Kyoto and Beyond: Opportunities for Flemish Business in Carbon Finance Veronique Bishop Carbon Finance Business The World Bank Presentation to Export Flanders May 26, 2005

Outline Kyoto Protocol basics Impact of carbon finance on your projects Key issues Working with the World Bank How carbon finance impacts RE projects, by poviding a high-quality revenue stream that improves projects’ bankability Tools that we have used to help RE projects secure underlying financing– both equity and debt

Kyoto Protocol Basics Entered into force Feb 16 OECD countries will need ~5.5 btCO2e Gap may be met by: Domestic measures: ~ 50% EU Emissions Trading Scheme Trading via 3 KP mechanisms: “Clean Devt Mechanism” “Joint Implementation” “Intl Emissions Trading”

EU Targets under Kyoto

Structure of the Carbon Market Project-Based Transactions JI and CDM Voluntary Retail Other Compliance Allowance Markets UK ETS EU Emission Trading Scheme Chicago Climate Exchange New South Wales Certificates

Volume Traded Through Projects: Growing (in million tCO2e) (Jan-Apr)

CDM, JI by sector % of CDM+JI ~150m t CO2e traded Jan CDM, JI by sector % of CDM+JI ~150m t CO2e traded Jan. 2004 - April 2005

CDM, JI by host country % of CDM+JI ~150m t CO2e traded Jan CDM, JI by host country % of CDM+JI ~150m t CO2e traded Jan. 2004 - April 2005

Impact of Carbon Finance Emission reductions are calculated relative to a baseline Key elements: CO2 reduced by displacing fossil fuels Mitigation of methane, nitrous oxide, other GHGs CO2 “sequestered” eg through agroforestry Impact depends on technology, ER price Price depends on: Risk and risk-sharing Supply and demand within market segment

Carbon revenues depend on price + fossil fuel displaced Generic Emissions Factor (tCO2e/MWh) Carbon Revenue at US$4/tCO2e (US$/MWh) Gas 0.40 $1.60 Coal 0.85-1.0 $3.40-$4.00 Diesel 0.75-1.50 $3.00-$6.00 ER cash flows improve IRRs by 0.5 – 2.5%

Carbon prices: Project-based (weighted average prices from Jan Carbon prices: Project-based (weighted average prices from Jan. 2004 to April 2005 in U.S.$ per metric tonne of CO2e)

Impact by Technology

Impact by project Sector Country/Project Incremental IRR . Discounted Payback Per. Landfill CH4 Brazil: Nova Gerar 32.70% 0.3 South Africa: Durban 32.60% 0.5 Argentina: Olavarria 13.30% 0.7 Energy Eff. Indonesia: Indocement 12.80% 1.1 Coalmine CH4 China: Jincheng 8.00% 1.5 Biomass+CH4 Bulgaria: Svilosa 5.00% 3.6 Biomass Hungary: Pannonpower 2.00% 4.9 Forestry+Bio Brazil: Plantar 4.70% 1.8 Forestry Romania: Afforestation 0.60% 6.2 Hydro Ecuador: Abanico 2.10% 6.8 Peru: Poeches 0.70% 12.4 Wind Philippines: Northwind 0.40% 20.0 Colombia: Jepirachi 23.1

Impact of Carbon Finance Revenue boost $3 to $5 per MWh for renewables, EE Up to $20 per MWh /$60/tcm for CH4 mitigation High quality cash flow OECD - sourced Investment-grade payor $- or €- denominated Eliminate FX risk Financial engineering helps tap capital

Issues in executing projects Lack of access to financing High capital cost, long payback period Risk (& risk aversion) Tariffs Collections Borrowing against revenue streams Loan cost & tenor Availability of risk mitigation instruments A solution: carbon finance

Kyoto Protocol: Constraints CDM, JI: Complex & uncertain eligibility rules Lead time Underlying financing Industrial gases lack sustainable development impact Small, poorer countries are bypassed Post – 2012? IET: Sellers must meet prerequisites Buyers want AAUs to be backed by real emission reductions

World Bank: solutions CDM, JI: Benchmark new methodologies Help Host Countries develop project pipelines Catalyze underlying financing Demonstrate “greening” of industrial gases Seek clarity & govt commitments beyond 2012 Defray KP registration risk IET: Green Investment Schemes to fund RE/EE investment TA to help sellers meet prerequisites

World Bank’s role Help OECD countries address CO2 shortfalls Catalyze climate-friendly investment in developing and transition countries Benchmark methodologies Inform buyers, regulators, public

How Carbon Funds Work Bank Managed Carbon Fund $ $ Technology $ Technology Finance $ Finance Industrialized Governments and Companies Developing Countries and Communities Bank Managed Carbon Fund CO Equivalent 2 Emission Reductions CO Equivalent 2 Emission Reductions Payment on delivery of emissions reductions, not up-front capital costs

