cdm project finance

7/29/2019 CDM Project Finance

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CDM PROJECT FINANCING

Pim KieskampSenior Climate Change Adviser

Renewable Energy, Energy Efficiency and Climate Change Program

(REACH)

Asian Development Bank


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Requirements (energy) projects

old present GEF CDMdesign

financial analysis

economic analysis

environmental impactassessment minimal(more or less)

(indirectly)

social impact

assessment

(more or less)

(indirectly)

contribute to sustainabledevelopment

(indirectly)

stakeholders involvement not really

GHG reduction (appreciated)

documentationof GHG


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So, main striking characteristics of CDM is stringentdocumentation of baseline and monitoring

Why is that? Because Annex I countries have tocomply with KP target and they want to do that inthe most cost effective way.


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Kyoto Protocol:Overview

Present

day

2012

(BaU)

Assigned Amounts

Domestic Actions

Joint Implementation

Emission Trading

Annex I

EmissionTrading

CleanDevelopment

Mechanism

Domestic Actions

2012 with

KP

- 5%

1990 level


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Baseline and CERs

CO2emission

year

Reduced emissions

Projectimplemented

Business as usual:

baseline


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Costs/burden

Ordinary project preparation requirements PLUS

Project preparation to satisfy sustainabilityrequirements (e.g., civil society participation)

Baseline MVP

Validation

Certification of reductions

On-going monitoring, verification, etc

To be born by project partners


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For many projects in Asia, financing is becomingthe single-most important factor for their successfulimplementation

Companies are finding it difficult to provide theequity needed for projects

Commercial lenders are cautious in providing newloans particularly to projects involving unfamiliartechnologies

Technologies, equipment & processes relevant forCDM are available commercially, many of whichoffer viable economic returns; yet, not many of suchprojects are being implemented in Asia compared to

what can be potentially achieved.


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Financing modalities

Self Financing:

Company uses internal funds to finance investment.

Funds come from existing cash reserves.

On Balance Sheet Financing:

Firm takes out a loan to finance the investment.

Firm reflects loan on its balance sheet.


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Finance

Equity finance Debt finance

Share issue Retainedearnings

Reserves Borrowing

External

finance

Internalfinance


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On Balance Sheet Financing Model

Loan

Construction Payment

Heat/Power

Biomass fuelsupply

Other Power

Off-takers

Construction

Services

ENERGY

PLANT

FINANCING

INSTITUTION

EPC

CONTRACTORFACILITY SITE

OWNER


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Project Finance Model

Power Salesto the Grid

Other

Investors

Biomass Fuel Supply

Fuel Payment

Loan

Repayment Loan FundingPPA Assignment

Completion

GuaranteeConstruction

Guarantee

ConstructionServices

Other FuelSupply Sources

ENERGY PLANT

COMPANY

FINANCINGINSTITUTION

EPC CONTRACTOFACILITY SITE

OWNER

Fuel Supply Power PaymentFuel Payment Power Sales

Dividends

Equity

ConstructionPayment

Heat/Power

EnergyPayment

Equity

Dividend


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Scope Financing options/SchemesSystem

Solar home systems

Small wind power

systems & hybrid

solar/wind/diesel systemsthat have no associated

distribution network

Pico- and micro-

hydropower

Size of project < 1 MW

Should develop innovative

financial mechanisms; seek

assistance for capacity building.

Self-financing On-balance sheet

Micro-credit

Grant/subsidy

RESCO/ESCO

Leasing

First-cost subsidies & lower

import duties

Mortgage financing

Vendor credit

Dealer credit

Financial bundling

Small-

scale/Non-

grid


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Mini-hydropower

Biomass gasifiers &

cogeneration systems

Wind/diesel/solar hybrids

& other medium-scale

renewable energy systems

in the range of 1-15 MW

Should use innovative financing

mechanisms, while exploiting the

benefits of financing schemes

applied to conventional energy.

On-balance sheet

Equity financing

Venture capital

Project finance (ltd. recourse)

Corporate guarantee

Grant/subsidy

RESCO/ESCO

Leasing

Vendor credit

Targeted project credit

Financial bundling

Medium-

scale/Isolated-

grid/Grid-

connected


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All (renewable) energy

systems with capacity

greater than 15 MW

Should operate within the same

financing rules applied to

conventional energy projects.

Project finance (limited/non-recourse)

Venture capital

Multilateral lending

ECAs

Political risk guarantee

Bonds issuance

Refinancing

BOO/BOT

Large-

scale/Grid-

connected


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Financial models CDM projects

So, a variety of financial options for CDM project:

Full or Partial Equity: a company finances all or co-financespart of a CDM project in return for full or shared financial

returns and CERs;

Financial Contribution: a company financially contributestowards the cost of a CDM project equal to some portion of theincremental cost of the project over and above the baselinetechnology, or finances the removal of market barriers, in returnfor CERs;

Loan: a company provides loan or lease financing atconcessional rates in return for CERs; or,

Certified Emissions Reduction Purchase Agreement: acompany agrees to buy CERs as they are produced by theproject.


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Despite the existence of the foregoingmechanisms, there is still a dearth ofexamples of projects that have been financed

(RE/EE) or will be financed (CDM), in a moresustainable way i.e., on a purely commercialbasis without full recourse to the sponsors.

WHY?


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CDM:Project modalities

Bilateral: An investor in a Annex I (developed)country invests in a entity in a non-Annex I(developing) country, transferring financial resourcesand technology

Multilateral: Investors contribute to a multilateralfund set up by some international agency (e.g. WorldBank, ADB, or private bank). This fund invests in aportfolio of projects in developing countries designed

to generate CERs and conventional commodities

Unilateral: An entity in a non-Annex I country investsin a project in its own or another non-Annex Icountry designed to generate CERs and conventional

commodities

CDM


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CDMProject modalities:

e.g. bilateral private-private

ANNEX I

Company

Non

Annex I

Project

authorization

audit

CER

$

benefits

Abatement

fund 2%

incentives/authorization

registration

Company

$ benefits

Admin

OEn / EB


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Without CERsimplemented

With CERsnot

implemented

No CDM

Without CERs not implemented;

with CERs implemented

CDM

FIRR

CER income


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Normal project risks:

Country/political risk

Sponsor risk

Technical risk

Environmental risk

Fuel/feedstock risk

Financial/legal risk

Construction risk

Operation risk


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Apart from the normal risks there are:

New risks associated with: project preparation

project approval baseline & MVP validation

monitoring & verification of certified emissions

Additional risks lack of firm market, price, sales & trade

mechanisms/history for CERs

unfamiliarity of CDM by financiers who would needto count CERs as part of finance plan


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So, with it additional costs and additional risks is there afuture for CDM????

Example:

The Netherlands will reduce 100Mt CO2eq throughCDM/JI (tender, CDM facilities etc) at average costsof ca 4 US$/ton CO2eq

This means 400 M US$ for CERs/ERUs. Contribution

to the capital costs may by be 5-15% (at least forCERs). Consequently an investment of 4,000 M US$is needed to generate the credits for the Netherlands.

Note: Should be new and additional (see also sheet

FIRR)


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Characteristics of expected CDM Market* Asia

Volume : 100 - 200 Mt C year

Export revenues: 1500 - 5000 M US $

Profit : 500 - 2500 M US $Expected beneficiaries

China, India

Indonesia, Philippines, Bangladesh and Pakistan

* Without USA


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[email protected]

+63 2 632 6607

www.adb.org/REACH
mailto:[email protected]:[email protected]

cdm project finance

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