1. UNIDO Vietnam Support for CDM projects in the Industrial sector: Pilot Project in Co-operation with the Austrian Industry Training Sessions on the Kyoto CDM The CDM Project Cycle with Practical examples of International CDM Projects & Lessons for Vietnam Mike Bess Hanoi, Vietnam 26th and 27th June 2006 © ESD 2006

2. Summary Normal Project Cycle What is different between a ‘normal project cycle’ and a ‘CDM project cycle’? Key steps needed for Vietnam CDM project cycle Key steps needed for Vietnam CDM projects in UNFCCC and in current & future CDM carbon market Lessons learned from other CDM projects relevant to Vietnam Roles of Industry, Government, NGO and International Institutions & Partnerships for Vietnam CDM © ESD 2006

3. CDM Project Cycle CDM project cycle incorporates all elements of ‘normal’ project cycle But, there are several additional elements that increase preparation &, if successful, increase returns, namely: –Develop baseline to establish ‘additionality’ & emission reduction credit eligibility –Develop a monitoring & verification plan for the crediting –Validate the baseline & monitoring plan (called the PDD) –Register the validated project with the UNFCCC CDM Executive Board –Verify project’s emission reductions year in, year out © ESD 2006

4. CDM Project Cycle © ESD 2006 Normal project cycle Undefined transaction costs Government eligibility criteria (DNA) Government capacity and investor capacity Defined transaction costs PDDs Baselines MPs Validation (DOE) Verification (DOE) Percentage of total project cost?

5. Project Approval Process © ESD 2006 PDD CER Placement & Term Sheet 2 Months Validation Host Government Approval Registration 2 Months 1-2 Months M&V ERPA DocumentsInvestor Government Approval Project Design Best timescale! Annual ?

6. Additional Finance from Carbon under CDM ‘Carbon assets’ are increasingly viewed as additional project revenue stream The number of CDM projects is growing fast, from almost none 2 years ago to dozens approved & hundreds in the pipeline today Emission Reduction Purchase Agreements (ERPAs), like Power Purchase Agreements (PPAs), are increasingly viewed as ‘collateral’, security by financiers Carbon assets are increasingly seen as a means to hedge project risk CERs are becoming known as source of project security, increased revenue, &, in some instances, source of institutional finance © ESD 2006

7. Additional Finance from Carbon under CDM (cont) Financial markets have responded very quickly & in full to new carbon market opportunities Concern even one year ago was that institutional (e.g., national government, World Bank) finance would ‘crowd out’ private finance This has not happened – private carbon finance is plentiful BUT…. Major problem is lack of good projects – not a demand side issue, but a supply side issue Those who can develop good projects, good carbon assets are in great position It is now, & will remain for some time, a sellers’ market © ESD 2006

8. Additional Requirements for Developing & Using Carbon Finance © ESD 2006 Carbon finance requires the following steps: Identify your project as a CDM project as soon as possible Present your project as CDM to the local Designated National Authority (DNA) Get ‘buy-in’ from local community & national authorities Develop a project concept on CDM as soon as possible

9. Additional Requirements for Developing Carbon Finance (cont) © ESD 2006 Get ‘Letter of Approval’ (LOA) from your DNA as soon as possible Structure carbon revenues as key element of the project Develop the PDD (baseline & monitoring plan) Get the project ‘validated’ by Designated Operational Entity (DOE) Register it with the UNFCCC Executive Board

10. Risks and Implications of JI & CDM for Project Finance © ESD 2006 JI & CDM projects have ‘normal’ project risks, i.e. typical, standard costs and risks associated with investments in emerging / developing economies: Technical Financial Geographic Political Other So - STANDARD and ESSENTIAL in such projects to apply rigorous due diligence...

11. Risks and Implications of JI & CDM for Project Finance (cont) © ESD 2006 Most risks associated with JI/CDM risks have diminished significantly Kyoto Protocol ratified & in force UNFCCC Executive Board has registered many projects & approved many methodologies => considerable body of ‘precedent’ has grown in past two years Validators have much more experience, costs & risks of validation have decreased Still some risk with government approval in some countries, but this is diminishing JI & CDM are becoming ‘mainstream’ project finance elements

12. Case Study 1: CDM East African Sugar Waste Energy Existing sugar factory is doubling cane production & processing capacity Potential exists to invest in new combined heat & power (CHP) unit Sufficient waste (bagasse) to sell 10MW into grid & provide factory with all electricity & heat Electricity sales to grid will displace 80 000 tonnes CO2 per year Great CDM project candidate Carbon credits will provide additional revenues of €600 000 to €700 000 per year for 10 years Will improve project’s profitability by over 20% © ESD 2006

13. Case Study 2: JI Polish Pulp & Paper Waste Energy Large pulp & paper mill currently using coal for process heat only Produces over 200 000 tonnes of wood waste every year Wood waste generates methane (CH 4 ), over 20 times more potent than CO 2 Potential exists to invest in new combined heat & power (CHP) unit Sufficient waste to sell 20MW into grid & provide factory with all electricity & heat Electricity sales to grid will displace 150 000 tonnes CO 2 per year © ESD 2006

14. Case Study 2: JI Polish Pulp (cont) Use of waste will reduce 100 000 tonnes CO2 equivalent per year Combined methane reduction & grid CO2 displacement gives 250 000 tonnes CO2 equiv Great JI project candidate Carbon credits will provide additional revenues of €1.5 million per year for 5 years (2008 – 2012) Investment payback in less than two years Does not jeopardise company’s EU ETS position or obligations © ESD 2006

15. Case Study 3: CDM China Wind Energy Project to install 30MW of new wind turbines Project in deep rural area Project has good sustainable development potential Project is ‘additional’ & supports China’s renewable energy strategy Electricity sales to grid will displace 100 000 tonnes CO 2 per year (wind for coal) Great CDM project candidate Carbon credits will provide additional revenues of €700 000 to €850 000 per year for 10 years Will improve project’s IRR by several points © ESD 2006

16. Case Study 4: JI Bulgaria Landfill Gas ● Project to install 10MW electricity from methane (CH 4 ) capture ● Carbon finance will provide cash to improve landfill waste management ● Use of methane for electricity will reduce CH 4 greenhouse gas emissions equivalent to 100 000 tonnes of CO 2 per year ● Electricity sales to grid will displace 50 000 tonnes CO 2 per year (wind for coal) ● Combined CO 2 equivalent displacement = 150 000 tonnes per year ● Great JI project candidate ● Carbon credits will provide additional revenues of €1 million per year for 5 years (2008-2012) ● Will payback investment in less than 2 years © ESD 2006

17. Conclusions Carbon finance has become ‘mainstream’ Carbon finance is a great way to add new revenue streams to clean energy investments Carbon finance should be an integral part of decision to invest in any potential renewable, energy efficiency or CHP project No lack of carbon finance sources Biggest ‘gap’ is lack of good projects If you have a good project, let us help you valorise the carbon asset & help you realise good carbon finance streams © ESD 2006

18. Thank you! Mike Bess Director, International Division Energy for Sustainable Development Ltd. +44 1225 816 808 mike@esd.co.uk www.esd.co.uk © ESD 2006