World Bank Carbon Finance Prototype Carbon Fund $180 m Community Development Carbon Fund. $128.6 m to date BioCarbon Fund $ 43.8 m to date Netherlands CDM Facility $ 180 m $ 80 m to date Italian Carbon Fund Netherlands ECAF Netherlands Europe and CentraI Asia Facility (with IFC) $ 35 m $ 200 m Spanish Carbon Fund Danish Carbon Fund $ 30 m

Securing Underlying Finance Host Country Ltr. of Approval Engagements re: Regulation (e.g. tariffs) Kyoto Protocol compliance CF ERPA ER pmt ERs Sponsor/ Project

Securing Underlying Finance Host Country Ltr. of Approval Engagements re: Regulation (e.g. tariffs) Kyoto Protocol compliance CF ERPA ER pmt ERs Sponsor/ Project Lender? Loan ??

ER payments placed in offshore escrow Future flow structure: Plantar Brazil Ltr. of Approval PCF ER pmts $5 m ERPA ERs SPV World Bank Multi-shareholder Fund Participants take Kyoto Risk If not: Fewer carbon contracts would be bankable and fewer projects would get built, and Less opportunity to explore financial structures to enhance value of carbon streams on project financing Less opportunity to develop and present baseline methods and pioneer asset creation process in core CDM/JI market Financing Agr. Rabobank Project Loan $5 m ER payments placed in offshore escrow

Brazil Plantar Sust. Fuelwood ER payments amortized 100% of commercial loan principal

Ecuador: Abanico Hydro 30 MW ROR hydro 85% capacity factor $33.3m cost IRR 15.6% 800,000 tCO2e ERs ERPA $4m rIRR 0.73% => 16.3%

CER payments placed in offshore escrow Future flow structure: Abanico Ecuador Ltr. of Approval NCDF Hidrobanico CER pmt $4.03 ERPA ERs SPV World Bank Multi-shareholder Fund Participants take Kyoto Risk If not: Fewer carbon contracts would be bankable and fewer projects would get built, and Less opportunity to explore financial structures to enhance value of carbon streams on project financing Less opportunity to develop and present baseline methods and pioneer asset creation process in core CDM/JI market Financing Agr. IIC Project Co. Loan $7 m PPA Off-taker CER payments placed in offshore escrow

Abanico Cash Flows CF Impact in Annual Debt Service, including interest (%) 33.3% 19.4% 41.4% 44.5% 48.0% 52.1% 57.0% CER payments helped project meet IIC’s investment criteria

Abanico Project Carbon finance enabled project to: Meet IIC’s investment criteria Lower interest rate by 100 bp Expedite financial closure …In one of L. America’s riskiest countries

Uganda ERT

Financial engineering solutions E. Eur: Green Investment Schemes Designed for Bulgaria, Romania Planned for Czech, Slovak, Latvia Dialogue beginning with Russia and Ukraine China: Greening Industrial Gases Channel proceeds of ER sales from HFC23 to renewables and other sustainable investment Argentina: carbon/investment fund Govt request for Bank assistance to help develop and deliver carbon assets to global market Bank seeking participation by bilateral

Financial engineering solutions Financial engineering of carbon transactions to facilitate lending against ERs: Offshore escrow Long-term contracting Energy funds Senior-subordinated/mezzanine structure Risk mitigation instruments Direct financing Insurance

Conclusions Carbon finance: World Bank Group’s role Lowers compliance costs Improves returns on climate-friendly projects Provides a bankable revenue stream Is taking off: Kyoto enters into force 1/4/05 World Bank Group’s role Support sustainable development Prepare the ground for the private sector Facilitate carbon market development Purchase ERs to catalyze investment

Carbon Market Structure Project-Based Transactions Allowance Markets UK Emission Trading Scheme Kyoto Pre-Compliance EU Emission Trading Scheme Key Figures: Project-based transactions account for more than 96% of volume traded (2003) Methodology: Limited information on transactions in the carbon market is publicly available Material for this study provided by Natsource LLC, Evolution Markets LLC, and PointCarbon, and direct interviews with market players Database of 288 project-based transactions (signed or advanced stage of negotiation) + aggregate data on allowance markets Chicago Climate Exchange Not for Kyoto Compliance New South Wales Certificates Retail

Traded Volumes Volume traded in project-based transactions, m tCO2e 60 Kyoto Pre-Compliance Not Kyoto Pre-Compliance 40 20 70 million tCO2e traded in 2003 (vintages up to 2012) 2.5 times more than 2002  220 million tCO2e traded since 1996 On average, projects generate 70% more emission reductions (post-2012 in general) Total value $200-$300m 1996 1997 1998 1999 2000 2001 2002 2003 Q1-Q3 Volume traded in project-based transactions, m tCO2e

Thank you! www.carbonfinance.org