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Catalyzing Clean Infrastructure Investment through Carbon Finance Risk Management Tools

This workshop outlines investment constraints in clean technology associated with carbon finance, emphasizing how carbon finance can enhance cash flow and reduce risks for projects. Key topics include the capital intensity of projects, the importance of creditworthiness, and the potential of combining carbon finance with other instruments for risk sharing. Case studies from Uganda, Costa Rica, and Chile reveal the impact of carbon finance on project returns and the need for improved revenue streams. The workshop aims to identify tailored risk instruments for CDM and JI projects.

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Catalyzing Clean Infrastructure Investment through Carbon Finance Risk Management Tools

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  1. Catalyzing Clean Infrastructure InvestmentVeronique BishopWorld BankWorkshop on Risk Management Tools in Carbon Finance November 19-20, 2003

  2. Outline • Investment constraints • How carbon finance can help • Risk sharing • Combining CF with other instruments • Workshop objectives & organization

  3. Investment constraints • Capital intensity • Intermittency • Poor offtaker creditworthiness • Illiquidity of (many) local FIs • Technology, scale • Environmental externalities undervalued • Green premium? • Kyoto?

  4. Capital intensity • [Chart showing discounted cost per kWh for range of generation sources]

  5. How carbon finance can help • Increased cash flow boosts returns

  6. Impact of Carbon Finance at $3/tCO2e – PCF Experience

  7. Annual Data Uganda Costa Rica Chile off-grid grid grid ERs (000 t) 49 61 79-138* Net Gen.(GWh) 30 75 160 CO2 ERs/GWh 1664 807 494-860 ER (USc/kWh) 0.50 0.24 * Gas vs. 0.15-0.26 coal BL Grid- vs. Off-grid Hydro($3/tCO2e)

  8. LFG Capture & Power Generation • Assumptions: • 6m3 LFG/ton waste/ann • LFG = 50% methane • 33% generation efficiency • 10.02 kWh / tonne waste • ERs (tCO2e): Per 1000t wastePer MWh • Flaring 41 4.06 • Power displacement 4-10 0.4-1.0 • Total 45-50 4.5-5.0 • Value at $3/tCO2e $135-$151 $13-$15

  9. Methane Abatement: India SWM • Power generation from gasification of solid waste • 15 MW plant, 95 GWh/ann, $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%

  10. Impact of Carbon Finance

  11. Impact of Carbon Finance

  12. Impact of Carbon Finance • Increased cash flow boosts IRRs • High quality cash flow reduces risk

  13. Impact of Carbon Finance • Increased cash flow boosts IRRs • High quality cash flow reduces risk • OECD - sourced • $- or €- denominated • Investment grade payor • Eliminate currency convertibility or transfer risk

  14. Impact of Carbon Finance • Increased cash flow boosts IRRs • High quality cash flow reduces risk • OECD - sourced • $- or €- denominated • Investment grade payor • Eliminate currency convertibility or transfer risk • Financial engineering helps access capital markets

  15. Basic Deal Structure Host Country Ltr. of Approval • Engagements re: • Regulation (e.g. tariffs) • Kyoto Protocol • compliance CF ERPA ERs ER payment Sponsor/ Project Financing Agr.’s Lenders Debt service

  16. Future Flow Structure Host Country Ltr. of Approval PCF Permits, etc. ERs ER payment SPV ERPA Financing Agr.’s Lender Sponsor/ Project

  17. Brazil Plantar Project ER payments are used to amortize commercial loan.

  18. Risk sharing in WB CF deals • Project risk: assumed primarily by Seller • Kyoto & Baseline risk: primarily by CF • Delivery = VERs (not CER/ERU) • JI VERs backed by AAUs • Early crediting • Switch to first track if eligible • Market risk: assumed entirely by CF • Country risk: shared • Letter of Approval (ERPA) • Host Country Agreement (JI)

  19. Combining CF with other instruments • Guarantees • Subsidy funds

  20. Future Flow + Guarantee Guaran-tor Host Country Counter-guarantee Ltr. of Approval Guarantee Agr. • Engagements re: • Regulation (e.g. tariffs) • Kyoto Protocol • compliance PCF ERPA ERs ER payment SPV Sponsor Financing Agr.’s Lenders Project

  21. Uganda Hydro: Energy Fund Uganda Credit Agr. Host Country Agr. IDA PCF $ ERPA Energy Fund ERs ER payment SPV Concession, Subsidy $ Financing Agr.’s, Loan Lenders $ Project

  22. Conclusions • Carbon finance can: • Improve returns, esp. non-CO2 GHGs • Provide a bankable revenue stream (like PPA) • Reduce subsidy required for renewables • ERPA minimizes lenders’ “Kyoto” exposure • How can we increase lending: • Improve ERPA? • Combine with risk instruments?

  23. Workshop objectives • Break down risks faced by clean tech projects • Examine risk instruments • Consider how to tailor risk instruments to CDM/JI projects • Agree to move forward

  24. Workshop programme • Overview • Case studies • Risk instruments • Plenary • Breakout groups • Rapportage • Next steps

  25. Thank you! www.carbonfinance.org

  26. Carbon Prices Source: PCF estimates, based on database assembled with Natsource,Co2e.com and PointCarbon

  27. Risk allocation ASSET QUALITY COMPLIANCE QUALITY DELIVERY RISK Penalty for non-delivery AAUs High Quality ETS ERs Contract for CERs ERUs CERs Price Contract for VERs VERs No Penalty for non-delivery ERs Small, risky asset

  28. What accounts for the price range? • Supply & demand • Compliance quality • Asset quality • Allocation of risks

  29. 1. Supply and demand • Willingness to pay: • price signals / announcements • C/ERUPT tender signals • penalties: UK >= £20/tCO2e; Denmark max €5/tCO2e • tax benefits • expectations • additional environmental/social benefits • Market imperfections: • information • uncertainty esp. Russia, US • short-term supply/demand factors e.g. UK market

  30. 2. Compliance quality • Government allowances • Eligibility: KP, ETS,“green certificates” • 2008-12 ERUs/CERs • Pre-2008 VERs

  31. 3. Asset quality • Delivery risk: • quality of carbon asset (baseline risk) • financial viability of: • project entity • sponsor (recourse) • offtaker (strength of offtake contract or market) • construction period • contract duration • Country risk

  32. CF Carbon Prices • Pricing as a function of: • Market conditions (current and projected) • Project, sector and country risk • Volatility of projected ERs (generally related to baseline and resource risk) • Degree of overcollateralization • Whether KP has been ratified by host country • Upfront payments • Credit enhancement

  33. www.carbonfinance.org

  34. World Bank Carbon Finance Vehicles Netherlands CDM Facility BioCarbonFund

  35. Development + Carbon = Carbon with a human face

  36. BioCarbonFund Harnessing the carbon market to sustain ecosystems and alleviate poverty

  37. Reduced tillage Sustainable Forest Management Afforestration/ Reforestration Revegetation Soil Carbon Management Landscape Management 1st Window: Kyoto-Eligible JI Countries only CDM & JI Countries JI Countries only 2nd Window: Over the horizon” CDM Countries

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