Catalyzing Clean Infrastructure Investment Veronique Bishop World Bank Workshop on Risk Management Tools in Carbon Finance November 19-20, 2003

Outline Investment constraints How carbon finance can help Risk sharing Combining CF with other instruments Workshop objectives & organization

Investment constraints Capital intensity Intermittency Poor offtaker creditworthiness Illiquidity of (many) local FIs Technology, scale Environmental externalities undervalued Green premium? Kyoto?

Capital intensity [Chart showing discounted cost per kWh for range of generation sources]

How carbon finance can help Increased cash flow boosts returns

Impact of Carbon Finance at $3/tCO2e – PCF Experience Technology  IRR (%) Fossil Fuel Displacement1 –2 ½ Energy Efficiency - District Heating Wind Hydro Bagasse~0.5 Gas Flare Reduction2-4 FF Displacement + Methane mitigation Biomass/Bagasse with methane kick3.6 - >5.0 Municipal Solid Waste with methane kick>5.0

Annual DataUgandaCosta Rica Chile off-grid grid ERs (000 t) * Net Gen.(GWh) CO2 ERs/GWh ER (USc/kWh) * Gas vs coal BL Grid- vs. Off-grid Hydro ($3/tCO2e)

LFG Capture & Power Generation Assumptions: –6m 3 LFG/ton waste/ann –LFG = 50% methane –33% generation efficiency –10.02 kWh / tonne waste ERs (tCO 2 e): Per 1000t waste Per MWh –Flaring –Power displacement –Total –Value at $3/tCO 2 e $135-$151 $13-$15

Power generation from gasification of solid waste 15 MW plant, 95 GWh/ann, $38m cost ERs from: –Power generation displacing fossil fuel (40%) –Methane capture & conversion (60%) Project IRR Equity IRR Without carbon finance14% 16% With carbon finance19% 25% Methane Abatement: India SWM

Impact of Carbon Finance

Increased cash flow boosts IRRs High quality cash flow reduces risk Impact of Carbon Finance

Increased cash flow boosts IRRs High quality cash flow reduces risk –OECD - sourced –$- or €- denominated –Investment grade payor  Eliminate currency convertibility or transfer risk Impact of Carbon Finance

Increased cash flow boosts IRRs High quality cash flow reduces risk –OECD - sourced –$- or €- denominated –Investment grade payor  Eliminate currency convertibility or transfer risk Financial engineering helps access capital markets Impact of Carbon Finance

Host Country Lenders Sponsor/ Project CF ERPA Financing Agr.’s Engagements re: Regulation (e.g. tariffs) Kyoto Protocol compliance Ltr. of Approval ERs Basic Deal Structure ER payment Debt service

Host Country Lender Sponsor/ Project PCF ERPA Financing Agr.’s Ltr. of Approval ER payment SPV ERs Permits, etc. Future Flow Structure

Brazil Plantar Project ER payments are used to amortize commercial loan.

Risk sharing in WB CF deals Project risk: assumed primarily by Seller Kyoto & Baseline risk: primarily by CF –Delivery = VERs (not CER/ERU) –JI VERs backed by AAUs –Early crediting –Switch to first track if eligible Market risk: assumed entirely by CF Country risk: shared –Letter of Approval (ERPA) –Host Country Agreement (JI)

Combining CF with other instruments Guarantees Subsidy funds

Host Country Lenders Sponsor PCF ERPA Financing Agr.’s Engagements re: Regulation (e.g. tariffs) Kyoto Protocol compliance Ltr. of Approval ER payment Project Future Flow + Guarantee SPV ERs Guaran- tor Counter-guarantee Guarantee Agr.

Uganda Lenders Energy Fund PCF ERPA Financing Agr.’s, Loan Host Country Agr. ER payment Project Uganda Hydro: Energy Fund SPV ERs IDA Credit Agr. Concession, Subsidy $ $ $

Conclusions Carbon finance can:  Improve returns, esp. non-CO2 GHGs  Provide a bankable revenue stream (like PPA)  Reduce subsidy required for renewables ERPA minimizes lenders’ “Kyoto” exposure How can we increase lending:  Improve ERPA?  Combine with risk instruments?

Workshop objectives Break down risks faced by clean tech projects Examine risk instruments Consider how to tailor risk instruments to CDM/JI projects Agree to move forward

Workshop programme Overview Case studies Risk instruments –Plenary –Breakout groups –Rapportage Next steps

Thank you!

Carbon Prices Source: PCF estimates, based on database assembled with Natsource,Co2e.com and PointCarbon

Small, risky asset High Quality ASSET QUALITY CERs VERs COMPLIANCE QUALITY No Penalty for non- delivery Penalty for non- delivery DELIVERY RISK ERs Risk allocation AAUs ERUs Price ETS ERs Contract for CERs Contract for VERs

What accounts for the price range? Supply & demand Compliance quality Asset quality Allocation of risks

1. Supply and demand Willingness to pay: –price signals / announcements C/ERUPT tender signals penalties: UK >= £20/tCO2e; Denmark max €5/tCO2e tax benefits expectations –additional environmental/social benefits Market imperfections: –information –uncertainty esp. Russia, US –short-term supply/demand factors e.g. UK market

2. Compliance quality Government allowances Eligibility: KP, ETS,“green certificates” ERUs/CERs Pre-2008 VERs

3. Asset quality Delivery risk: –quality of carbon asset (baseline risk) –financial viability of: project entity sponsor (recourse) offtaker (strength of offtake contract or market) –construction period –contract duration Country risk

Pricing as a function of: –Market conditions (current and projected) –Project, sector and country risk –Volatility of projected ERs (generally related to baseline and resource risk) –Degree of overcollateralization –Whether KP has been ratified by host country –Upfront payments –Credit enhancement CF Carbon Prices

Country/PCF ProjectPrice/tCO2eRationaleVolume 000tCO2eValue US$m Bulgaria: Biomass 3.50JI with HCA; resource risk Mexico: Inelec Hydro 3.50CDM: pooling of 4 projects; OECD count.1, Moldova: Soil Conservation 3.50CDM: low risk but 15 yr delivery; option 1,456+ opt =1, Vietnam: HCMC Landfill 3.50CDM: strong sponsor, financing2, Costa Rica: Rio General Hydro 3.50CDM: strong sponsor, financing1, Romania: Afforestation 3.60JI with HCA; low risk but 15 yr delivery India: ABIL MSW 3.75CDM: strong sponsor1, Mexico: Fuerza Eolica Wind 3.75CDM: strong sponsor, OECD country2, Guatemala: El Canada Hydro 3.75CDM: strong sponsor; fin. closure2, South Africa: Durban MSW CDM: Low risk + social ben ’ s 3, Colombia: Wind CDM + social ben ’ s Bulgaria: District Heating 4.00JI with HCA; ERPA with Municipality 1, Uganda: Small Hydro (2001) 3.00CDM; semi-fixed payments 1, Brazil: Seq. & Biomass 3.50CDM 1, Chile: Small Hydro – firm 3.50CDM 1, Costa Rica: Renewables 3.50CDM : umbrella; small projects 547 wind +172 hydro Chile: Small Hydro – option CDM Latvia LFGTE (2000) 4.11+JI : Minimum guaranteed by Host Country

World Bank Carbon Finance Vehicles BioCarbon Fund Netherlands CDM Facility

Development + Carbon = Carbon with a human face

BioCarbon Fund Harnessing the carbon market to sustain ecosystems and alleviate poverty

Reduced tillage JI Countries only 1 st Window: Kyoto-Eligible Sustainable Forest Management Afforestration/ Reforestration CDM & JI CountriesJI Countries only 2nd Window: Over the horizon” Revegetation Soil Carbon Management Landscape Management CDM Countries