Developing a Project utilizing the CDM

Scheme of the Kyoto Protocol

Worldbank Workshop on CDM

Jakarta, Indonesia

September 13th, 2006

Oliver WALTER

Financing is a most decisive step in the entire project development process, it is not a bolt-on element, which can be set up at the end of a process, but must be secured and embedded early in the process!

Finance Dept./Institutions shall be involved at an early stage of a project!

a good and bankable project must be identified at the beginning!

lack of realistic and viable projects!

convincing approach towards potential lenders (also bankers have to be trained!)

Financing in the Project Development Process

Sources for Kyoto related financing might be:

• Funds/donors:

Global Environment Facility, GEF, www.gefweb.org

Special Climate Change Fund http://unfccc.int/cooperation_and_support/financial_mechanism/special_climate_change_fund/items/3657.php

• Export Credit Agencies

so far, only limited experience and they do not consider it as their task!

• International Financial Institutions (EIB, SIDA, NDF,..)

often, grants by IFIs are a hindrance for a CDM project, as concessional financing is not permitted.

• commercial banks

required tenors, amounts,..?

Sources of Financing / Risk Insurance

Establishing the necessary enabling environments, including removing of barriers remains an essential element not only in relation to financing but also to the overall process of technology transfer.

important aspect for prove of financial additionality in Baseline Study!

take into account trade, investment and environmental policies!

sustainable development objectives have to be made palatable to financial institutions/ ECAs (generally, MoF is behind National Carbon Fund and ECA, one budget pot! - national measures vs. flexible instruments.)

innovative legislation linked with incentives

a good understanding and cooperation between involved government institutions is a precondition, often a MoU is of great value!

(Financial) environments

• focus on creditworthiness of Borrower/Guarantor and country risk often requires challenging security packages

• more and more, traditional securities do not suffice anymore in particular for high volume projects (pledge, mortgage, corporate guarantees, prom. notes,…)

cash payments for CERs by a purchasing fund/national JI/CDM program are considered as bankable security from a

lender’s point of view!

Collateral Structure

• Emission Reduction Purchase Agreements are concluded between the owner of the CERs in the host country and the buyer of the

Certificates. Upon Commercial Operation of a plant (= start of repayment period) and successful Monitoring, CERs will be generated, issued and thereafter transfered from the national register

of the host country to the fund‘s country.

• So far, only PPAs were accepted as security by banks, nowadays ERPAs become more commonly accepted by Lenders as bankable and reliable collateral.

• it is favourized to have CER payments by the buyer to be effected on an off-shore escrow account, serving as partial repayment of the loan.

ERPA as collateral – escrow account

• collect info and build up detailed knowledge of CDM regulations

• select good, CDM-eligible project

• company’s in-house common understanding and convince Management for CDM as useful instrument and benefit

• bankable security structure for set-up financing

• have a clear picture on additional CDM related cost PIN at early stage to potential buyer/Validator for 1st cross check might save

stranded cost

• together with client early positioning towards involved (non-) govt. institutions (Ministries, Consultants, Banks, Embassies, OE,…)

• close co-operation between related government entities

Key factors for success

Carbon Financing Structurep

artia

l rep

aym

en

t of lo

an

payments for CERs

PDD, Validation Registration

CERsERPA

co-operation

support of approval

host country govt. - DNA

Government

support, LoE, LoA

co-o

pe

ratio

n

Lender

credit agreement

cover

additional collateral package

Exporter

Importer

supply

contra

ct

ECA

cover

nat. JI/CDM Fund off-shore escrow account

Simplified CER revenue calculation

Project: Hydro Power Plant, MEUR 100

Installed Capacity: 2 x 45 MW

Annual Output: 220.000 MWh

Carbon Factor acc. to BLS: ~ 1 ton of CO2e/MWh

Tons of CO2 avoidance: approx. 220.000 tons of CO2e per annum

CERs: approx. 220.000 CERs shall be issued/annum

Commercial operation: 1/2008

Kyoto Period: 2008-2012

Price per CER: EUR 5,-

Revenues: EUR 5.500.000,- during 1st Kyoto Comm.Period

(5,5% contribution)

VA TECH FINANCE JI / CDM experience

Project in force and under implementation:

EUR 300.000.000

Projects with a considerable volume under development, inter alia:

India: Biomass, MEUR 16

Mexico: Waste Treatment, MEUR 18

Bhutan: Hydro Power, MEUR 150

Case Study:

HEPP TSANKOV KAMAK

Financing of a Pilot Project

under the Kyoto Protocol

Project Data

Hydro Power Plant Tsankov Kamak (2x40 MW)

• Total Project Cost: approx. EUR 200 Mio.

• Client: NEK, Natsionalna Elektricheska Kompania

(investor, owner, operator & borrower)

• Exporters: - VA TECH HYDRO

- ALPINE MAYREDER

- Verbundplan

Starting Point in 2001

Approach of IFIs and ECAs (OeKB) for Financing:

Project Cost:

MEUR 200 versus MEUR 5 max. OeKB cover for BG

Security:

NEK corporate risk versus request for State Guarantee

Tenor:

16 y versus cover of up to 5 y repayment period

Client:

100% state owned versus cover only for private clients

Development

• Kyoto Protocol approach: Tsankov Kamak to be realized as Joint Implementation (JI)-Project based on the Kyoto Protocol

• Memorandum of Understanding: Sept. 2nd, 2002 Ministry of Environment, Austria – Bulgaria

• Pilot Project: November 2002 Tsankov Kamak declared as Pilot Project between Austria & Bulgaria

• Supply Contracts: signed Oct. 1st, 2003

• Credit Agreements: signed Nov. 14th, 2003, Financial Closing 4/2004

Deal of the Year 2003, declared by Trade Finance MagazineDeal of the Year 2003, declared by Trade Finance Magazine

Financing

EXPORT CREDIT AGREEMENT

- EUR 100 mio. loan

- Tenor: 16 years

- ECA: Cover of 5 Export Credit Agencies (A, CZ, D, F, S)

COMMERCIAL CREDIT AGREEMENTS

- 4 loans, in total EUR 120 mio.

- Tenor: 7 years

Collateral structure

a mixture of structured security package consisting of,

inter alia, Bulgarian government involvement, various

escrow accounts, pledge of assets, mortgage of the

site, promissory notes,…

BASELINE STUDY: elaborated by Austrian Consultant- international Validation- official recognition as JI-project

EMISSION REDUCTION PURCHASE AGREEMENT:

concluded between NEK and Kommunalkredit for transfer of ERUs revenues serve as collateral!

EMISSION REDUCTION UNITS (ERUs):

Upon commercial operation (2008), ERUs will be generated and purchased by the Republic of Austria (approx. 200.000 ERUs/year).

KYOTO PROTOCOL ASPECTS

(KYOTO-) FINANCING STRUCTURE

Paym

ent of

interest, prin

cipal

Emission Payments

off shore

escrow accounts

MEER, MoF

4 annual payments

Em

ission Reduction

Purchase A

greement

Em

ission

Certificates

Base Line

Study (BLS)

Kommunalkredit

KWI

DNV

validation

of BLS

info for

BLS

NEK(Bulgarian Utility

company)

Austrian Supplier’s Group

OeKBG3G1

AgreementsSupp

ly

cont

ract

s

Comm. lenders

intercreditor agreement

Loan

reinsurance

VA TECH FINANCE GmbH

Pledge Agreement

ECA lenders

SUMMARY

AUSTRIA

• 1st JI/CDM project

• Export increase

• Purchase of ERUs

• increase of ECA/OeKB

cover

MEUR 5 MEUR 80!!!

BULGARIA

• green, clear energy

• Reduction of CO2-Emissions

• Job creation

• know-how transfer

• financial viability (ERUs)

• WWTP Devin

Excellent cooperation between both countries:Ministries, Embassies, Commercial Councils, Banks,…..

• Target: contribution to Austria’s Kyoto target by purchase of emission reduction certificates

• Effectiveness: since December 3rd, 2003

• Basis: Environmental Promotion Law

• Agent:Kommunalkredit Public Consulting

Austrian CDM-program IAustrian CDM-program I

Preferred project categories:

• building/rehab of electricity units working with renewable energy (wind, hydro, biomass, biogas,…)

• avoidance/treatment of deposit gas

• measures resulting in lower energy consumption

• waste measures with CO2 reducing effect

• change of energy (renewable or lower C-content)

Austrian CDM-program IIAustrian CDM-program II

Criteria:

• accordance with UNFCCC and Kyoto Protocol

• consent of both countries, preparedness of co-operation

• measurable reduction of GHG, due to project

• contribution to sustainability in host country

• no minimum quantities of emission reduction certificates

• Memorandum of Understanding is advisable

• availability of local structures & know how to execute CDM project

• good relations to regional / local institutions in host country

Austrian CDM-program IIIAustrian CDM-program III

win-win-situation for Indonesia and Austriawin-win-situation for Indonesia and Austria

AUSTRIA

• continuation on

cooperation on the hydro

sector

• export increase

• purchase of CERs

• reaching Austria’s

• national Kyoto target

INDONESIA • green, clear energy

• Reduction of CO2-Emissions

• Job creation

• know-how transfer

• financial viability (CERs)

• improved natural resources utilization, sustainable industrial development, acceleration of national economic growth,…

As the bilateral CDM Implementation Agreement is already signed between Indonesia and Austria, the start of project realization could be within a very short time frame after a Project Identification Note has been agreed

CONTACT DETAILS:

VA TECH HYDRO NDONESIA

Josef M. ULLMERUllmerJo@vatech.co.id

G. ENZENHOFEREnzenhGe@vatech.co.id

VA TECH Bld. 2nd Floor

Jl. Talang No. 3

Proklamasi

Jakarta 10320 - Indonesia

Tel.: +62-21-3906929

Fax: +62-21-3905006

VA TECH HYDRO AUSTRIA

Andre SCHOPPERAndre.schopper@vatech-hydro.at

Penzinger Strasse 76

A – 1141 Vienna

Austria

Tel.: +43-1-89100-3948

Fax: +43-1-89100-3821

VA TECH FINANCE

Oliver WALTERwalter@vatech-finance.com

Serravagasse 10

A – 1140 Vienna

Austria

Tel.: +43-1-8920903-23

Fax: +43-1-89 55 205