Innovative Financing for Solar Water Heating: Carbon & Renewable Energy Certificate Trading Examples and Lessons from Selected International Experiences Green Power and Solar Thermal Energy Symposium Washington DC, Oct. 5th, 2005 Steven Kaufman Green Markets International, Inc.

Presentation Overview  International carbon reduction trading, the Clean Development Mechanism (CDM), and solar water heating Example CDM solar water heating experience: Kuyasa Project, Cape Town, South Africa  International Renewable Energy Certificate (REC) trading, and RECs for solar water heating Example solar water heater REC experience: Australia  Lessons for program design and market participation

Innovative Financing for Solar Water Heating  Green Markets International is a non-profit organization working to expand the use of renewable energy for climate protection and development.  Conducting REEEP-supported initiative, focusing on financial and commercial innovations for solar water heating in the Caribbean region and Brazil: Developing model business plans for SWH ESCO and fee-for-service operations Building stakeholder knowledge of carbon trading and helping to develop SWH CDM projects Exploring international REC trading possibilities

International Carbon Markets  Fueled by mandatory requirements of the Kyoto Protocol, international trade in greenhouse gas reductions is now a large and rapidly growing market.  Governments and private companies in industrialized countries with emission reduction obligations have already committed over a billion dollars for emission reductions from projects outside their borders.  The international carbon market has the potential to provide an important boost for renewable energy projects and markets in many parts of the world.

The Kyoto Protocol & Carbon Trading Under the Kyoto Protocol, three mechanisms enable cross-border trading in greenhouse gas (GHG) emissions reductions:  International Emissions Trading (IET) Trading blocks of emissions credits between emissions-capped industrialized countries, called Annex 1* countries  Joint Implementation (JI) Project-based trading among Annex 1 countries  Clean Development Mechanism (CDM) Project-based trading between Annex 1 and non-Annex 1 countries Certified Emission Reductions (CERs), created in the CDM process, can be used by Annex 1 countries to meet their reduction commitments during , and can accrue for project activities that commence before *Countries with emissions caps under the Kyoto Protocol are technically “Annex B” countries, though they are called Annex 1 here, referring to Annex 1 of the UNFCCC. In practice, these terms are commonly used interchangeably.

Eligibility Requirements for the CDM CDM Projects Must:  Be implemented in a non-Annex 1 country that is a party to the Kyoto Protocol  Be additional to what would occur in the absence of the project activity  Support sustainable development in the host country  Obtain approval of host country’s Designated National Authority for the CDM  Result in real, measurable, long-term climate change benefits CDM Projects Must Not:  Divert Official Development Assistance (ODA)  Involve nuclear power

CDM Project Cycle & Transaction Costs Note: Actual costs can vary considerably depending on various factors.

Challenge for Small-Scale Projects Transaction costs can be proportionally much higher for small-scale projects, since many of the costs are fairly fixed and do not vary much based on project size  Parties to the climate convention recognized that small- scale projects often have substantial sustainable development benefits, and that high transaction costs could prevent small-scale projects from participating in the CDM  Parties to the convention instructed the CDM Executive Board to develop simplified modalities and procedures for small-scale projects.

CDM Simplifications for Small-Scale Projects Simplified modalities and procedures for small-scale projects include:  Simplified Project Design Document  Simplified, pre-approved methodologies for baseline setting and monitoring plans  Ability to bundle project activities at various stages in the CDM cycle  Simplified requirements for environmental impact analysis  Lowered project registration fees  Shorter review period for project registration  Same Designated Operational Entity can validate and verify & certify emissions reductions for a specific small-scale project

Small-Scale CDM Project Definitions Project activities defined as “small-scale” for CDM participation include:  Renewable energy systems with less than 15 MW capacity  Energy efficiency projects less than 15 GWh/year  Other projects emitting less than 15 kilotonnes CO 2 /year

