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CDM TransactionsCDM Transactions
A Canadian Buyer’s A Canadian Buyer’s PerspectivePerspective
CDM/JI WorkshopWinnipeg
March 1/06
Donald WhartonTransAlta Corporation
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TransAltaTransAlta
• Canada’s largest investor-owned generation and electricity marketing company
• Operations in Canada, United States, Mexico, and Australia
• 10,000 MW generating capacity
• $8 billion in coal-fired, gas-fired, hydro and renewable assets
• Active on GHG trading, also NOx & SO2 in U.S. and Canada
• One of Canada’s largest wind & renewables energy generators
• Large GHG emitter…fossil base, growth focus…31 Mt/yr in Canada
• Executed Canada’s first CDM transaction. Currently engaged in additional purchases.
Carbon constraints represent a business risk
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Strategic Approach (on Strategic Approach (on Offsets) Offsets)
A measured, portfolio approach to mitigate potential financial risk from future climate change compliance costs. Requires flexibility in the face of uncertainty. Buy offsets early to stay ahead of the price curve and to ensure compliance.
Climate ChangeRisk Mitigation
Strategy
Offsets
Internal reductions
Renewables build
Clean coal investment
Policy development
Near-term option and bridging strategy to longer-term solutions
Offsets represent one component
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Why Purchase CER’sWhy Purchase CER’s
• Reasonable prices – if you know where to look
• Current supply availability
• High assurance of value
• Few experienced buyers
• Bankable towards future obligations
• Existing market demand in EU
But what about current Canadian uncertainty? Three scenarios:
1. CER’s are eligible compliance instruments…use for compliance
2. No CDM for Canadian companies…sell into other markets
3. CER’s are eligible but not competitive with domestic options…arbitrage
With smart contracting, risks are managed and value created
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Why NowWhy Now
For companies who choose to act early, there are few alternatives. CDM offsets represent both the lowest cost alternative and a manageable market-based instrument that can be tailored to follow changing regulatory scenarios.
We could wait. Here are the downsides:
Price
Supply
Capacity
Shareholders
Expectations of rising price curves as demand from EU and others picks up.
Demand could easily outstrip supply, given time req’d to create & negotiate CDM projects
Current CDM approval processes severely limits the availability of projects
Shareholders expect prudent risk management efforts. Ask Exxon, AEP, Shell…
There are risks in acting and in waiting. Companies must decide.
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A Recent CDM PurchaseA Recent CDM Purchase
• TransAlta purchased 1.75 million tonnes of Certified Emission Reductions (CER’s) from Chile
• CER’s are created from an agricultural operation, where technology has been installed to eliminate methane emissions from large hog waste operations
• This is the first purchase of CER’s by a Canadian company
More details later
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Portrait of a CDM ProjectPortrait of a CDM Project
Agricultural waste creates large emissions of methane worldwide. Capture and destruction of the methane dramatically reduces GHG emissions. The technology to do this is available but rarely used, even in developed nations.
Agrosuper, Chile invested several million dollars to capture methane from their large hog operations, using biodigestion technology. Captured methane is used for process heating or is flared. GHG emissions are reduced by 400,000 t/yr from baseline.
Revenue from the sale of CER’s provides an incentive for Agrosuper and similar companies to install more of this technology.The best CDM projects don’t depend heavily on CER revenue
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Portrait of a CDM ProjectPortrait of a CDM Project
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Details of our TransactionDetails of our Transaction
• total of 1.75 Mt’s of CER’s purchased by TransAlta• 10-year forward purchase contract (2003-12)• payment on delivery• high quality counter-party with proven technology• strong host country (Chile) support• TEPCO, Japan also a purchaser• methodology has been approved…AM0006• project registered with the CDM Executive Board• first validation report accepted & awaiting issuance of
CER’s• Operational Entity for validation is DNV, Norway.• deal brokered by CO2e.com
14 months in the making
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The Commercial Elements of Buying OffsetsThe Commercial Elements of Buying Offsets
TransAlta considers offset acquisitions like an asset acquisition – project sourcing & screening, due diligence, negotiating commercial terms, contract execution, project and portfolio management.
We are most concerned with risk mitigation given existing uncertainties. This includes:
• counter party (seller) sustainability
• technical risk (project underperformance)
• delivery risk (contract breech)
• regulatory change risk (Kyoto & other)
• country & political risk (necessary approvals)
There are many flakey deals out there
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Commercial Elements (cont’d)Commercial Elements (cont’d)
TransAlta looks for:
• large volume projects (minimum size 100,000 tonnes/yr)
• highly competitive price per tonne
• forward contracts from 2004 to 2012, possibilities of option deals
• payment on delivery
• contingent on Kyoto or a Canadian regulatory requirement
• proven methodologies under approved protocols
• clear ownership by seller
• regulatory clarity – the tonnes will count for compliance
It’s all about managing risk
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PredictionsPredictions
There will be more CDM transactions by Canadian companies in response to perceived or real financial risk and shareholder pressure
There will be some bad deals
CDM will be the preferred investment by early Cdn leaders until the domestic rules are clarified
The EU will be the market driver in the near-term
Institutions and Funds, like the World Bank, will continue to play a large role in the CDM market
Thank you
