1. MDG Carbon Facility: what it is and how it operates Presented by Marina Olshanskaya Tuesday, 25 September RBEC Energy and Environment Community of Practice Meeting 24-26 September 2007, Bratislava

2. 1 RBEC Energy and Environment CoP Meeting 1 Presentation Overview Carbon market: latest update MDG Carbon Facility Services MDG Carbon Facility Business model & offer MDG Carbon roles for COs MDG Carbon Due Diligence (group work)

3. 2 RBEC Energy and Environment CoP Meeting 2 Current status of carbon market: volume Market capitalization reached $ 30 bln Near 3-fold increase in 2005- 2006 CDM/JI – 18% of the total market volume Voluntary markets: insignificant share, but rapid growth

4. 3 RBEC Energy and Environment CoP Meeting 3 Current status of carbon market: location of CDM/JI projects (share of volume) China continues dominating CDM market, with India and Brazil coming 2 nd and 3 rd RBEC non-Annex I countries remain largely unrepresented RBEC Annex I countries more equally represented with Russia, Ukraine and Bulgaria on the top of the list

5. 4 RBEC Energy and Environment CoP Meeting 4 Current status of carbon market: prices Average prices for primary CERs in 2006 - US$10.90 (€8.40), a 52% increase over 2005 ERUs average price in 2006 increased to US$8.70 (€6.70), a 45% year-on-year rise But ERUs remained cheaper than CERs on average

6. 5 RBEC Energy and Environment CoP Meeting 5 More information on carbon market State and trends of the carbon market 2007, World Bank at www.carbonfinance.org Pointcarbon, www.pointcarbon.com Prices and carbon market news service (free) JI/CDM Monitor (subscription available - let Marina know if interested) Climate-L: news and announcement list service on climate change policy and issues UNEP Riso Centre: www.cd4cdm.org Publications and CDM/JI pipe-line

7. 6 RBEC Energy and Environment CoP Meeting 6 UNDP’s Challenges in Developing Carbon Projects As a technical assistance agency, UNDP does not have the mandate to trade carbon emission reductions and take on carbon market risks UNDP will need to mobilize some working capital to meet start-up costs; MDG Carbon supports commercial project developers and operates on a full cost-recovery basis. This is a major departure from UNDP’s traditional business model; MDG Carbon fee policies must be supported by an ongoing, rigorous and transparent financial modeling process.

8. 7 RBEC Energy and Environment CoP Meeting 7 Overview of the MDG Carbon Facility Partnership with Fortis Fortis Project Proponents UNDP 2 Year Agreement (15M tCO2) ??? Payment of Cost Recovery Fee III. Payment for Credits II. Delivery of Carbon Credits I. Project Development Services

9. 8 RBEC Energy and Environment CoP Meeting 8 Services Offered by the Facility Project Year MilestoneServices Offered by Facility include Year 1CDM/JI registration; agreement of CER/ERU sale - project identification and initial screening - preparation of project documentation - due diligence Year 2Project commissioning - basic oversight and technical assistance on implementation Year 31 st year of credit issuance - monitoring support and pre-verification of credits MDGCF services

10. 9 RBEC Energy and Environment CoP Meeting 9 UNDP - Project Development Services Part 1: Due Diligence Part 2: Project Documentation Part 3: Establish Monitoring System Five Tools Carbon Layer Technical Feasibility Finance & Legal MDGs and Environment Country risk Two step process Initial screening In depth evaluation Preparation of documentation Approval by host country and CDM Board Review by 3 rd party auditors Implementation and oversight of monitoring system in project’s first year ERPA 1 st Credit Issuance Registration Part 1: Due Diligence Part 2: Project Documentation 1 st installment: 71K 2 nd installment: 142K 3 rd installment: 72K

11. 10 RBEC Energy and Environment CoP Meeting 10 Overview of the MDG Carbon Facility Partnership with Fortis Fortis Project Proponents UNDP 2 Year Agreement I-II-III Payment of Cost Recovery Fee III. Payment for Credits II. Delivery of Carbon Credits I. Project Development Services

12. 11 RBEC Energy and Environment CoP Meeting 11 Fortis – Carbon Banking Services 15 million credits Key feature: one price across the portfolio, irrespective of project characteristics Benefits for project proponents Fixed price protects against market downside Advance payment for UNDP’s Cost- Recovery Fee Fortis as a solvent counterparty Features Carbon Market Price Source: European Climate Exchange, as of 6/25/07 MIN

