CDM Carbon Finance Workshop. Session 9: Discussion of project risks and mitigation strategies. Accra, June

Transcription

1 CDM Carbon Finance Workshop Session 9: Discussion of project risks and mitigation strategies Accra, June

2 Contents Introductory quiz CDM and project risk explained Key concepts covered Case study Major concepts explained Some special cases Groupwork Report back and key learnings 10 2

3 Introductory quiz Question How many days on average does it take from request for registration until registration? Answer 116 days What percentage of projects are rejected by the CDM EB? 9.8% What percentage of these rejections is for reasons of additionality? 57% How many CDM projects have been registered? 1690 How many additional CDM projects are in the pipeline? >

4 Contents Introductory quiz CDM and project risk explained Key concepts covered Case study Major concepts explained Some special cases Groupwork Report back and key learnings 10 4

5 By the end of this session you will be experts on Key concept Registration risk Issuance risk Delay risk Risk varies by project type Description Registration risk is the risk that the project is not issued with a letter of recommendation by the DOE, or registration is rejected by the Executive Board of the UNFCCC The major reasons for non-registration are additionality and compliance with baseline and monitoring methodology Issuance risk is the risk that the project does not issue the full amount of credits estimated in the PDD The major causes for underdelivery are methodological complexity and project performance Delay risk is the risk the project begins to generate emission reductions later than estimated in the PDD for either project implementation or CDM delay reasons The major causes are poor project implementation and CDM issues Historically all major risks have varied by project type 5

6 Case study: Energy production and methane avoidance from groundnut husks Project description Ghana Groundnut Growers Association (GGGA) currently leaves husks in large piles which decompose anaerobically, releasing methane Under the project, the groundnut husks will be fired instead of coal in a boiler to produce energy, thereby reducing emissions of carbon dioxide from the burning of fossil fuels By not allowing the husks to decompose anaerobically, the release of methane will also be avoided Estimated emission reductions ( 000 tco2e) Methane avoidance Fuel switch Questions Why might a DOE or the EB reject registration of this project? How likely do you think this is? Do you think this project will issue all of its estimated emission reductions? What reasons might there be for underdelivery? Do you think that the emission reductions will commence when expected? What factors may impact a delay in emission reductions? 6

7 Case study: Registration risks Registration risk is the risk that the project is not issued with a letter of recommendation by the DOE, or registration is rejected by the Executive Board of the UNFCCC Major risks Additionality early CDM consideration; investment analysis; barrier analysis; common practice analysis Baseline and monitoring methodology application of methodology; applicability; leakage; deviation Relative risk of project Percentage of projects rejected by reason Early CDM consideration Investment analysis Barrier analysis Common practice analysis Methodological issues Other Biomass projects Total = 15.4% All projects Total = 9.8% 2.9 Additionality is the largest risk to the GGGA project The risk is not as large as projects such as energy efficiency (where cost savings alone usually generate sufficient return) Risk larger than other types such as N2O abatement where CERs are the only revenue 7

8 Different project types have varying exposure to nonregistration risks Proportion of projects rejected registration by reason Early CDM consideration Biomass Hydro Power Waste gas/heat utilization Wind Power Energy Efficiency Biogas Methane Recovery & Utilization Cement Fuel Switch 3.5% 0.6% 2.4% 2.4% 1.7% 0.0% 0.0% 4.2% 0.0% 1.5% Total Investment analysis 3.1% 2.1% 8.0% 1.4% 0.0% 0.5% 0.0% 0.0% 4.8% 2.3% Barrier Analysis 3.1% 0.3% 0.0% 0.0% 5.0% 0.0% 0.0% 33.3% 0.0% 1.4% Common Practice analysis 0.4% 0.3% 0.8% 0.0% 0.0% 0.0% 0.0% 8.3% 0.0% 0.4% Methodological issues 5.3% 0.6% 5.6% 0.0% 20.0% 1.0% 0.9% 4.2% 4.8% 2.9% Other 0.0% 1.2% 1.6% 0.0% 15.0% 0.0% 0.9% 0.0% 4.8% 1.4% Total 15.4% 5.1% 18.4% 3.8% 41.7% 1.5% 1.8% 50.0% 14.3% 9.8% Risk: Low High 8

9 Case study: Issuance risks Issuance risk is the risk that the project does not issue the full amount of credits estimated in the PDD Major risks Monitoring complexity the more complex the monitoring requirements the more likely the DOE or the EB will introduce conservativeness measures Project performance if the project underperforms this will impact the number of credits issued (e.g. if less electricity produced than estimated) Historic average issuance (% of PDD estimate) Relative risk of project Project type Average issuance (%) Biomass Hydropower Waste gas / heat recovery Wind power Energy efficiency Biogas Methane recovery Cement Fuel switch Historically the actual issuance from biomass projects is 92% The issuance risk is higher than simple projects without a methane baseline such as hydro, but lower than more complex projects such as LFG 9

10 Case study: Delay risk Delay risk is the risk the project begins to generate emission reductions later than estimated in the PDD for either project implementation or CDM delay reasons Major risks Project implementation the implementation of the project may be delayed for a number of project-related reasons CDM issues the CDM registration may be delayed by issues such as requests for reviews for additionality or methodological reasons Percentage of projects reviewed by reason Project issues Biomass projects Total =.3% All projects Total = 29.6% Early CDM consideration Quality of project sponsor Relative risk of project Investment analysis Barrier analysis Contractors Financing Project complexity Common practice analysis Methodological issues Economic conditions (e.g. projects currently delayed) Other Many more 10

11 Case study: Delays may be completely out of the control of the project Delay risk is the risk the project begins to generate emission reductions later than estimated in the PDD for either project implementation or CDM delay reasons Average time from request registration until registration (The average is 116 days) Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Days

12 Case study: Delays may be completely out of the control of the project Delay risk is the risk the project begins to generate emission reductions later than estimated in the PDD for either project implementation or CDM delay reasons Time used for Completeness Check Days Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 12

13 Case study: Can the UNFCCC turn their performance around? Delay risk is the risk the project begins to generate emission reductions later than estimated in the PDD for either project implementation or CDM delay reasons May 2005 (SB22) December 2005 (COP/MOP1) 4,200 2,900 1,900 1, May-06 May-07 Jun-09 Registered project activities Projects in the pipeline Projected CERs before 2012 (millions) 13

14 Contents Introductory quiz CDM and project risk explained Key concepts covered Case study Major concepts explained Some special cases Groupwork Report back and key learnings 10 14

15 Case study: Mini-grid hydropower project in Ghana Project description The Rural Hydro Company plans to develop a 10MW hydro project to supply power to a mini-grid system in Ghana The project also involves the development of a mini-grid system, and will supply power to homes, schools and hospitals in the region, reducing the need for the diesel powered generators which are currently used The project is expected to commission in Sept 2010 The project is eligible under methodology AMS.I.A under the CDM Estimated emission reductions ( 000 tco2e) Questions to be answered As a bank, identify the major CDM and project risks facing this project which you should consider when assessing the potential CDM revenue from this project in terms of registration, issuance and delay Where possible, propose mitigation strategies to address each of these risks 15

16 Contents Introductory quiz CDM and project risk explained Key concepts covered Case study Major concepts explained Some special cases Groupwork Report back and key learnings 10 16

17 Case study feedback Additional risk Registration Risk Early CDM consideration Investment analysis Barrier analysis Common practice analysis Methodological issues Mitigation strategy Send letter of early consideration to DNA, GS and UNFCCC as soon as involvement in project starts Include carbon revenues in all press communications, records of investment decision and feasibility studies Conduct due diligence to ensure that project is financially additional before investing If not financially additional, conduct due diligence to determine whether any major barriers exist and whether similar barriers have been accepted by the EB in similar projects Conduct due diligence to ensure that project activity is not common practice in the market before investing Employ quality consultant and ensure incentives aligned through a success fee 17

18 Case study feedback Additional risk Risk Emission reductions overestimated Mitigation strategy When evaluating project, assume actual delivery based on historical project type performance to ensure prudence Employ quality consultant who is incentivised through a success fee Issuance Improper monitoring Project performance Ensure that proper attention has been given by the project to monitoring in terms of the CDM methodology Ordinary measures to evaluate risks of project performance and mitigation strategies Other?? 18

19 Case study feedback Additional risk Risk Delays in CDM registration Mitigation strategy Employ quality consultant who is incentivised through a success fee Project delays Ordinary measures to evaluate risks of project delays and mitigation strategies Other?? Delay 19