Presentation SCHOCK 2007 10 14 - Carbon Mechanisms

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Independent Third Party Inspection of CDM-/JI-ProjectsLessons Learnt

Prof. Dr. Günter SchockTÜV Rheinland

Competence Centre Climate Change

JI/CDM Project Presentation and Investors ForumJI/CDM Project Presentation and Investors ForumLeipzig 14 Leipzig 14 –– 16 October, 200716 October, 2007

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1. Independent Third Parties

2. Validation / Determination Process

3. Verification Process

4. Summary & Discussion

� List of Content

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� Independent Third Parties

Designated Operational Entities (DOEs)

PROCEDURE FOR ACCREDITING OPERATIONAL ENTITIES BY THE

EXECUTIVE BOARD OF THE CLEAN DEVELOPMENT MECHANISM

Version 8, EB 34

⇒⇒⇒⇒ Accreditation by CDM-EB

Designated Operational Entities (DOEs)

PROCEDURE FOR ACCREDITING OPERATIONAL ENTITIES BY THE

EXECUTIVE BOARD OF THE CLEAN DEVELOPMENT MECHANISM

Version 8, EB 34

⇒⇒⇒⇒ Accreditation by CDM-EB

Accredited Independent Entities (AIEs)

PROCEDURE FOR ACCREDITING INDEPENDENT ENTITIES BY THE

JOINT IMPLEMENTATION SUPERVISORY COMMITTEE

Version 2, February 2007

⇒⇒⇒⇒ Accreditation by JI-SC

Accredited Independent Entities (AIEs)

PROCEDURE FOR ACCREDITING INDEPENDENT ENTITIES BY THE

JOINT IMPLEMENTATION SUPERVISORY COMMITTEE

Version 2, February 2007

⇒⇒⇒⇒ Accreditation by JI-SC

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� Timeline of Accreditation of DOEs

List of AECall for Inputs

List of AEwith Indicative Letter

List of DOEsfunction(s) & sectoral scope(s)

Decision made by entity to apply for accreditation

maxminǾ

1,2 years0,5 year1 year

3,2 years1,0 year2,0 years

2 years0,5 year1 year

???

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� Status Quo of DOEs and AEs (20.8.2007)

40 entities have launched an application for accreditation40 entities have launched an application for accreditation

• 18 entities are accredited (DOE-status)

• 07 entities with a successful on-site assessment (AE-status with IL)

• 12 entities have not finished the on-site assessment (AE-status)

• 03 entities have withdrawn their application

• 18 entities are accredited (DOE-status)

• 07 entities with a successful on-site assessment (AE-status with IL)

• 12 entities have not finished the on-site assessment (AE-status)

• 03 entities have withdrawn their application

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� Functions of DOEs / IEs

1. Validation / Determination of Project PDD (ex-ante investigation)

2. Verification of Emission Reductions (ex-post investigation)

1. Validation / Determination of Project PDD (ex-ante investigation)

2. Verification of Emission Reductions (ex-post investigation)

Request for

• Approval of New Methodologies

• Deviation from Approved Methodology

• Clarification / Guidance

• Revision of Approved Methodologies

• Review

• Registration / Approval

Request for

• Approval of New Methodologies

• Deviation from Approved Methodology

• Clarification / Guidance

• Revision of Approved Methodologies

• Review

• Registration / Approval

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� List of Content

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� Validation and Verification Manual*

2CDM

Validation

2CDM

Validation

3SS-CDM

Validation

3SS-CDM

Validation

CDM ValidationReport Template

CDM ValidationProtocol

SS-CDM ValidationProtocol

4JI

Determination

4JI

Determination

5Initial

Verification

5Initial

Verification

6Periodic

Verification

6Periodic

Verification

JI DeterminationReport Template

JIDetermination

Protocol

Initial Verification Report Template

VerificationReport Template

InitialVerification

Checklist

PeriodicVerificationChecklist

1Generic Guidelines

1Generic Guidelines

*… independent state-of-the-art tool describing approaches and practices to be applied jointly by DOEs / AIEs

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� Validation / Determination Process: Steps1

Contract Review incl.Completeness Check

1Contract Review incl.Completeness Check

2Audit Team Selection


3Global Stakeholder Process

3Global Stakeholder Process

4Desk Review of PDD

4Desk Review of PDD

5On Site Visit

5On Site Visit

6Draft Validation /Determination

Report and Protocol

6Draft Validation /Determination

Report and Protocol

7CLs and CARs

7CLs and CARs

8Internal Review

8Internal Review

9Final Validation / Determination

Report and Protocol

9Final Validation / Determination

Report and Protocol

10Request for Registration

or Approval

10Request for Registration

or Approval

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� Validation / Determination Process: Topics