13. 12 RBEC Energy and Environment CoP Meeting 12 Business Model: RFP Pricing RFP Pricing Approach Standardized price for all projects across the portfolio Fixed purchase price per credit for all credits delivered under ERPA Pricing formula Price determined at ERPA signing as HIGHER of Floor component (10 EURO/tCO2) OR Rolling component (% discount to EUA Phase 2 Price one year ahead)

14. 13 RBEC Energy and Environment CoP Meeting 13 Business Model: RFP Pricing Pricing Formula Example Illustrative FSP Pricing Floor: €10 Rolling Component: e.g. 50% discount Example at two market prices: EUA Phase 2 at €12 EUA Phase 2 at €22 Floor Component Rolling Component €10.00 €6.00 €11.00 MIN

15. 14 RBEC Energy and Environment CoP Meeting 14 What Price Will Fortis Pay for Carbon Credits? MAIN BENEFITS OF FORTIS DEAL: Standardized price for all projects across the portfolio Guaranteed minimum price of 10 euros “Rolling” component to take advantage of market upturns Pricing formula Has a floor of 10 euros – this is an excellent hedge against market volatility Cannot reveal the “rolling” component discount But if it was applied today, the price would be substantially higher than 10 euros Reveal price when they enter into Letter of Exclusivity This is standard practice for commercial confidentiality Need to screen the proposal before revealing the price Bank will offer to market (for free) credits beyond the 80%

16. 15 RBEC Energy and Environment CoP Meeting 15 Business Model: Host Country MoU Host Country MOU is entered into with the government, covering all UNDP’s activities regarding MDG Carbon in that country; Host Country MOU is an obligatory requirement in every country in which MDG Carbon will operate. This is because MDG Carbon’s Cost Recovery Fee is unique to UNDP and the Host Country MOU effectively ensures UNDP is acting within its financial rules and regulations. UNDP signatory to the Host Country MOU should be the RR or his/her designate based on Delegation of Authority from HQ Key Provisions Objectives Host country government authorizes UNDP to provide JI/CDM project development services to project proponents on a cost recovery basis Host country should refer to this MoU in each Letter of No Objection and Letter of Approval issued to MDG CF Project Proponents

17. 16 RBEC Energy and Environment CoP Meeting 16 Business Model: UNDP Documents & Agreements with PP Information Note Informational / marketing Manage liability from exclusive relationship with FSP Memorandum of Understanding Manage risk and costs in performing due diligence, negotiating Service Agreement Service Agreement Manage risks and ensure payment for services delivered UNDP’s Objective Sets out UNDP objectives in carbon Sets out rationale for exclusive FSP, including RFP process Sets out “one-stop-shop” approach Overview of UNDP services and payment terms Establishes PP freedom of choice Disclaimers on PP risks and securities laws Mutual, non-binding intent to enter into Service Agreement Exclusivity period of [3-6] months Overview of due diligence activities and early termination Contingency on FSP’s LoE PP disclaimers regarding UNDP’s liability for FSP actions Details scope and nature of services Details payment terms and milestones Limits UNDP liability Defines Events of Default, including contingency on ERPA Key Content/ Terms Document & Signatories Document is only delivered, not signed Document later incorporated as annex in MoU and Service Agreement Exclusivity agreement in “UNDP language” Signed by Country Office and PP Consists of two core components (i) Cost-sharing agreement (ii) Project document Signed by Country Office (DoA from BDP) and PP Government involvement via DNA Letter of Approval First contact. Prior to DD screening Prior to/beginning of DD evaluation Parallel to signing of FSP’s LoE Prior to PDD development Parallel to signing of ERPA Timing

18. 17 RBEC Energy and Environment CoP Meeting 17 Overview of the MDG Carbon Facility Partnership with Fortis Fortis Project Proponents UNDP 2 Year Agreement A) LoE B) Emissions Reduction Purchase Agreement (ERPA) Payment of Cost Recovery Fee Payment for Credits Delivery of Carbon Credits A) MoU B) Cost Recovery Service Agreement Project Development Services

