EMAN- Sustainable Supply Chains- 2007 Finland The role of risk related to carbon finance in CDM projects Maija Saijonmaa Pöyry Energy Consulting 25.5.2007 2
1. Pöyry Energy Consulting in brief 2. Global carbon markets and Kyoto Mechanism (CDM and JI) 3. CDM/ JI project credit procurement options and risks 3
Pöyry, a worldwide leading group in Energy, Forest and Infrastructure & Environment The Pöyry Group is a consulting and engineering company with three divisions: ENERGY European leader in energy engineering and consulting FOREST INDUSTRY Worldwide market leader INFRASTRUCTURE & ENVIRONMENT Leading position worldwide PÖYRY 2006 RESULTS ENERGY FOREST INDUSTRY INFRASTRUCTURE & ENVIRONMENT GROUP TOTAL Revenues [M ] Employees 197 1 692 225 2 418 202 2 207 624 6 317 4
Pöyry Energy Consulting Ten offices in Europe: - Düsseldorf - Milan - Paris - Helsinki - Moscow - Vienna / Villach - Madrid - Oxford - Zürich Helsinki Oxford Düsseldorf Paris Vienna Zürich Villach Madrid Milan Moscow About 170 energy market experts We have combined our extensive regional expertise to create a unified Europeanbased management consulting company for the energy industry. Pöyry Energy Consulting is the leading Management Consultant in the European energy sector (Il Sole 24 Ore) 5
Pöyry provides wide variety of carbon-related services EU ETS Model Price forecast 2006-2012 Post-Kyoto assessment CARBON Carbon Strategies Carbon Financing Emissions reductions Renewables Energy efficiency CHP New technologies Optimisation of carbon portfolio Development of JI/CDM projects Estimation of project additionality Preparation of required documents (Baseline, PIN, PDD, etc.) Purchase strategy 6
1. Pöyry Energy Consulting in brief 2. Global carbon markets and Kyoto Mechanism (CDM and JI) 3. CDM/ JI project credit procurement options and risks 7
The Kyoto Protocol is the basis for regulating international GHG emissions and for the EU Emission Trading Scheme (EU ETS) Kyoto Protocol 6 Greenhouse Gases 2008 2012 Status 08/2006: 164 signatories, 61.6% of worldwide emissions Annex I countries Joint Implementation (JI) Non-Annex I countries Clean Development Mechanism (CDM) EU27 EU15 DE SE HU SK -8% RO BG etc. -6% -8% -8% -8% BR IN CN KR MK KZ etc. International Emissions Trading (IET) RO BG UA RU EU ETS Greenhouse Gas CO 2 Phase I: 2005-2007 Phase II: 2008 2012 Legal Basis: EU Directive 2003/87/EC EU27 DE SE A FI UK SK RO BG Installations 8
CDM and JI markets are global JI/ CDM projects are investments that reduce GHG gases. E.g investments in: energy efficiency renewable energy fuel switch HFC& N20 reduction Key project host-countries countries: CDM: China and India JI: Russia Major CER/ ERU byers European governments Companies under EU Emissions Trading Scheme Japan and Canada 9
For example Finland and Finnish companies can benefit cutting emissions more economically abroad than home though CDM/ JI Joint Implementation (JI) (between Annex I countries) Annex I country Clean Development Mechanism (CDM) (between Annex I and Non-Annex I countries) Emission Reduction Units (ERU) Certified Emission Reductions (CER) 10
Carbon market grew significantly in 2006 Mt CO2eqv 1800 1600 1400 1200 1000 800 600 400 200 EU ETS is the dominating market In 2006 value of the carbon market 23 billion (2005, 9 billion ) EU ETS share 19 billion in 2006 0 2005 2006 EU ETS Other trading schemes* Other compliance Primary CDM Secondary CDM JI 11
