International Finance Corporation Carbon Finance: Issues and Opportunities for the Private Sector MDL en Centro America San Salvador, El Salvador March 27-28, 2003

What is IFC? Private sector affiliate of World Bank Group Promotes economic development through commercially viable, private-sector investments Largest multilateral source of loan and equity finance for private enterprises in developing countries Catalytic role in stimulating and mobilizing private investment

What does the IFC do? Project finance - loans, equity, etc. –Departments: Power, Oil & Gas, Mining, Chemicals, Agribusiness, Funds/Private Equity, Communications & Information Technology, Manufacturing, Regional Mobilization of capital Capital markets development Financial advisory work Project development facilities Special development initiatives

IFC’s Value Added Direct funding with long-term staying power Catalyst for other investors and lenders (+ possible concessional funding for alternative energy projects) Honest broker/neutral partner –Reassuring presence for joint venture partners and host Government Risk identification and mitigation Potential access to funding for environmental projects

IFC’s Catalytic Role IFC acts as a catalyst to stimulate and mobilize private investment: IFC investments approvedUS$ 4.0 billion +IFC syndicationsUS$ 1.8 billion +Other funding sourcesUS$ 9.7 billion Total project cost (223 projects) US$ 15.5 billion (for FY ending June 2002)

Why does IFC make a special effort to finance environmental projects? Because accelerating market acceptance of environmentally beneficial technologies, products and services offers one of the best ways to meet IFC’s mission of improving people’s lives and reducing poverty

IFC Renewable Energy Portfolio 11 projects in 7 countries + 1 regional + 3 global Total project cost $860 million Financing of $240 million for IFC’s account plus $200 million in syndicated commercial bank loans –Hydro – 5 projects in Latin America + Nepal + Turkey –Geothermal and biomass cogen in Guatemala –Financial Intermediaries – Energia Global, REEF –Energy Efficiency (includes distribution)

Potential Transactional Barriers for Renewable Energy Smaller project sizes  Higher transaction costs Longer lead times  Higher development costs Higher ratio of capital  Need for longer-term costs to operating costsfinancing at reasonable rates Newer technologies  Higher operating risks Less experienced sponsors  Higher completion and operating risks Unfamiliar to financiers  Scarce/higher-cost capital Either excess or absence  Over-subsidized or of concessional fundingunder-competitive

Financing for GHG Reduction Global Environment Facility (GEF) –UNFCCC Carbon Finance/Emissions Trading –UNFCCC and Kyoto Protocol

IFC/GEF Climate Change Projects Photovoltaic Market Transformation Initiative –$30 M to accelerate solar power in India, Kenya, Morocco Solar Development Group (SDG) –$50 M global equity/BDS fund for PV ($6 M IFC + $10 M GEF) Renewable Energy and Energy Efficiency Fund –$65 M worldwide fund ($15 M IFC + $30 M GEF) Small and Medium Scale Enterprise Program –$21 M for SMEs from Costa Rica to Bangladesh Hungary Energy Efficiency Co-financing Program –$17 M partial guarantee facility ($12 M IFC + $5 M GEF) Commercializing Energy Efficiency Finance Program –$48-93 M partial guarantee facility ($30-75 M IFC + $18 M GEF)

Why is IFC interested in Trade of Emission Reduction Credits….. IFC specializes in project-based investments New source of financing for projects in our pipeline and portfolio that will reduce GHG Emissions Stimulate participation of developing country private sector in evolving market (non-IFC projects) Lower marginal costs to reduce GHG emissions in developing and transitional countries Facilitate transition to private sector intermediation and provision of value-added financial products

Impacts of Emission Reduction Sales World Bank and others have found ER revenues can have an impact on Project IRR: For $3/mtCO2e... –Energy efficiency / district heating % –Wind % –Hydro % –Bagasse % –Biomass with methane kickup to 5.0% –Municipal Solid Waste> 5.0%

IFC-Netherlands Carbon Facility (INCaF) Estd. Jan 2002 in partnership with Dutch Government €44 M to buy GHG emission reductions –from eligible projects in developing countries that reduce or avoid GHG emissions compared to BAU –under KP’s Clean Development Mechanism for benefit of Netherlands to use toward national obligations under KP Target sectors –Renewable energy, Energy efficiency, Fuel switching –Waste management, Landfill gas and CBM utilization Location –All developing countries except Central & Eastern Europe

General Requirements Eligible sector and region Project likely to close in short-term IFC and non-IFC projects eligible –Non-IFC projects subject to due diligence and E&S review Host country approval –KP ratification –Endorsement of project Independent Audits focusing on: –Likelihood of project to achieve reductions –Achievement of actual reductions over time

What does INCaF offer? Cash in € –Additional revenue stream (enhancement) for projects –‘Upfront’ payments possible in some cases –Can expect €3-5/mtCO2e Forward contracts –Payments over 7, 10, or 14 years –Periodic certification of actual GHGs reduced Assistance (incl. financial) at all stages –Project design & baseline identification –Monitoring & verification plan –Validation and registration

Value Added for RE Projects Improves competitiveness of power generation from landfills and other sources of methane Can make some marginal RE projects bankable Reduces investor/lender risk –Provides contracted flow of forex for seller –Cash flows from sale of ERs can provide security for lenders (e.g., improved DSCR) Advance payments can be critical to financial closure –Stricter standards apply Transaction costs have to be managed

Current CDM Pipeline Letters of Intent Signed/Under Negotiation Industrial fuel switching – V&M Tubes, Brazil [€15M] Waste-to-energy – South Asia 3 x 8-10 MW biomass – South America Biogas – Southeast Asia 25 MW bagasse – Central America 3 x MW small hydro – South America 100 MW hydro – South America 2 x 20 MW bagasse – South Asia Sample Projects Under Review/Discussion Waste-to-energy – South Asia 4 x 3-8 MW small hydro – South Asia 70 MW biomass – Latin America 40 MW bagasse – Latin America Fuel switching – Africa

Transaction Costs Key to expanded participation by private sector, and therefore, success of CDM INCaF’s early experience in reducing transaction costs –Purchase significant portion of ERs generated by project –Working with sponsors / investors who have contracted with advisors –Anchor buyer for projects generating large volume of ERs (ability for other smaller buyers to come in at significantly lesser costs) –Bundling of smaller projects to take advantage of common sponsor; sector; baseline – need a theme to wrap around –Processing with project & contract structuring / streamline Kyoto Protocol requirements

IFC’s Plans Going Forward Establish a JI Facility Intermediation: A few small CER (CDM) and ERU (JI) & AAU transaction structures and vehicles as private sector roles and activities increase –Prefer to partner with companies/FIs with long term interest in emerging markets Value-added products –Use IFC ability to take long term credit risk –Develop project finance-related products in collaboration with other FIs to unlock the investment potential of ERPAs Consider investing IFC capital in carbon market businesses and products

Carbon Finance: Issues and Opportunities for the Private Sector Sid Embree Consultant, Carbon Finance Environmental Finance Group International Finance Corporation Washington, DC USA phone: fax: web: For additional information on IFC’s carbon finance activities, please contact: