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Carbon Reduction Opportunities in the Energy Sector

Carbon Reduction Opportunities in the Energy Sector. Helmut Schreiber Lead Environmental Economist THE WORLD BANK Energy and Infrastructure Unit, Europe and Central Asia Region. Outline. Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities

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Carbon Reduction Opportunities in the Energy Sector

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  1. Carbon Reduction Opportunitiesin the Energy Sector Helmut Schreiber Lead Environmental Economist THE WORLD BANK Energy and Infrastructure Unit, Europe and Central Asia Region

  2. Outline Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  3. Energy Use and Sustainable Development • One of the key challenges that nations face today is scaling up industrial activities in an economically, socially and environmentally sustainable way: ENVIRONMENTAL SUSTAINABILITY => CLIMATE CHANGE MITIGATION => GHG EMISSIONS REDUCTIONS • In Central and Eastern Europe and Central Asia, GHG emissions reductions will have to be achieved against a background of the increasing industrial demand for energy services accompanying economic recovery. • Developing and EIT countries can't reduce their demand for the energy services necessary for development; still, the energy consumption - economic growth nexus must be weakened. Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  4. Kyoto Mechanisms can Assist … … the sector in becoming more energy efficient: • Kyoto Protocol: Adopted at the Third Conference of the Parties to the United Nations Convention on Climate Change held in Kyoto, Japan in December 1997, the Kyoto Protocol commits industrialized country signatories to reduce their greenhouse gas (or “carbon”) emissions by an average of 5.2% compared with 1990 emissions, in the period 2008-2012. • Flexible Mechanisms: Clean Development Mechanism (CDM) and Joint Implementation (JI): These mechanism provided by the Kyoto Protocol, designed to assist developing countries and countries in transition in achieving sustainable development by permitting industrialized countries to finance projects for reducing greenhouse gas emission in developing countries and receive credit for doing so. • These mechanisms create new financial incentives for industries in developing and transition economy countries to accelerate their introduction of efficient energy systems. Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  5. Key Components of a JI Project • Proposed Project - Defined in terms of outputs produced and GHG emissions over the life of the project • Baseline – The most probable future way of producing the same outputs absent the proposed project • Emission Reductions – The difference between baseline and proposed project GHG emissions by year • Crediting Period – Typically 2008 – 2012 • Project Boundary – defined to include all GHG Emissions related to the proposed project that are under the control of the project participants • Additionality – Claimed emission reductions must be above and beyond those that would have occurred without the proposed project Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  6. The Current Global CDM Project Portfolio • Globally there are over 1,500 projects in the UNFCCC's CDM portfolio (registered, registration requested or at validation phases) • There are some 500 CDM projects registered • 10.5% of all pipeline projects (166 out of 1584) is in the industrial energy efficiency sector with an average GHG reduction size of 100 ktCO2eq/year. Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  7. The Oil & Gas SectorGlobal GHG Emissions Estimates IPCC Estimate (1996): • 630 – 1,470 Million MTCO2eq/a • $3.8 - $8.8 Billion USD/a @ $6.00/MT • 55% are from Russia and FSU Countries • Intensity estimates 247.8 – 579.6 MT CO2e/Million CM of gas production • Emissions growth of 60% expected from 2000-2025 due to increases in production and longer transport distances Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  8. The Oil & Gas SectorEmissions by Source Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  9. The Oil & Gas SectorEmission Reduction Target Areas Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  10. The Oil & Gas SectorSummary of Opportunities • GHG Emissions from this sector are very large • FSU has a very large share of those emissions • APG utilization, venting or flaring locations, compressor stations and pneumatic devices are large potential targets • Looking for ways to increase use of gas that would otherwise be wasted or to reduce leaks or maintenance venting Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  11. The Oil & Gas SectorHow Can Carbon Finance Contribute? Case Study – Kursk Gas Distribution System Leak Reduction Program • 7,000 km of pipelines • 229 regulator stations • 1,431 pressure reduction stations • 6,200 valves, 18,500 flanges • Annual throughput 1.9 billion cubic meters • Annual ERs 321,500 MT CO2e • Annual sales value @$6.00/MT = $1.9 MUSD • May cover close to total project costs for inspection, monitoring, leak repairs & replacements Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  12. The Oil & Gas SectorCarbon Project Challenges (1) • Baselines and Additionality • Is busines as usual (BAU) really the baseline? • Why is it not very profitable to use valuable gas that is now being wasted? • If it is very profitable, why isn’t recovery the most probable future? • If the project is the most probable future, the project and the baseline are the same and there are no ERs to be claimed • How To Demonstrate Additionality • Investment Analysis – show that BAU or another project is more attractive economically than the proposed project • Prevailing practice – show that proposed project is not a common practice • Barrier analysis – if the project is financially attractive, document the barriers that make the project an unlikely future without carbon payments Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  13. The Oil & Gas SectorCarbon Project Challenges (2) For System Leak Reduction Projects • How to discover sources of leaks in a 7,000 km system? • How to monitor leaks with and without the proposed improvements? • How to demonstrate that leak reduction is not highly profitable and therefore likely without carbon payments? Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  14. Energy Efficiency Improvement Opportunities • Often Multiple EE Measures in Multiple Facilities • District Heating Systems • Production (Boiler Efficiencies/Fuel Choices, CHPs) • Delivery System Loss Reduction • End User (Metering, Control, Insulation, Windows) • Standard Building Stocks • Schools • Hospitals • Municipal Buildings • Housing • Investment Financing Is Often Very Limited • Multiple Decision-Makers Often Are Involved • Third-Party Investors – Shared Savings May Be Attractive Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  15. Ex-Plant Delivery Losses End User Boiler House Flats (# occ, m2) Gas Residential / Mixed Steam B1 SF Homes (# occ, m2) Coal Space Process Commercial B2 Commercial (# occ, m2) Fuel Oil Hot Water Large Loads (> 2,500 GJ) BN Space Tap Water Large (# occ, m2) Biomass Fuel Supply Heat Production Primary Distribution Secondary Distribution Buildings End User Space Waste Heat Measurement Standards ? C A B Energy Efficiency Improvement OpportunitiesDistrict Heating Project Components Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  16. Energy Efficiency Improvement OpportunitiesProject Additionality Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance Unit Abatement costs $/t CO2 Carbon Target Market Are Additional Not Likely Even With Carbon Revenue Not Probable Without Carbon Are Additional Least Carbon is Least Cost Probable Without Carbon Revenue Not Additional