CDM projects dominate the project mechanism markets 3000 2500 2000 1500 1000 Development of JI and CDM projects, MtCO2 The current estimates forecast supply up to 2012 is between 1100-3000 MtCO2 in low and high scenarios 500 0 PDDs Commented Source: Registered Point Carbon Issued Around 90% of the project volume are CDM projects 11.1.2005 11.2.2005 11.3.2005 11.4.2005 11.5.2005 11.6.2005 11.7.2005 11.8.2005 11.9.2005 11.10.2005 11.11.2005 11.12.2005 11.1.2006 11.2.2006 11.3.2006 11.4.2006 11.5.2006 11.6.2006 11.7.2006 11.8.2006 11.9.2006 11.10.2006 11.11.2006 11.12.2006 11.1.2007 11.2.2007 11.3.2007 11.4.2007 Date 12
1. Pöyry Energy Consulting in brief 2. Global carbon markets and Kyoto Mechanism (CDM and JI) 3. CDM/ JI project credit procurement options and risks 13
Emission reduction project credits can be purchased through various trading channels 1. Executing the project yourself; Project sponsor / investor 2. A bilateral contract between the project executer and the buyer; a wholesale trade 3. Indirect acquiring and buying through e.g. funds; a retail sale 4. CER and ERU market places with more sophisticated products (secondary markets; spot, derivatives, financial contracts, etc ) Company 2. 4. 3. CER/ERU 1. JI/CDM project project market market place place CER/ERU wholesale buyer buyer 14
Major risk factors in CDM projects CDM project cycle related risks Project non- approval CER issuance risk Real emission reductions differ from those projected IT systems not in place ITL (International Transaction Log) need to be functional to transfer CERs from CDM projects EUA price fluctuations Value of emission reduction units fluctuate Uncertainty of the post-2012 emissions regulation Value of emission reduction units after 2012 is uncertain 15
The CDM project cycle related risks decrease as the project proceeds Project Identification Validation / Determination Registration of the project Verification & Indicative price Issuance of level in the Emission Reductions market 5-7 /tco 2 Risk Price Determine you risk/return position Take only conscious risks More financial products to be seen 9-11 /tco2 12 /tco2 Globally highest reference price (currently EUA future price) 16
CER issuance success rate has varied by different project types from 19 % to 114 % CERs issued/ CERs projected (%) 120,0 % 100,0 % 80,0 % 60,0 % 40,0 % 20,0 % 0,0 % 41 % Agriculture CER issuance success rate (%) 97 % 83 % Biogas Biomass energy 47 % Cement Source: UNEP/RISOE CDM pipeline 75 % 85 % 80 % EE industry Fossil fuel switch Fugitive 19 % Geothermal 91 % 84 % HFCs Hydro 20 % Landfill gas 114 % N2O 64 % Wind 81 % Total Reasons for variation in the CER issuance success rates: Changes in project baseline Changes in project activity production Changes in fuels used Delays in the project start dates Insufficient implementation of the monitoring plans 17
Highly fluctuated EUA prices often give indicative prices for CERs EUA emission allowance price development 35 30 25 20 15 10 5 0 1.12.2005 1.1.2006 1.2.2006 1.3.2006 1.4.2006 1.5.2006 1.6.2006 1.7.2006 1.8.2006 1.9.2006 1.10.2006 1.11.2006 1.12.2006 1.1.2007 1.2.2007 1.3.2007 1.4.2007 /t CO2 18 EUASPOT EUADEC 2007 EUADEC 2008
Ways to manage CDM project risks Better ERPA (Emission reduction purchase agreement) negotiations CER buyers contract only to a fraction of expected deliveries from PDD and at lower price Portfolio management to manage delivery risks project type and geographical location diversification Use of insurance products Not yet very popular Use of secondary CERs- CER after markets CDM project cycle related risks avoided but prices higher 19
Key conclusions CDM/ JI projects include besides normal project risks additional CDM specific risks Companies investing in CDM projects/ purchasing emission reduction units should be aware of the risks and their magnitude CDM project risk management is crucial 20
Maija Saijonmaa Pöyry Energy Consulting Tel: +358 10 33 24305 Email: maija.saijonmaa@poyry.com