Small-Scale CDM Project Categories with Approved Methodologies* *As of February 15, 2005 and outlined in Appendix B of the simplified modalities and procedures for small-scale CDM project activities

CDM Participation & Transaction Costs SSC=Small-Scale

Kuyasa: Sustainable Energy CDM Project Involving SWH  Location: Community of Kuyasa, Cape Town, South Africa  Project Activities: Three Residential Energy Enhancements: - Solar Water Heaters (150 liters avg.) - Insulated Ceilings - CFLs  Number of households: 2,307 existing homes in phase 1, and 4,000 new homes in phase 2 Source: SouthSouthNorth

Kuyasa Solar Water Heating Component Pre-Project Situation: people heated water on stove tops CDM Project Baseline: emissions from hot water via electric tank water heaters based on “suppressed demand” for this energy service Emission Reduction Estimates: based on model output for thermal energy from SWH, electric water heater efficiency of 70%, and coal-fired electricity generation = tons CO 2 /sys/year

Kuyasa Project: Revenue from Carbon Trading The project is now registered with the CDM, but project participants have not yet completed carbon reduction sales transactions Participants anticipate generating revenue equal to at least 12% of the project’s capital costs, based on a CO 2 price of €8; at higher carbon prices, carbon reduction sales could potentially supply 76% of capital costs at €25 and 100% at €33 (Source: SouthSouthNorth) Carbon prices have recently been increasing

Carbon Trading Prices Source: Point Carbon, various others Carbon Market Program Approx. $/TonCO2 (Summer 2005) Clean Development Mechanism (CDM) $5 to $10 European Union Emission Trading System (EU ETS) $20 to $30 Retail and other voluntary markets $3 to $15

International Trade in Renewable Energy Certificates There have been a few international REC transactions:  Guatemala hydro RECs to the Netherlands  Symbolic REC contribution to WSSD from ENEL: wind farm in Cost Rica and geothermal in Italy  Probably some voluntary transactions within North America, with more activity to come… To date, though, experience is very limited.

RECs for Solar Water Heating: Australia Key Features of Australia’s REC Program for SWH  Regulations adopted in 2001 enable solar water heaters to generate RECs for compliance with Australia’s Mandatory Renewable Energy Target (MRET) which requires 2% of electricity generation by renewables though  SWH systems must either be installed in a new building, or it must replace an electric water heater or an electric-boosted solar water heater that has been installed for over 1 year.  RECs anticipated over 10 years are credited to SWH system buyers upon registration. Typical SWH systems are eligible for between 10 and 64 RECs depending on the user’s location and system type. A table in the MRET regulations specifies the amount of RECs.

RECs for Solar Water Heating: Australia, cont. Program Features and Reported Results  Registering a Solar Water Heater to obtain RECs costs A$20 (US$15) and must be done within 1 Year of SWH installation  Agents provide SWH REC registration services and buy RECs from SWH owners, which eases market participation  REC prices have reportedly ranged from nearly A$40 (the cost of the fine charged to parties not meeting REC obligations) for the first few years to the mid-A$20’s more recently  Australia’s SWH REC program has boosted Australia’s solar water heating market considerably, especially during the first few years of the program when REC prices were higher

Lessons From Selected International Experiences Regarding Carbon Trading and REC Rules and Markets The carbon market for Kyoto compliance is large and growing, but participation can be arduous SWH initiatives still can benefit from Kyoto carbon markets if scale is sufficient to cover participation costs; simplified procedures also help Australia’s simple REC rules, upfront crediting, and agents to ease participation give a good boost to the SWH market Simple rules and procedures, and active intermediaries, could facilitate SWH in US REC markets and emerging carbon markets, such as RGGI (the Northeast’s Regional Greenhouse Gas Initiative)

THANK YOU! For more information, see: Green Markets International, Inc. 691 Massachusetts Ave., Suite 7 Arlington, MA USA Note: Cover Photos Courtesy of SouthSouthNorh