CDM/JI an efficient way to reduce our financial exposure to carbon

Transcription

1 CDM/JI an efficient way to reduce our financial exposure to carbon Investor and Analyst Conference H London, August 09, 2007 Michael Fübi Vice President Climate Protection RWE Power

2 Agenda A General explanations The Kyoto Protocol and its "Flexible Mechanisms" CDM/JI: How does it work? Status of CDM/JI market B Can Kyoto credits balance the EU-ETS shortage? C RWE s CDM/JI activities Investor and analyst conference, H Aug. 9,

3 Kyoto Protocol: The targets can be achieved domestically and abroad Commitment Countries listed in Annex-B of the Kyoto Protocol have to limit their greenhouse gas emissions in the period to specific targets; Non-Annex-B countries do not have any commitment EU-countries: -8 % compared to the 1990 emission levels (aggregate across EU) Russia: -0% compared to the 1990 emission levels The Kyoto Protocol leaves the selection of measures to achieve the targets to the individual countries. The measures can be achieved domestically achieved as well as through activities abroad. Actions to achieve the target Domestic actions Examples: - Transport sector: introduction of bio-fuels - Private households: building insulation, efficient lighting - Industry: regulations to prohibit emissions or to promote emission reductions (e.g. taxation or cap-and-tradesystem like EU-ETS) Actions abroad As the specific costs for emissions reductions are often much higher in the industrialized countries than in less developed countries, the Kyoto Protocol allows the Flexible Mechanisms to make use of this opportunity. But: At least 50% of the reductions committed to must be achieved domestically ( Supplementarity ). Investor and analyst conference, H Aug. 9,

4 Kyoto Protocol: Three "Flexible Mechanisms" to achieve the goals in a cost effective manner Emissions Trading (ET): Countries that keep emissions below their agreed target will be able to sell the excess emissions to countries that find it more difficult or more expensive to meet their own targets Germany/UK Payment Assigned Amount Units (AAUs) e.g. Romania Clean Development Mechanism (CDM): Emission reductions through investment by an industrialized country in a project in a country without reduction commitments are credited by the UN to the emission account of the investor country Germany/UK Investment Certified Emission Reductions (CERs) e.g. China Joint Implementation (JI): Emission reductions through investment by one industrialized country in a project in a second industrialized country are transferred from the emission account of the host country to the emission account of the investor country. Germany/UK Investment Emission Reduction Units (ERUs) e.g. Russia Investor and analyst conference, H Aug. 9,

5 CDM/JI: How does it work? To date, projects with an expected volume of 2,200 mill. t from CDM projects and 175 mill. t from JI projects are known. 738 projects with about 1,000 mill. t expected volume have been registered by the CDM Board (UNFCCC). So far, 63 mill. certificates have been issued. Project idea Preparation of Project Design Document Validation Registration by UNFCCC The regulatory process represented a bottleneck till one year ago. Now the processes for CDM projects are established and transparent. The regulatory framework for JI projects is not implemented in all JI countries. There is a considerable backlog of demand. International Transaction Log (ITL) will be completed by end of this year. Implementation Monitoring and Verification of emission reductions Certification by UNFCCC Use under EU-ETS Source: ; Investor and analyst conference, H Aug. 9,

6 Main types of CDM or JI projects Greenhouse gas Global warming potential (GWP) Derivation Mitigation Mitigation Costs (Investment) CO 2 1 Burning of fossil fuels Energy efficiency, renewable energy > 10 /t CO2e CH 4 (methane) 21 Coal mines, landfills, animal waste Installation of gas gathering and power generation systems 5-10 /t CO2e N 2 O (nitrous oxide) 310 By-product of fertilizer production HFC23 11,700 By-product of cooling medium production Installation of catalyst Installation of HFC23 incineration systems < 5 /t CO2e < 1 /t CO2e Investor and analyst conference, H Aug. 9,

