CDM Carbon Finance Workshop Session 10: Discussion of programmatic CDM and associated risks Accra, June 24-26 2009
Contents Introductory quiz Programmatic CDM & alternatives Case study Carbon credit options Major risks Groupwork Report back and key learnings 10 2
Introductory quiz Within the last weeks, the rules of programmatic CDM have changed to become more favourable. Which of each of the following is the old rule, and which is the new rule? Old rule New rule The start date of each project activity must be after the registration date of the PoA The start date of each project activity must be after the start of validation The start date of each project activity must be after 1 January 2007 Any combination of Only related methodologies can Only one methodology can be methodologies can be included be included under a PoA included under a PoA under the PoA DOE s only liable to repay credits from invalid project activities for one year DOE s liable to repay all credits from invalid project activities DOE s not liable to repay credits from invalid project activities Need to check every sub-group of projects for debundling No debundling check if independent subsystems < 1% of small scale threshold No debundling check necessary PoA: Programme of Activities Debundling: taking a large scale CDM project and illegally breaking it into smaller components which can take advantage of the simplified small scale modalities and procedures 3
Contents Introductory quiz Programmatic CDM & alternatives Case study Carbon credit options Major risks Groupwork Report back and key learnings 10 4
Case study: Household solar PV systems Project description Solar Solutions is looking to roll-out household solar photovoltaic systems to 15,000 previously unelectrified households in Ghana over a period of 3 years If this is successful, there is scope to roll this out to a further,000 homes thereafter Carbon credits are critical to the financial viability of this project Estimated emission reductions ( 000 tco2e) 20 40 60 80 100 120 140 2010 11 12 13 14 15 2016 Questions What options are there for obtaining carbon credits for this project? 5
Three main options exist for obtaining carbon credits for Solar Solution s project Option 1 CDM Bundle Description A group of pre-defined project activities registered under a single CDM project All projects activities must be able to be defined upfront Applicable to Solar Solutions? 2 PoA An umbrella under which all future project activities meeting the requirements of the PoA can be registered 3 VCS Group An umbrella under which all future project activities meeting the requirements of the group can be registered The VCS alternative to a CDM PoA 6
1 A CDM bundle should be considered if all or most project activities can already be identified Advantages Disadvantages Conclusion Standard CDM rules apply Avoid complexities and risks associated with PoA s making the project more likely to be successfully registered and minimising the cost of a single registration All project activities need to be identified upfront (not possible to add future project activities after registration) If more project activities need to be added, a separate bundle needs to be registered, leading to additional costs A bundle can only include a single methodology If all or most project activities complying with a specific methodology can be identified upfront go for a bundle For example, Solar Solutions has already identified the 15,000 households and specific implementation plan they will adopt 7
2 A Programme of Activities has a number of advantages over a regular CDM project Regular CDM can be cumbersome High transaction costs (EUR 60 90,000 per project) means small projects are not viable Long development timelines delays time until project owners receive money for carbon credits Negotiating on a project by project basis gives carbon credit buyers the negotiating power Programmes of activities are much better suited for small energy efficiency initiatives Able to easily include additional identical project activities under the programme, and therefore no need to identify all project activities upfront Economies of scale in CDM development costs Significantly shorter timelines to register projects once PoA is registered Project volume shifts bargaining power for carbon credits to project owners 8
2 PoA s only make financial sense is sufficient CPA s can be registered 9
2 No PoA s have yet been registered but a number are under validation PoA topic Solar home systems Methane capture and combustion from animal waste Solar water heaters Household energy efficiency Composting of municipal solid waste Small hydropower CFL roll-out Countries Bangladesh Brazil South Africa Mexico Uganda Honduras, Indonesia Senegal 10
2 There are still a number of risks with PoA s which need to be mitigated Risk Need for strong participants to ensure successful implementation of underlying projects Mitigation strategy Have strong co-ordinating entity to manage participants and provide guidance Offer incentives to align participants with goals of PoA May not get sufficient scale over time to achieve economies of scale Ensure there are sufficient foundation projects contracted before beginning development Success of uptake in local environment Financial viability Ensure that PoA is in line with and drives local policy Ensure there is a robust programme which is likely to be healthy over time (e.g. solar replacing diesel gensets in South Africa PoA registration risk as none registered yet Focus on additionality, monitoring and eligibility requirements Employ experienced carbon developer 11
3 A VCS Group should be considered if project does not comply with CDM or PoA requirements Advantages Disadvantages Conclusion Multiple methodologies can be included in a VCS Group under sub-groups Projects can be easily added even if not identified upfront DOE s only need to verify a sample of project activities, significantly reducing costs No liability issues as with PoA s Can be applied in cases where project does not comply with CDM but does comply with VCS VCU prices lower than CER prices A project should go for VCS if: Project owner not happy with risk associated with PoA, or Project activities do not meet CDM requirements (e.g. no early consideration of carbon credits), or Project activities do not meet requirements of PoA s (e.g. some project activities start before planned validation date) 12
Summary of applicability of carbon credit grouping options Projects need to be predefined Multiple methodologies Early consideration needed Additional PoA risks Project start date CDM bundle Anytime CDM PoA Before validation start VCS group Anytime 13
Contents Introductory quiz Programmatic CDM & alternatives Case study Carbon credit options Major risks Groupwork Report back and key learnings 10 14
Groupwork: Prioritise which PoA to drive You have been presented with three potential PoA projects in Ghana However, you only have the resources to implement one of these PoAs Project Emission reduction potential Gold Standard? Mini-hydro 60 100 1 150 160 170 180 Project description Household energy efficiency 2010 11 12 13 14 15 2016 20 50 90 140 200 250 0 2010 11 12 13 14 15 2016 Household methane recovery 60 100 1 150 160 170 180 2010 11 12 13 14 15 2016 15
Groupwork: Prioritise which PoA to drive Question Which of the PoA options would you choose to drive, and why? Be sure to take into account carbon market risk, project risk and PoA risk 16
Contents Introductory quiz Programmatic CDM & alternatives Case study Carbon credit options Major risks Groupwork Report back and key learnings 10 17
Groupwork discussion: Some thought starters Consideration Hydro EE Methane Compliance with the Gold Standard may reduce post- 2012 risk PoA risk may be reduced if there is an existing project which can leveraged off The risk of PoA s may be mitigated by ensuring that costs are recovered sooner (i.e. more credits in earlier years) PoA risk can be further minimised by reducing CDM risks as it is likely these will exacerbated in PoA s. Therefore we should choose a project which has minimal CDM registration risk For the same reason we should choose a project which has minimal CDM issuance risk Monitoring complexity should also be kept to a minimum Other? Good Good Bad Good Good Bad Good Bad Good Medium Bad Good Good Bad Bad Good Medium Bad 18
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 19
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) Project type Average issuance (%) Relative risk of project Biomass Hydropower Waste gas / heat recovery Wind power Energy efficiency 45 36 79 92 97 Biogas 45 Methane recovery 36 Cement 58 Fuel switch 86 20