  17. Energy Efficiency Improvement OpportunitiesWhy is the Sector Often Underdeveloped • Heat or Electric Supply Company Does Not Want To Invest To Lose Sales Revenue • End User May Face Subsidized Energy Prices – Inadequate Incentive To Conserve • Many Low Cost Measures May Not Be Additional • Aggressive Efficiency Standards May Crowd Out Carbon Role • Viable Higher Cost Projects May Face Financing Constraints • Multiple Decision Makers = Uncertainty • Transactions Costs Can Be High – Need Bundling Mechanisms Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  18. Energy Efficiency Improvement OpportunitiesBaseline Challenges • Many Projects Include Very Profitable and Not So Profitable EE Measures - Need To Isolate The Additional Components • Lack of Clear Decision Criteria Makes Baseline Definition Difficult • Diversity of Measures Makes Standardization Difficult • Interaction Effects Often Missed • Lighting Improvements Impact Heat Demands Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  19. Energy Efficiency Improvement OpportunitiesHow Can Carbon Finance Contribute? • Carbon Revenue Stream Can Enhance Access To Debt Financing • Carbon Assessment Can Identify Other Emission Reductions That May Be Monetized • Improved Project Sequencing • EE Targets Desired Sequence Typical Seq. • End User 1 3 • Delivery 2 2 • Production 3 1 Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  20. Energy Efficiency Improvement OpportunitiesSummary • EE Opportunities Are Large But Often Underdeveloped • Good Energy Audits Are An Effective Way To Find Targets • EE Standards Can Be Complimentary or Competitive With Carbon Financing • Bundling Is Essential To Manage Transactions Costs • Carbon Can Help But Not Eliminate Financing Barriers Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  21. Renewable Energy Project Opportunities • Illustrative RE Technologies • Wind • Small Hydro • Biomass or Biogas • Geothermal • Often Trading Higher Investment Costs For Lower Fuel Costs • Benefits Include Avoided Fossil Fuel Costs (TEBS), Local Environment Improvement (LEBS) and Global Environmental Gains (GEBS) • Heat And/Or Electricity Are The Most Common Project Outputs Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  22. Renewable Energy Project OpportunitiesWorld Bank Support • Renewable Energy Program Proposed for Russia (Global Environmental Facility, GEF) • GeoFund Provides Risk Reduction for Geothermal Projects Regionally (GEF) • Standardized Baselines For Electric Grid Displacement and For District Heating Projects (e.g., Czech Republic) • Extensive Experience With Wind, Biomass, Geothermal, and Small and Large Hydro Projects • Clear Vision on Coordinated Carbon And Other RE Policies Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  23. Renewable Energy Project OpportunitiesAdditionality Testing • Investment Analysis (IA) Is Most Common Method • For Public Investments, Economic Analysis • For Private Investments, Financial Analysis • In Either Case, The Least Cost or Highest Return Option is The Baseline • If Proposed Project Is Least Cost, Must ID Barriers That Make The Project Unlikely • Prevailing Practice - Also Persuasive if Confirms Investment Analysis Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  24. Renewable Energy Project OpportunitiesCommon Barriers • Technology Viewed As Unproven and Risky • New Technology Tough to Finance • Wind and Run Of River Hydro Are Sporadic, Not Firm • Geothermal Has Large Upfront Risk • Traditional Fuel Prices May be Subsidized • Emissions Are Seldom Taxed by The Damage Caused • Upfront Investment Often Large • Future Support Policies Are Often Unclear Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  25. Renewable Energy Project OpportunitiesAdditionality Issues • Heavy Policy Influence on Baseline • Mandated Portfolio Standards • Emission Limits or Fines • Guaranteed RE Prices • Green Tagging and Green Pricing • Too Little Support Compromises Investment Even With Carbon • Too Much Support, Eliminates the Need for Carbon Revenues Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  26. Renewable Energy Project OpportunitiesSimple RE IA Additionality Model Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  27. Renewable Energy Project OpportunitiesSummary • Typically Large Potential • Support Need May Be Front Loaded – Carbon Payments Are As Delivered. Can Use Carbon Payments To Secure Loans • Worldwide