Investors’ Concerns & Criteria for CDM Electricity Projects presented by Christian Matossian E7 Programme Manager Project Manager, RWE Environmental Affairs UNEP RISOE Second National Workshop (Phase II) January 12-13, 2004 Cairo, Egypt

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 2 What is E7?

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 3 What is E7 ? Non-profit group of 9 leading electricity companies from G7 nations Created in 1992 (after Rio Summit) by CEOs Mission to be proactive on global electricity issues and promote sustainable development Actions: electricity projects, capacity building, joint positions, policy debate, stakeholder partnerships

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 4 E7 climate change experience Climate change working group: Policy statements, position papers, stakeholder dialogue Capacity building initiatives Electricity Projects (AIJ, CDM, and JI) – as developer & investor Individual e7 member companies also have climate change project experience from their commercial investments and/or stewardship initiatives

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 5 E7 climate change working group Group of climate change specialists from e7 companies Joint policy statements to COPs, CDM EB, WSSD, etc. Publications: –The e7 Guide to Implementing Projects Under the Clean Development Mechanism (November 2003) –CDM and the Other Flexible Mechanisms – E7 and its Partners from Around the World (October 2000) –The Impact of Climate Change on The Strategies of the Electricity Industry (October 2000) –Other position papers and project lessons learned reports available on Stakeholder dialogue with developing country utilities, NGOs, international orgs, etc.

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 6 E7 capacity building Training, technical assistance, knowledge transfer to developing country governments, electricity companies, and organisations Over 30 projects completed Current CDM capacity building programme with UNDESA to begin in Q –Electricity related CDM training from investors’ perspective based on project experience

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 7 E7’s AIJ, CDM, and JI projects Renewable energy development in Indonesia (AIJ) Thermal power plant efficiency measures in Jordan (AIJ) Wind park on Galapagos Islands in Ecuador (CDM) Micro-hydropower development in Bhutan (CDM) Energy efficiency measures in Bulgaria (JI) Hydropower development in Bolivia, Zimbabwe, and Nicaragua (CDM) Wind power in Chile (CDM)

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 8 E7 project case studies

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 9 Renewables in Indonesia (AIJ) E7 financed and developed 4 MHPs, 200 SHS, and 1 wind-solar-diesel hybrid system Decentralised, rural electrification, demonstration project AIJ acknowledgement: Indonesia and Germany Management handed over to village-level micro utilities in 2001 Most systems are financially sustainable Monitored project and ancillary development for 3 years (completed in 2003)

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 10 Renewables in Indonesia (AIJ) – Cont’d Project is CDM eligible since completed in 2001 Exercise showed that project is not worthwhile to register as CDM 1.AIJ calculated ER of 33,000 t CO2 vs. CDM calculated ER of 10,000 t CO2  crediting period difference  real vs. standardised carbon intensity 2.245,000 USD transaction costs vs. 40,000 USD estimated revenue from CERs  High monitoring/verification costs associated with decentralised supply and rural electrification  Low than forecasted CERs, low price of CO2 Other lessons/issues: complex AIJ registration process, weak definition of SD, financial sustainability tariffing

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 11 Hydropower in Bolivia (CDM) CDM pilot project: 25 MW hydro, isolated grid, financially sustainable, innovative investment scheme Feasibility study 90% complete. Now on hold due to change in government policy Macro barriers: –Legal and administrative framework not ready for this kind of CDM project –Change of government in 2002 with change in policy (gas priority) Micro barriers: –Joint venture agreement with local distribution company –Fixed tariffs

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 12 Wind power in Galapagos (CDM) CDM pilot project: wind park in Galapagos Islands (2000 kW) to replace diesel and to mitigate risk of fuel spills Project is in Feasibility phase. Schedule delayed 1.5 years. Macro barriers: –Disconnection between ministries –DNA not enough authority –Legal and administrative framework not ready for this kind of CDM project Micro barriers: –Environmental risks (bird issue) –Fixed tariff vs. Financially/technically sustainable tariff –Intervention of ministry into investment issues –legal precedent-setting

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 13 Investment Considerations

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 14 CDM/JI strategies: e7, companies E7 position (non-profit, demonstrative): –sustainable development –financial sustainability –parallel development goals –strong local partnership –small-scale projects RWE position (commercial, requirements): –Need for CERs/ERUs based on emissions profile –Participation in international funds such as PCF is attractive because of high level of experience and low risk –Otherwise, projects undertaken directly must satisfy company criteria (IRR, acceptable risk, etc.)

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 15 Impact of Carbon Finance on Project Financing at $3/t CO2e (estimates from PCF’s early experience) Technology  IRR (%) Energy Eff.-Dist Heating~2.0 Wind Hydro Gas Flare Reduction2-4 Biomass with methane kick>5.0 Municipal Solid Waste with methane kick>5.0

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 16 Volume and costs of project types Specific transaction costs drop clearly with project size * Average cost estimate of PWC and PCF translated over a 10-year project life

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 17 Conclusions & Recommendations

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 18 Host country factors attracting CDM investors Host country CDM policy –Established, clear, consistent CDM policy –Strong DNA –Clear requirements (Sustainable Development, etc.) Enabling investment environment –Investment promotion office Techno-economic potentials –Preliminary studies for project types/sizes with highest potential –Data Easy baseline estimation –Prepared for generation types –Data Long-term investment protection / up front criteria

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 19 Global factors affecting CDM investors Kyoto mechanisms and regulations for CDM projects have to be in force –Ratification (Russia?) Fungability with other legal frameworks –e.g. Decision on acceptance of CDM/JI within EU emissions trading scheme Project type restrictions and additional requirements should be minimised –Restrictions on hydropower –Financial additionality? –Tranaction costs still discriminate against small/medium projects Calrify post 2012 situation –Energy investment requires substantial capital for investment over long periods –Infrastructure has technical life beyond crediting periods Low price of CO2

January 12-13, 2004 Second National Workshop (Phase II) – Cairo, Egypt 20 Questions / Discussion For more information, please visit or contact: Christian Matossian Tel: +49 (0) Fax: +49 (0)