7 CDM/JI market overview In the last two years the CDM/JI business has been stepped up significantly. Since 1999, certificate contracts with a total volume of more than 800 mill. t have been closed. Much of the volume contracted is accounted for by Chinese projects. India and Latin America are leading in the number of projects. The majority of reduction comprises projects for avoidance of HFC23, N 2 O and Methane. Volume of CERs/ERUs sold in mill Before vor Brazil 4% South America 5% Africa 7% Rest of Asia 9% China 60% India 15% Source: State and Trends of the Carbon Market 2006, World Bank Investor and analyst conference, H Aug. 9,

8 Supply & Demand balance indicates a shortage > 1,000 mill. EUAs for Demand (in mill. EUAs) EU 25 (according NAP1 period) 10,500 additional installations NAP2 270 Romania 410 Bulgaria 250 Aviation 380 ~11,800 Demand is the remaining uncertainty Macro forecasts: GDP growth; demand reaction Micro forecast: production levels and carbon intensity Aviation & shipping Norway and Switzerland Supply (in mill. EUAs) Free allocation EU 27 9,275 Auctions 430 New Entrants Reserve (NER) 630 Aviation 270 ~ 10,600 Most NAPs are in the final stage Starting from 2008 countries like Germany, UK and Italy intend to auction or sell EUAs The allocation of allowances from the new entrants reserve is fairly skewed towards the end of NAP2 period Shortage of ~ 1,200 mill. EUAs The shortage of the EU-ETS is expected to be in the range of 1,000 1,400 mill. EUAs according to the estimates of various analysts. Investor and analyst conference, H Aug. 9,

9 CDM/JI usage limitation in the EU-ETS The EU Commission has limited the potential to use Kyoto credits to ensure supplementarity in the individual member states (at least 50% of the committed reductions have to be achieved inside the respective countries). The total allowed inflow into the ETS can be sufficient to balance the shortage provided that all major players use their redemption capacity. Mill. certificates in the period EU-ETS Shortage EU27 Variance of analysis CDM/JI Caps by member states CDM/JI-Caps by sector Potentially realisable CDM/JI-inflow D ESP Power-Sector Power-Sector ITA POL UK F Non-Power-Sector Non-Power-Sector -X%, some players might not use their redemption capacity ,000 1,250 1,500 1,750 Several sources: e.g. NAPs, Point Carbon, RWE etc. Investor and analyst conference, H Aug. 9,

10 Global demand for Kyoto credits for Markets Demand Comments EU-ETS: ~ 1,200 mill. t 1,200 mill. t as average of analysis (see chart 8) The EU-ETS will be the main and price setting market EU Governments: ~ 500 mill. t Mainly: Spain, Italy, Netherlands, Austria Japan: ~ 200 mill. t As of today, but 2007 climate strategy review may lead to increase of up to 700 mill. t Canada: New Zealand: Voluntary markets: ~ 20 mill. t ~ 45 mill. t ~ 75 mill. t Total demand: 2,000 2,500 mill. t As only governments are allowed to trade Assigned Amount Units (AAUs), the demand will mainly have to be covered with CDM and JI projects The very active CDM/JI market ensures the belief that the supply will balance this demand. Investor and analyst conference, H Aug. 9,

11 RWE s approach to the CDM/JI market Purchase of Kyoto credits via: Direct transactions with sellers Tender-process Participation in Carbon Funds Direct involvement in CDM/JI projects via: Financial investment Technology contribution CDM/JI regulatory process RWE aims to utilize its full CDM/JI redemption capacity of approx. 90 mill. certificates for the period Investor and analyst conference, H Aug. 9,

12 RWE s current Kyoto credit portfolio for Projects by July, 2007 Contract volume by technology mill. certificates LoI Validated In Operation LoI LoI Validated In Operation 90 Contract volume Risk adjusted volume Target Hydro N2O 2 O HFC23 Energy Efficiency Wind CH4 4 Contract volume by region China South Korea Egypt Others The average price per contracted certificate is < 10. We expect to reach the target volume at per certificate. Investor and analyst conference, H Aug. 9,