Project Experience Is Large And Growing In Each Technology • CDM Guidelines Provide Specific Baseline and Additionality Testing Methods Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  28. The World Bank’s CFB Mission • The Bank’s overarching mission: poverty reduction • The Bank is a key player in the global effort to combat climate change • The Bank’s carbon finance initiatives are part of this global effort • Carbon Finance Business: poor countries to benefit from international efforts to address climate change, including taking advantage of the emerging carbon market for GHG emission reductions • The Bank’s related mission: to catalyze a global carbon market that: • reduces transaction costs • supports sustainable development • reaches and benefits the poorest communities of the developing world Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  29. Overview of CFB Instruments • World Bank administered specific purpose carbon funds: • Prototype Carbon Fund • Community Development Carbon Fund • BioCarbon Fund • World Bank administered OECD country funds: • Italian Carbon Fund • Netherlands Clean Development Facility • Netherlands European Carbon Facility • Danish Carbon Fund • Spanish Carbon Fund • Umbrella Carbon Facility (UCF) • Including the China HFC-23 window of the UCF, total carbon funds being managed by the World Bank exceeds US$1.9 billion (of which 36 ERs purchase contracts for over $1.1 billion signed) Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  30. 1. Project Idea Note (PIN) 2. Early Notification and Letter of Endorsement (LoE) 3. Host Country Committee Memorandum of Understanding (HCC MOU) 4. Carbon Finance Document (CFD) 5. Letter of Intent (LoI) 6. World Bank Due Diligence 7. Baseline Study (BLS) and Monitoring Plan (MP) 8. Letter of Approval (LoA) 9. Project Design Document (PDD) 10. Validation 11. Registration 12. Pre-Negotiations Workshop / Consultations 13. Negotiations / Host Country Agreement / ERPA 14. Post-Negotiations Workshop 15. Initial Verification / project commissioning 16. Monitoring 17. Verification and Certification 18. Transfer of emission reductions The JI Project Cycle Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  31. Minimum Project Requirements • Type of Project: Greenhouse gases targeted should be those under the KP (CO2, CH4, N2O, HFCs, PFCs, and SF6) • Adequate Emission Reductions (ERs) Volume: minimum threshold of 50,000 tCO2e/year, but lower reductions also possible for “small projects” • Demonstration of Additionality and Determination of Baseline Scenario and Emission Reductions • Competent Project Participants and Clear Institutional Arrangement • Viable Business and Operation Model that Helps Reduce Transaction Costs • Ratification of Kyoto Protocol by the Host Country • Expected Schedule: Project should be operational before January 2008. • Sound Financing Structure • Technical soundness • Environmental additionality • Safeguard Policies of the World Bank Group • Contribution to Sustainable Development Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  32. Frequently Asked Questions • What Documents Are Required To Qualify A Project For Carbon Payments From CFU of World Bank? • Project Design Document (PDD) • Monitoring Plan (MP) • Emission Reductions Purchase Agreement (ERPA) • WB Safeguards Clearance • Who Prepares The PDD and MP? • World Bank can hire and supervise experts • Project sponsors must provide full cooperation • Preparation costs are then deducted from future carbon revenue stream • When are carbon payments received? • PDD and MP Must be independently validated as appropriate methods for calculating ERs. • Annual ERs achieved must be independently verified using the validated methods • Payments are made annually for reductions achieved in the prior year following verification. Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

  33. World Bank Advantages In Carbon Finance • Deal volume (USD1.9 bln in total) • Cross-Cutting experience in FSU • World Bank vetting can mobilize non-carbon financing • World Bank Safeguard regulations validate environmental integrity of projects • Strength of World Bank projects for post 2012 potential carbon sales Carbon Finance for the Energy Sector The Oil & Gas Sector Energy Efficiency Improvement Opportunities Renewable Energy Project Opportunities The World Bank and Carbon Finance

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