multiple methodologies • Revision of methodologies • CPA start date

Regulatory and operative challenges DOE liability for erroneous inclusion of CPAs Project Idea Note PoA DD & CPA DD Host Country Approval Validation Registration Inclusion of further CPAs Monitoring and Verification = services provided by South Pole can be done by any DOE Needs to be done by a DOE which hasn’t performed PoA validation or inclusion of any CPA

Regulatory and operative challenges DOE performing inclusion of any CPA is liable for erroneous inclusion for 1 year after inclusion of the CPA and for 6 months after each PoA verification DOE liability for erroneous inclusion of CPAs Project Idea Note PoA DD & CPA DD Host Country Approval Validation Registration Inclusion of further CPAs Monitoring and Verification = services provided by South Pole can be done by any DOE Needs to be done by a DOE which hasn’t performed PoA validation or inclusion of any CPA

Regulatory and operative challenges DOE liability for erroneous inclusion of CPAs

Regulatory and operative challenges DOE liability for erroneous inclusion of CPAs Project Idea Note PoA DD & CPA DD Host Country Approval Validation Registration Inclusion of further CPAs Monitoring and Verification = services provided by South Pole • Several DOEs are including CPAs only if they performed validation. • Inclusion is almost as detailed as traditional validation and hence no real economies of scale are happening.

Regulatory and operative challenges • Only at validation stage are project owners allowed to request for approval of multiple methodologies • Risk of no approval cannot be minimised. In case the request is not approved by the EB, the project developer would have lost the money invested in taking the project up to validation • Approval may take more than a couple of months • Request of approval can only be done by DOEs • Requesting approval of multiple methodologies implies an additional external fee • The combination of methodologies has to be used for each and every CPA!!! • Not practical • e.g. Programm of biodigestors with and without energy use. Each component needs a different meth combination Request for approval of the application of multiple methodologies to EB Project Idea Note PoA DD & CPA DD Host Country Approval Validation = services provided by South Pole

Regulatory and operative challenges If a methodology, subsequent to being placed on hold or withdrawn, is revised or replaced by inclusion in a consolidated methodology, the PoA shall be revised accordingly. The changes shall be subsequently documented in a new version of PoA (e.g Version 1.1), validated by a DOE and approved by the Board. • It is highly probable that in 28 years, a small-scale methodology will undergo at least one revision • Hence, the project developer will have to incur more than once in validation / revalidation fees for the PoA • Most widely used SSC-Meths • AMS.I.D Version 14 • AMS.I.C Version 15 • AMS.III.D Version 15

Regulatory and operative challenges CPA start date • Time gap between CPA start date and PoA registration can be considerable. Potential loss of significant carbon income for 1st CPA may discourage project owners to be the 1st CPA • Given that CPAs cannot start before beginning of validation (e.g. once CPA-DD has been made) encourages work on projects in very early stages increasing the risk of working on projects that don’t happen in the end Earliest beginning of crediting period for any CPA Earliest start date of any CPA Project Idea Note PoA DD & CPA DD Host Country Approval Validation Registration Inclusion of further CPAs Monitoring and Verification = services provided by South Pole

Economic and commercial challenges Some of the most relevant economic and commercial challenges that PoAs face today are: • Lack of experience in the market • Upfront costs associated with the development of a PoA • Coordinating entity selection and taxation issues

Economic and commercial challenges Lack of experience in the market • Lack of experience among DNAs, DOEs, CDM developers and the EB, which makes it impossible to predict the time it will take to register a PoA • Only one programme registered so far • No availability of stories of success in the long term • Limited availability to experienced DOEs • Only one DOE has completed validation of a PoA • In our experience, of 23 DOEs approached for quotation of validation services for a PoA • Only 6 DOEs showed interest/capacity to undertake this project • Only 3 DOEs presented an offer • Only 2 offers were serious enough (e.g. in terms of completeness, detailed proposal of services, etc.)

Economic and commercial challenges Upfront costs associated with the development of a PoA • As previously discussed, the potential for economies of scale hasn’t been fully realised due to • High validation fees from DOEs due to high-perceived risks and regulatory uncertainties (e.g. Liability for erroneous inclusion of CPAs) • Lack of experience in the market • So far no single project developer has submitted more than one CPA-DD for a PoA • There is a high risk associated with not being able to include enough CPAs into a PoA or not being to reach a volume that is high enough to reach breakeven point or expected IRR • There are not many international funds for financing of PoAs

Economic and commercial challenges Upfront costs associated with the development of a PoA * SNV, 2009 ** KfW, 2009

Economic and commercial challenges Critical size needed for different type of programmes * * KfW, 2009

Economic and commercial challenges Coordinating entity selection and taxation issues • Tax treatment and other liabilities for PoAs are unclear and may vary from country to country. • Unclear if and which host countries will issue LoAs and which restrictions will be imposed on the Coordinating Entity • Unclear how international PoAs will • be approved by host countries • be approved by the EB (what happens if the EB rejects the PoA for one country? Will the whole process start again?)

Conclusions • Programmatic CDM ispromisingbutstillmanyhurdlesneedtobe removed ifPoAs are toplay a significant role in the global mitigationefforts • Ourcurrentlearning curve is in veryearlystages. More changes are expectedto come basedonon-goinglearning • Costs are expected to go down as project developers and DOEs develop a better understanding on the risks involved in developing a PoA • More funding mechanisms are needed particularly for programms which are not viable on a pure commercial schemes

South Pole Carbon Mexico Alberto Carrillo, Country Director a.carrillo@southpolecarbon.com Campeche 290 -402 Col. Hipódromo Condesa Mexico 06100 Tel. (55) 5531 9013 (55) 5564 6793 South Pole Carbon Asset Management Ltd. Thank you for your attention

Programme of Activities: Challenges and Opportunities