1Background Information


2Technological Issues

2Technological Issues

3Baseline and Monitoring

Methodology

3Baseline and Monitoring

Methodology

4Additionality

4Additionality

5Global and Local

Stakeholder Process

5Global and Local

Stakeholder Process

6Monitoring Plan

6Monitoring Plan

7Small Scale Projects, Bundling

and De-Bundling

7Small Scale Projects, Bundling

and De-Bundling

8EIA

8EIA

9Crediting Period

9Crediting Period

10Reduction of GHG Emissions

10Reduction of GHG Emissions

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� Validation / Determination Process: Findings1

Limited Understanding andProof of “Additionality”

1Limited Understanding and

Proof of “Additionality”

2Limited evidence for

CDM-/JI-Consideration

2Limited evidence for

CDM-/JI-Consideration

3Limited Consistency of PDD

3Limited Consistency of PDD

4Unclear Project Boundaries

4Unclear Project Boundaries

5Application of

Outdated Methodologies

5Application of

Outdated Methodologies

6Limited Evidence of

Local Stakeholder Process

6Limited Evidence of

Local Stakeholder Process

7Limited EIA

7Limited EIA

8Application of Default Values

not Traceable

8Application of Default Values

not Traceable

9Documents in Local Language

9Documents in Local Language

10Missing LoA

10Missing LoA

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� Demonstration and Assessment of Additionality*

Step 1Identification of Alternatives


Step 2Investment Analysis


Step 3Barrier Analysis


Step 4Common Practise Analysis


option

either or

* (version 03) EB 29

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� Key Questions









Are there any alternatives to the CDM-project?Are there any alternatives to the CDM-project?

Is the CDM-project financially attractive?Is the CDM-project financially attractive?

Are identified alternatives prevented byat least one of the identified barriers?Are identified alternatives prevented byat least one of the identified barriers?

Can similar activities be observed?Can similar activities be observed?

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� Investment Analysis

Subtask aSelection of Method

Subtask aSelection of Method

Subtask bApplication of Method

Subtask bApplication of Method

Subtask cCalculation of Indicators

Subtask cCalculation of Indicators

Simple Cost (I), Investment Comparison (II)or Benchmark Analysis (III)

Simple Cost (I), Investment Comparison (II)or Benchmark Analysis (III)

Revenues only from CERs ⇒⇒⇒⇒ Option IIf other Revenues ⇒⇒⇒⇒ Option II or III

Revenues only from CERs ⇒⇒⇒⇒ Option IIf other Revenues ⇒⇒⇒⇒ Option II or III

IRR, NPV, and/or Product-Specific Costs(only for Option II and III)

IRR, NPV, and/or Product-Specific Costs(only for Option II and III)

Subtask dSensitivity Analysis

Subtask dSensitivity Analysis

Reasonable Variations of Critical ParametersReasonable Variations of Critical Parameters

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� Calculation of IRR

Option IIInvestment Comparison Analysis

Option IIInvestment Comparison Analysis

Option IIIBenchmark Analysis

Option IIIBenchmark Analysis

either Project IRR or Equity IRR !either Project IRR or Equity IRR !

only Project IRR ! *only Project IRR ! *

* However, if there is only one potential project developer (e.g. when

the project activity upgrades an existing process), the IRR shall be

calculated as equity IRR!

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� Definition of Project IRR and Equity IRR

Project IRRscalculate a return based on project cash out- and inflows only,

irrespective of the source of financing

Equity IRRscalculate a return to equity investors and therefore also consider

the cash out- and inflows of debt financing

Project IRRscalculate a return based on project cash out- and inflows only,

irrespective of the source of financing

Equity IRRscalculate a return to equity investors and therefore also consider

the cash out- and inflows of debt financing

Project IRR ≠ Equity IRRProject IRR ≠ Equity IRR

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� Assessment of IRR

�� IRRs should be as high as possible!

�� IRR should be at least higher than a threshold

�� IRRs should be as high as possible!

�� IRR should be at least higher than a threshold

Thresholds are company and project specific, i.e.

• Projects with high risks need higher IRRs

• Investors with attractive alternatives ask for higher IRRs

Thresholds are company and project specific, i.e.

• Projects with high risks need higher IRRs

• Investors with attractive alternatives ask for higher IRRs!!

