prototypecarbonfund

1. www.prototypecarbonfund.org Canadian National Workshop on the Clean Development Mechanism (CDM) and Joint Implementation (JI) Delta Hotel, Ottawa January 7, 2002

2. Status of Carbon Purchase Agreements negotiated • Latvia Landfill Gas Capture and Power Generation • $2.5 million PCF Purchase • anaerobic decomposition of about 20,000 tons of garbage a year • ERs from the existing landfill site gas recovery by June 2002 • Uganda West Nile Small Hydro • $3.9 million PCF purchase • a 5.1 MW and 1.5 MW small hydro generating facilities in the West Nile region • Displaces >200 small and few large public diesel gensets • Chile Chacabuquito Run-of-River • $3.5 million PCF Purchase; parallel purchase of $1 million • 25MW run-of-river hydro generating 175 GWh to replace coal/gas • Brazil Plantar • $5 million of PCF Purchase; parallel purchase options of $10 million on offer • Substituting coal/coke by sustainably produced charcoal in pig iron production, plus afforestation and ecosystem restoration, biodiversity and health benefits

3. Carbon Purchase Agreements currently under Negotiation • Costa Rica Umbrella Project for Renewable Energy Resources • $7-10 million PCF Purchase: • 3 hydro and 2 windfarms (total of 85 MW). • Sectoral baseline and MVP now under validation • Romania: Cluj Energy Islands • $8 million PCF Purchase • upgrade the district heating system of Cluj-Napoca city • substantially improve energy efficiency; 421 MWt for district heating and nominal power output of 35MWe

4. Technologies in Projects cleared by and submitted to Shareholders by mid-February 2002

5. US$75.5 million of $145 million will be committed to Projects by February, meeting Fund investment target

6. Business Plan Target June 01-July 02 • Target: 11 Carbon Purchase Agreements • Now Finalized or under negotiation: 7 • Under preparation for end-June negotiation: 8 • Uzbekistan-Andijan district heating rehabilitation • Poland: 3 district heating systems - fuel switches from coal to geothermal and biomass (straw) • Mauritius: MSW to energy (incineration/power) • Czech Energy Efficiency: hospitals, schools (4). • Nicaragua: Rice Husk Power • Reserve operations: Jamaica Wind, India MSW-Energy, Morocco Wind, Thailand Pulp Waste, Romania Forestry

7. Project selection, preparation and baseline validation Approval, Financial Closure and implementation thru commissioning Initial and Periodic independent verification/ certification Submit to Executive Board and Assign emissions reductions to Participants Account CDM Project Cycle Registration and Transfer Emission Reductions

8. Project identification and preparation “Ensuring Environmental Credibility” Baseline Study (preferably as part of Feasibility Study) 6-8 weeks effort Cost: $30-40,000 4 weeks Cost: $30,000 & Preparation of Monitoring and Verification Protocol Validation process and opinion Single Large Project Front-End Costs: US$200-350,000 CDM unique costs: Baseline, MPand Validation: US$60-70,000 Lifetime Costs: $500,000? Negotiation of Carbon Purchase Agreement Financial Closure

9. Main Lessons Learned • CDM Costs are only 20-30% of total costs to deliver an Emissions Reductions Purchase Agreement (ERPA) • Most common constraints: • Quality of deals and volume of deal flow (no flood, simply a trickle) • Uniqueness of Baseline/MP &Baseline Risk (methods, scenarios, Executive Board A6SC view) • Government preparedness for CDM/JI operation (Host country agreements/letters of approval, pricing, responsibilities, status of ratification, internal processes) • Bringing deals to financial closure (matching carbon finance with underlying project financing) • Transaction costs on projects <$3 million of CF

10. Carbon prices on past transactions

11. A possible scenario? • Prices Flat at $2-4/tCO2e thru 2005 • EU, Japan and CANZ discover high abatement costs in 2005-2006. • Simultaneously, it becomes clear US is out for the first commitment period. • … And Russia decides to bank most of its hot air (or for whatever reason, buying hot air becomes politically too difficult) • Annex B (-US) turns to CDM… but too late.

12. How fast could CDM catch up? • From PCF experience: • 3-5 years gap between CDM project idea and ERPA signature, • 2-3 years gap between signature and first ERs. • Largest potential ER providers (China, India) still positioning to enter CDM market. • Lag functions between carbon price signals and project equity investor response is crucial factor

13. Impact of Carbon Finance on Project Financing at $3/t CO2e Project, Not Equity, FIRR. Note: data are preliminary

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

15. World Bank Response • Expand Market Development Activity to buy down learning curve and early market risk for private sector • Introduce more countries to CDM/JI opportunity • Continue “learning-by-doing” strategy • Open Markets for small countries and small projects: the potentially excluded majority Vehicles • PCF: Take up head room of $35m; do fourth year • Dutch: contract to buy >$30m/year 2002-2005 • Launch Prototype Sequestration Fund: March 2003 • Launch Small Country/Small Projects Fund, end-2002