1. Prototype Carbon Fund 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.orgdopazo@worldbank.org The PCF and other World Bank Carbon Funds - Pioneering Greenhouse Gas Emission Reductions PCF – LESSONS LEARNED

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

5. 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) Impact of Carbon Finance (at $3/t CO2e) on Quality and Quantity

6. 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 IRR Equity IRR Without carbon finance14% 16% With carbon finance>19% > 25% Impact of Carbon Finance (at $3/t CO2e) on Project Financing

7. Technology  IRR Energy Efficiency - District Heating ~2.0 Wind 1.0 -1.3 Hydro 0.8-2.6 Bagasse 0.4 – 3.6 Gas Flare Reduction 2 – 4 Biomass with methane kick 2 - 7 Municipal Solid Waste with methane kick >5.0 Note: data are preliminary Project (not equity) IRR

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 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.orgdopazo@worldbank.org The PCF and other World Bank Carbon Funds - Pioneering Greenhouse Gas Emission Reductions PCF – LESSONS LEARNED