0 BARRIERS TO CDM PROJECT FINANCING Presentation to CDM Financial Mechanism Training Course 18 September 2003 Clean Energy Finance Committee

1 Advantages a) Direct: Revenues from CDM credits  Certified Emission Reductions (CERs) b) Indirect: Higher project status as a result of CDM designation Publicity value Will increase the project’s attractiveness to both equity investors and lenders How Will CDM Help Project Financing?

2 a)A product which project proponents can acquire and sell. Not a loan. b)CER purchasers can count them towards their GHG reduction commitment under the Kyoto Protocol. c)The payment for CERs will be made in a hard currency by very creditworthy buyer(s). What are CERs?

3 Typically 7% - 55% of capital investment Ratio varies according to project type High  methane capture projects Low  straightforward renewable energy projects CER Returns

4 Comparative CER Returns RENEWABLE ENERGY METHANE CAPTURE Facility20MW power plant – displacement of fossil fuel Facility to capture methane emmissions from waste CapexUS$ 30 millionUS$ 4 million Carbon Emission Reduction  70,000 tCO2 / year  43,000 tCO2 / year Crediting Period10 years Carbon Value  US$3~ 5 Returns (Rough Calculation) 70,000 tCO 2 /year X 10 yrs X US$ 3~5 = US$ 2.1~3.5 million About 7-12% of Capex 43,000 tCO2/year X 10 yrs X US$ 3~5 = US$ 1.3~2.2 million About 32-55% of Capex

5 Capex US$ 30 M:US$ 10 M equity, assuming 2:1 debt/equity 70,000tCO2e/year:US$ 0.21~0.35 M / US$ 3~5 Increase in ROE:US$ 0.21~0.35 M / US$ 10 M = 2.1~3.5% ROE Enhancement by CERs in for Renewable Energy Projects

6 Additionality a) Official languages  Reductions in emissions that are additional to any that would occur in the absence of the certified project activity. (Kyoto Protocol, Article 12.5(c))  A CDM project activity is additional if anthropogenic emissions of greenhouse gases by sources are reduced below those that would have occurred in the absence of the registered CDM project activity. (Marrakesh Annex Article 43) Requirements of CDM

7 b) More strict interpretation:  The CDM status will be given only to those projects that cannot be implemented without it.  Those projects that can/will be carried out in the course of regular business (Business-As-Usual - BAU - projects) are disqualified. c) To qualify for CDM status, it is advisable not to start construction until the major part of the validation process is finished. This is to:  Avoid being confused as a BAU project  Allow professional observation and recording of the current situation, making it available in baseline setting. Requirements of CDM

8 Steps in CDM Process ValidationMonitoringRegistrationVerification Certification CER Issuance and Registration   Project Participant   CDM Adviser   Designated Operating Entity UNFCCC Project Participant Designated Operating Entity UNFCCC 3 months – 2 years 2 monthsTo be determined Continuous over lifetime of project To be determined ENTITIES TIMING Approval by Host Country Project Design Document PROJECT IMPLEMENTATION Designated National Authority

9 Transaction costs  Project Design Document (PDD) In-house (manpower costs) or CDM Specialists - (fixed fees + success fees)  Validation Designated Operational Entity (DOE)  Registration UNFCCC CDM Executive Board  Verification and Certification Designated Operational Entity (DOE) (Note: For approximate fee levels of costs, see the PCF 2001 annual report P.38) Costs of CDM – One Barrier

10  CDM projects should not be the least cost option nor have the highest IRR, or else it will not be CDM eligible; hence less competitive, lower returns  Procedural risk – lengthy application/approval process for CDM registration and CER issuance  Performance risk – technology transfer/new technology, renewable fuel supply  Market risk – Power Purchase Agreement  Country/Region risk  Regulation risk– DNA approval requirements, regulatory changes which may render the project BAU Barriers to Project Financing

11  Renewable energy Yala Rubber Wood Residue Power Plant, Thailand - 20MW power plant using rubber wood residue as biomass fuel will replace fossil-based grid-electricity ATBiopower, Thailand - 22MW power plant fueled by emission-neutral rice husks will replace fossil-based grid- electricity Bumibiopower Biomass Power Plant, Malaysia - 6MW power plant fueled by empty palm fruit bunches and shells Our CDM Experiences

12  Methane capture Philippines– anaerobic technology to be used to recover methane gas from municipal waste significantly reducing fossil fuel-based energy consumption of a city government Philippines – landfill gas to energy Malaysia – palm-oil mill will recover methane gas from wastewater; biogas will then be used to generate power, replacing fossil-based electricity Our CDM Experiences

13  Wholesale investment banking arm of Bank of Tokyo-Mitsubishi  Full range of financial services related to equities, bonds, derivatives Mitsubishi Securities

14 Clean Energy Finance Committee  Operating unit specializing in clean energy-related activities CDM advisory Production of Project Design Document – focus on CDM parameters Financial advisory services – equity, debt, and CDM finance  Team of professionals dedicated solely to energy- related CDM projects in Asia  Close relationship to major Japanese investors – both CER buyers & equity investors

15 Thank You! Andres del Rosario CDM Consultant Clean Energy Finance Committee