19. 18 RBEC Energy and Environment CoP Meeting 18 UNDP - Cost Recovery Fee Payment Approach Cost Recovery Fee Projects lack capital, Fortis advances the costs Payment in 3 installments on meeting pre- defined milestones Full cost-recovery for direct costs Cost recovery fee based on ongoing, rigorous modeling exercise Central Support Regional Tech Advisers Country Office Consultant Travel/Other 3 rd Party CDM Costs TOTAL $39k $71k $52k $53k $30k $41k $285k ERPA 1 st Credit Issuance Registration 25%$71k 50%$142k 25%$72k Milestone %age Amount

20. 19 RBEC Energy and Environment CoP Meeting 19 Initial Project Pipeline - Regional Distribution of Projects MDGCF projected pipeline

21. 20 RBEC Energy and Environment CoP Meeting 20 UNDP - Team Structure Country Office Role MDG Carbon Facility Team Part 3: Monitoring System Part 1: Due Diligence Part 2: Project Docs. RTA CO Conslts Project 1Project n RTA CO Conslts Assist in identifying/ sourcing projects Assist in due diligence and gathering of documents Technical Finance & Legal Execution Assist in project documentation formulation Liaise with local authorities and actors Oversee collection of operational data Desk top review and site visits Central Support Carbon Projects

22. 21 RBEC Energy and Environment CoP Meeting 21 Roles for Country Offices Working closely with RTAs Initiation: Using GEF projects to remove barriers to private sector investment in emitting sectors Where appropriate, capacity development in host country that leads to project opportunities Assist host government to ensure efficient and effective DNA processes and project approvals Canvassing opportunities for carbon finance Identifying projects undertaken through GEF that have the potential for replication with CDM Recognising project opportunities that come forward that are better suited to CDM than to GEF Assisting Project Proponents to develop an effective PIN

23. 22 RBEC Energy and Environment CoP Meeting 22 Roles for Country Offices (cont’d) Project development: Facilitating host country Letter of Approval and other requirements for projects Assisting RTAs and HO staff to gather necessary due diligence documents, in particular in assessment of country risk Providing in-country ‘reality check’ of projects under development Country level input to MDG assessment Implementation: Where necessary and feasible, provide technical assistance to project design &construct Where necessary, facilitate government-project interaction Where necessary, provide oversight of governance of project Monitoring: With RTAs, ensure monitoring is undertaken as required in the PDD

24. 23 RBEC Energy and Environment CoP Meeting 23 MDG Carbon due diligence Commercial banks buying ‘product’ (emission reductions) – they need to be sure they are committing to a stable, safe partner in project proponent  requirement for formal due diligence process MDG Carbon due diligence process that all projects must undergo: Phase 1: Screening CDM eligibility, financial and technical feasibility etc. early elimination of ineligible or unviable projects low cost to screen Phase 2: Evaluation in depth May require additional studies or info collection Recommend either for commitment or rejection. Risk areas are identified and risk management strategies developed.

25. 24 RBEC Energy and Environment CoP Meeting 24 Due diligence Aspects Due diligence on 5 aspects: A.Carbon layer B.Technical feasibility (engineering) C.Financial/Management/Legal viability D.Compliance with environmental & social principles + MDG impacts E.Country risk

26. 25 RBEC Energy and Environment CoP Meeting 25 Due diligence aspects in Screening and Evaluation Carbon layer Technical feasibility Country risk Commitment SCREENING EVALUATION E&S complianc e + MDG impacts Financial and Legal Intensity of due diligence varies between screening & evaluation depending on aspect  e.g. carbon layer due diligence performed mainly at Screening while MDG impact assessment requires more effort and is conducted at Evaluation  Due diligence applied in coordination and iteratively  e.g. if Carbon layer assessment reveals low volume of CERs, the underlying financial security is analyzed before continuing with other aspects

27. 26 RBEC Energy and Environment CoP Meeting 26 www.undp.org/mdgcarbonfacility/ www.mdgcarbonfacility.org/

28. 27 RBEC Energy and Environment CoP Meeting 27 Group work: Kazan Biogas Project Group 1: Carbon layer (Anita) Group 2: Technical feasibility (Dima) Group 3: Financial/management/legal (Jamila) Group 4: Env & social safeguards + MDG impact (Katalin) Group 5: Country risk (Aleksandar)

29. 28 RBEC Energy and Environment CoP Meeting 28 Group work: results (5 min per group) Key Project strengths and benefits (A-B) Key identified risks (C-D) Risk management strategies for identified risks Overall recommendation (A-D)