13 Examples of RWE CDM/JI Projects: Reduction of N 2 O RWE together with Carbon Projektentwicklung, Austria, ( Carbon ) have founded the joint venture Carbon Climate Protection GmbH to develop CDM and JI Projects. As the leading European project developer for N 2 O abatement projects, Carbon has successfully implemented CDM projects for N 2 O -conversion at the nitric acid plants Abu Qir in Egypt (1.2 mill. CERs p.a.) and Hu Chems in South Korea (1.3 mill. CERs p.a.). The project (Abu Qir) has been in operation since the end of Very good performance concerning projected emission reductions. Annual emission reduction is equivalent to approximately the emission of 600,000 diesel-engined cars with 10,000 km/a mileage. Abu Qir Fertilizer, Egypt: The new ENVINOX Catalyst Investor and analyst conference, H Aug. 9,

14 Examples of RWE Projects: Utilisation of Coal Mine Methane RWE Power s subsidiary Mingas-Power has systems for power generation based on coal mine methane with a total generation capacity of 54 MW el in operation. Based on this experience we are in advanced negotiations to realize joint project with Chinese and Russian owners of coal mines. In these projects we are willing to take over the responsibility for planning, installation and operation as well as the financing. In return RWE receives carbon credits. Investor and analyst conference, H Aug. 9,

15 Examples for off-take agreements Wuzhou Composting Project, China Scope: conversion of an unmanaged landfill to a state of the art waste separation and treatment system Total emission reduction: 200,000 t CO 2 by 2012 Status: registered by UNFCCC, operation started mid 2007 World Bank Umbrella Carbon Facility Scope: abatement of HFC23 emissions at two chemical plants in China Total emission reduction: 130 mill. t CO 2 by 2013; shared between 5 World Bank funds, 6 companies from the investment/industry sector and 6 utilities; RWE share is ~12 mill. t CO 2 Status: registered by UNFCCC, in operation since 2006, first CERs have been delivered Investor and analyst conference, H Aug. 9,

16 Conclusion The demand for certificates in the EU-ETS will be much bigger than the available EUAs. CDM and JI are vital to balance the EU-ETS. A CDM/JI industry has evolved which will be able to deliver enough Kyoto credits to cover the demand. Most probably there will be a timing mismatch between Kyoto credit demand and availability. If the EU-ETS cannot be balanced sufficiently by CDM and JI, the only other option is fuel switch. All major installations should use their CDM/JI redemption capacity to ensure enough CDM/JI inflow into the EU-ETS. RWE is well positioned to exploit its maximum allowed CDM/JI redemption capacity to reduce our financial carbon exposure. Investor and analyst conference, H Aug. 9,

17 Glossary AAU Annex-B- Countries CDM CER Assigned Amount Unit = Kyoto unit Allowance CO 2 allowance (= certificate) Group of countries that have agreed within the Kyoto Protocol to a target for their greenhouse gas emissions Clean development mechanism Certified emission reduction (certificate from CDM project) HFC23 Hot Air ITL JI NAP Climate damaging waste product in the production of coolants Reduction of CO2 emissions through economic decline (eastern Europe, Russia) International Transaction Log: software to transfer Kyoto credits Joint implementation National allocation plan CO 2 e ERU ETS EUA CO 2 equivalent Emission Reduction Unit (certificate from JI project) European Emissions Trading System European Allowance Non- Annex-B- Countries N 2 O The countries that are not included in Annex B in the Kyoto Protocol Nitrous Oxide, Climate damaging waste product from production of nitric acid and from use of fertilisers GWP Relative scale which compares the gas in question to that of the same mass of carbon dioxide (whose GWP is by definition 1) UNFCCC VER United Nations Framework Convention on Climate Change Verified emission reduction: not registered by UNFCC Investor and analyst conference, H Aug. 9,