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Proposal for Carbon market development guarantee. Financial Solutions Unit, FEU Treasury Department . Energy Unit, LCR Carbon Finance Unit. Key Challenge for Low Carbon Energy Investments. Introduction & Objective. - PowerPoint PPT Presentation
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Financial Solutions Unit, FEU
Treasury Department
PROPOSAL FOR CARBON MARKET DEVELOPMENT GUARANTEE
Energy Unit, LCR
Carbon Finance Unit
105/30/2011, HCC Meeting, Barcelona.
INTRO
DUCTIO
N &
OBJECTIVE
Key Challenge for Low Carbon Energy Investments
2
The objective: propose new financial products that monetizes future flows of CERs to raise finance today for investments
Cas
hflo
w+
-
Time
Investments in EE or RE projects require funding before they can generate returnsKey challenge: raising funds today for investment in EE / RE projects
Investment e.g., energy savings for EE; GWh for RE)
Time
Returns
INTRO
DUCTIO
N &
OBJECTIVE
Carbon Credits or Emission Reductions ( for example “CERs”) – a co-product
3
e.g., energy savings for EE; GWh for RE)
Cas
hflo
w+
-
Time
CERs
Carbon credits contributes to cash-flow but NOT to the financing…
InvestmentReturns
INTRO
DUCTIO
N &
OBJECTIVE
Monetizing Carbon Credits today to help finance the investment
4
e.g., energy savings for EE; GWh for RE)
Cas
hflo
w+
-
Time
CERs
InvestmentReturns
Objective: monetize today future flow of Carbon Credits (CERs etc.) to support the financing phase.
COPEN
HAGEN ACCO
RD - FINAN
CECopenhagen Accord - Finance
5
•Will vary according to CO2 prices…•At $15/tCO2: $10 to 20 billion per annum in 2020
Grant MDBs
Private Capital Invest
Carbon Markets
Sales
Developed countries shall raise $30 billion through 2010 to 2012 of new and additional resources
… and to mobilize $100 billion per year by 2020 from a variety of sources
NATU
RE OF A CARBO
N FIN
ANCE CO
NTRACT
6
Nature of Carbon Financing Contract
CERsPower Purchase Agreement
$$$
Energy Project Finance – “Day 1”
electricity
DebtEquity
Investor Banks
Energy sales – “Day 2”
$$$
ERPA
CER sales – “Day 2’”
NATU
RE OF A CARBO
N FIN
ANCE CO
NTRACT
7
Bridging the Gap
CERs
Power Purchase Agreement
$$$
electricity
DebtEquity
Investor Banks
$$$
ERPA
Challenge: ways to monetize on Day 1 the future stream of carbon revenues – similar to what we see with receivables.
e.g., energy savings for EE; GWh for RE)
Cas
hflo
w+
-
Time
CERs
InvestmentReturns
Day 2Day 1
WB GUARAN
TEED CER SALES CON
TRACTWB Carbon Guarantee contract – How it works
Proposal to help monetize future Carbon Credits (CERs, etc.) through the ‘Carbon Guarantee’:• Objective: facilitate an upfront payment for CER forward
sales Contract (i.e., selling today future CER flows)
• Application: a developing country seller (investor in EE/RE) sells CERs to an Annex 1 country buyer (compliance buyers, etc.)
• Guarantee: the Bank guarantees government payment obligations (under its shortfall agreement), effectively guaranteeing CER delivery risk for projects in developing countries
CO2 M
ARKET DEVELOPM
ENT GUARAN
TEE
9
CO2 Market Development Guarantee – How it works
Host Country
Pool of CDM Projects
CERs
$
energy savings $
Carbon Aggregator
CO2 M
ARKET DEVELOPM
ENT GUARAN
TEE
10
CO2 Market Development Guarantee – How it works
Host Country
Pool of CDM Projects
CERs
energy savings $
Carbon Aggregator
Compliance Buyer[Sovereigns, Private or Public entities]
$ ‘Shortfall’ Agreement [for failure to deliver]$
(ERPA)
WB Guarantee of Shortfall Agreement
“Off-Shore”
Day 1
Day 2
Host Country Government
Indemnity Agreement
CO2 M
ARKET DEVELOPM
ENT GUARAN
TEE
11
CO2 Market Development Guarantee – How it works
Host Country
CERs
$
Carbon Aggregator
Compliance Buyer[Sovereigns, Private or Public entities]
$ ‘Shortfall’ Agreement [for failure to deliver]
$ (ERPA)
WB Guarantee of Shortfall Agreement
“Off-Shore”
Day 1
Day 2
Host Country Government
Indemnity Agreement
If things go well…
CO2 M
ARKET DEVELOPM
ENT GUARAN
TEE
12
CO2 Market Development Guarantee – How it works
Host Country
CERsCarbon
Aggregator
Compliance Buyer[Sovereigns, Private or Public entities]
$ ‘Shortfall’ Agreement [for failure to deliver]
$ (ERPA)
WB Guarantee of Shortfall Agreement
“Off-Shore”
Day 1
Day 2
Host Country Government
Indemnity Agreement
If things go well…
CO2 M
ARKET DEVELOPM
ENT GUARAN
TEE
13
CO2 Market Development Guarantee – How it works
Host Country
CERsCarbon
Aggregator
Compliance Buyer[Sovereigns, Private or Public entities]
$(ERPA)
“Off-Shore”
Day 1
Day 2
If things go wrong…
CO2 M
ARKET DEVELOPM
ENT GUARAN
TEE
14
CO2 Market Development Guarantee – How it works
Host Country
CERsCarbon
Aggregator
Compliance Buyer[Sovereigns, Private or Public entities]
$ ‘Shortfall’ Agreement [for failure to deliver]
$ (ERPA)
WB Guarantee of Shortfall Agreement
“Off-Shore”
Day 1
Day 2
Host Country Government
Indemnity Agreement
LoanIf things go wrong…
RISK ALLOCATIO
N
Risk Seller Buyer
Project
Market/ Price
Regulatory
Allocation of Risk between the Buyer and Seller. Back-stopping by the Guarantor
15
The project owner takes all project risks, including completion risk and project performance risk
The Buyer takes all Carbon Credit price risk The Seller takes the risk that the Carbon Credits are not eligible
in a pre-specified market (for e.g. EU Emissions Trading System). The non-eligible CERs are considered as “not delivered” triggering the
Guarantee if the Seller does not pay the Buyer for the shortfall.
CO2 M
ARKET DEVELOPM
ENT GUARAN
TEE
16
CO2 Market Development Guarantee – How it works
Host Country
CERsCarbon
Aggregator
Compliance Buyer[Sovereigns, Private or Public entities]
$ ‘Shortfall’ Agreement [for failure to deliver]
$ (ERPA)
WB Guarantee of Shortfall Agreement
“Off-Shore”
Day 1
Day 2
Host Country Government
Indemnity Agreement
MDB
Trust Guarantor
“Climate Fund/ Annex I”
$
CON
CLUSIO
NS
Carbon Guarantee is possible financial product to allow developing countries to help finance low-carbon investment from the proceeds of the forward sale of Carbon Credits to buyers in industrialized countries;
Provides funding today in exchange for a future flow of carbon credits to be generated from an EE/RE investment
Donor funds or other “climate fund” back-stopping Bank guarantee allows
• The carbon guarantee instrument to have wider application• Participation of private sector project owner and sellers • Public sector projects in countries where governments are not
interested in providing guarantees to benefit.
Conclusions
17