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� Calculation of NPV (without tax)

+170- 700∑

+210-Sale of Electricity

- 40-O&M

-- 700Investment

1 - 100Year�� NPV (25%) ⇒⇒⇒⇒ - 93

�� NPV (20%) ⇒⇒⇒⇒ +13

�� NPV (0%) ⇒⇒⇒⇒ +1.000

�� NPV (25%) ⇒⇒⇒⇒ - 93

�� NPV (20%) ⇒⇒⇒⇒ +13

�� NPV (0%) ⇒⇒⇒⇒ +1.000

�� NPV (20%) > 0 ⇒⇒⇒⇒ CDM-project is economically attractive !�� NPV (20%) > 0 ⇒⇒⇒⇒ CDM-project is economically attractive !

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� Calculation of NPV (with tax)

140-700∑ 2

-30Tax (30%)

100Revenues

-70-Depreciation

170-700∑ 1

1 - 100

�� NPV (25%) ⇒⇒⇒⇒ - 200

�� NPV (20%) ⇒⇒⇒⇒ - 113

�� NPV (15%) ⇒⇒⇒⇒ + 3

�� NPV (25%) ⇒⇒⇒⇒ - 200

�� NPV (20%) ⇒⇒⇒⇒ - 113

�� NPV (15%) ⇒⇒⇒⇒ + 3

�� NPV (20%) < 0 ⇒⇒⇒⇒ CDM-project is economically not attractive !�� NPV (20%) < 0 ⇒⇒⇒⇒ CDM-project is economically not attractive !

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� List of Content

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� Verification Process: Steps1

Contract Review incl.Completeness Check

1Contract Review incl.Completeness Check



3Publication of

Monitoring Report

3Publication of

Monitoring Report

4Desk Review of

Monitoring Report

4Desk Review of

Monitoring Report

5On Site Visit

5On Site Visit

6Draft Verification Report

6Draft Verification Report

7CLs and CARs

7CLs and CARs

8Internal Review

8Internal Review

9Final Verification Report

9Final Verification Report

10Certification of CERs and ERUs

10Certification of CERs and ERUs

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� Verification Process: Topics1

Background Information(e.g. PDD, Validation Report)


(e.g. PDD, Validation Report)

2Open Issues of Vaildation /

Determination Process

2Open Issues of Vaildation /

Determination Process

3Project Implementation

3Project Implementation

4Implementation of Monitoring

Methodology and Plan

4Implementation of Monitoring

Methodology and Plan

5Assessment of

Metering Equipment

5Assessment of

Metering Equipment

6Data Management

and Processing

6Data Management

and Processing

7QA / QC

7QA / QC

8Calculation of GHG

Emission Reductions

8Calculation of GHG

Emission Reductions

9Risk Analysis incl. Accuracy

9Risk Analysis incl. Accuracy

10Assessment of External Data

10Assessment of External Data

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� Verification Process: Findings1

Missing Approvals, Licences,etc.

1Missing Approvals, Licences,

etc.

2Limited Documentation

2Limited Documentation

3Missing Calibration

3Missing Calibration

4Cooperation with

Non Accredited Labs

4Cooperation with

Non Accredited Labs

5Deficits in Data Processing(e.g. different data bases)

5Deficits in Data Processing(e.g. different data bases)

6Inconsistencies over Time

6Inconsistencies over Time

7Unforeseen Difficulties

with Selected Methodology

7Unforeseen Difficulties

with Selected Methodology

8Limited Traceability of Data

8Limited Traceability of Data

9Missing Metering Devices

9Missing Metering Devices

10Limited Training

of Working Personnel

10Limited Training

of Working Personnel

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� Example: Wind Farm

Indicator

Indicator

Public GridBack-Up Line

No Indicator

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� List of Content

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� Summary

• Accreditation procedure for DOEs / AEs (min 1 y / average 2 y)

• Experience of ≈ 20 DOE ⇒⇒⇒⇒ ≈ 800 registered projects

• Validation /Determination = key functions of DOEs and AEs(but not the only one!)

• VVM is common practice

• Additionality is key problem in validation / determination

• Data management and QA/QC issues are key problem in verification

• Accreditation procedure for DOEs / AEs (min 1 y / average 2 y)

• Experience of ≈ 20 DOE ⇒⇒⇒⇒ ≈ 800 registered projects

• Validation /Determination = key functions of DOEs and AEs(but not the only one!)

• VVM is common practice

• Additionality is key problem in validation / determination

• Data management and QA/QC issues are key problem in verification