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My presentation at the 2008 Latin American Wind Energy Conference (LAWEC) November 5-7, Guadalajara, MX
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LAWEA 2008 Michael Stavy, Consulting Energy Economist
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The Use of the Kyoto Protocol and its Clean Development Mechanism (CDM) to Help
Finance Latin American Wind Plants
Thurs., 6 Nov 08; 9:00-10:30amGuadalajara, MX
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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The PresenterMichael Stavy
Consulting Energy Economist432 N. Clark ST STE 204Chicago, Il 60654 USA
312-832-1631www.michaelstavy.com
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Download Lecture Handouts
• Download lecture handout with details and footnotes
• Provide webpage, username and password at end of presentation
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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The Disclaimer
While I prepared this presentation and I believe that it contains correct
information, I make no warranty expressed or implied, nor do I
assume any legal responsibility for the accuracy, completeness or usefulness of any information
presented. Presentation © 2008 Michael Stavy
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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The Global Problem
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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• Increase in GHG emissions is causing an increase in the earth’s surface temperature
• Global warming is an observed scientific fact
• An increase in temperature will change life as usual (LAU)
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Life as UsualParc Montsouris, Paris 14th
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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A European Coal Plant Life as Usual will not continue
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Solutions to Global Warming
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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• Suffer• Adjustment• Mitigation• The Protocol is an attempt at
mitigation• Windpower is a mitigating
technology• Protocol mitigating “Galbraithian”
technostructure
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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The Kyoto Protocol
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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The Carbon Unit
• Protocol measures GHG in metric tons (tm) of carbon dioxide (CO2), the major GHG.
• Other GHG emissions (i.e. CH4, N2O, HFC, PFC, SF6) are standardized into tm-CO2 by their global warming potential (GWP).
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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The Carbon Unit
• Main GHG from burning fossil fuels (coal, natural gas, oil) to generate electricity is CO2
• Assigned Carbon Emission Allowance Unit (AAU)
• AAU = 1 t-CO2
• AAU only issued by UNFCC Secretariat
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Protocol Basics
• Tries to change the human economy so that it will produce the required output with less carbon
• A treaty among sovereign nations• UNFCC Secretariat administers
Protocol for signatory nations• Protocol only applies to signatory
nations and their citizens
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Protocol Basics
• All Latin American (LA) countries signatories
• USA not a signatory• Annex I countries are the developed
countries• Non-Annex I are the developing
countries • All LA countries are non-Annex I
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Protocol Basics
• Only certain Annex I countries (Annex B countries) have emission caps (ceiling on emissions) during the first commitment period
• Only citizens of signatory countries can trade Protocol carbon units
• No matter what the Annex B domestic architecture, Protocol trading is sovereign government to sovereign government
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Protocol Cap
• Maximum t-CO2/yr a country allowed is its yearly cap
• Base Year 1990-t0
• Emissions measured from base year
• First Commitment Period 2008-2012
• Period by which Annex B countries must reduce their carbon emissions by, on average, 5.2% from t0
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Protocol Cap
• Protocol allows countries next to each other to cap emissions under a joint emissions bubble
• European Union Emission Trading Scheme (EU ETS) is one such bubble
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Kyoto Emission Control Architectures
Three major architectures are
1. Cap and command-RPS
2. Cap and trade-the EU ETS 3. Carbon tax
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Clean Development Mechanism-CDM
• Designed to help developing countries (non-Annex I) emit less carbon during first Commitment Period
• Joint Implementation (JI) mechanism is a parallel program for Annex I countries that are not in Annex B. Not relevant to LA
• CDM projects only venued in non-Annex I countries
• All LA counties can have CDM projects
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Clean Development Mechanism-CDM
• CDM projects generate Certificated Emission Reduction allowances (CER) from their avoided carbon emissions
• Administered by UN CDM Board• Each LA country must have own National
Authority (NA) to regulate domestic CDM program and to certify its domestic CER to UN CDM Executive Board
• CDM projects must meet the additionality principal
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Clean Development Mechanism-CDM
• Additionality principal requires CDM projects have carbon reductions that would not take place without CER revenue
• LA wind plants that would have been built without the CER revenue are not eligible for CDM status
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Clean Development Mechanism-CDM
• LA wind plants usually earn CER from their avoided carbon emissions compared to carbon content of its venued county’s electric grid
• Many LA electric grids (Mexico, Brazil, Costa Rico, etc) hydro powered resulting in a low carbon content for grid electricity
• Other emission bases can be used
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Clean Development Mechanism-CDM
• CDM wind projects helped financially by selling the CER “generated”
• CER are bought by an Annex B country in order for Annex B country to be in compliance with its Protocol cap
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Clean Development Mechanism-CDM
• Most CER are sold in EU ETS carbon market
• Another large buyer is the Government of Japan
• There is not a significant Japanese
C & T market!
• There is no US market for CER
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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EU ETS Specifics
• Study EU ETS because it is the major CER market
• Uses the cap and trade protocol emissions control architecture
• Under EU ETS bubble, the AAU is called European Carbon Emission Allowance (EUA)
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Countries Under the ETS Bubble
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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EU ETS Specifics
• EU Directorate administers the EU ETS
• EU Directorate receives AAU from the UNFCC Secretariat
• EU Directorate distributes EUA to EU ETS countries
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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EU ETS Specifics
• Each EU ETS country decided which industrial sectors are capped during first commitment period
• We will only look at EU ETS power carbon cap
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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EU Cap and Command-C & C
• Each EU fossil power plant given cap-maximum t-CO2/yr that it can emit
• Based on historical emissions
• Plant penalized if actual t-CO2/yr > cap
• Not rewarded if actual t-CO2/yr < cap
• Wind plants emit 0 t-CO2/yr
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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EU Cap and Command-C & C
• Used for HFC emissions caps under the Montréal Protocol
• US Montréal signatory
• LA countries Montréal Protocol signatories
• Table # 1 below shows C & C emissions data for 3 hypothetical EU fossil power plants
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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EU Cap and Command-C & C
• Fossil power plant 1 is even with cap
• Plant 2 is below its cap
• Plant 3 is above its cap
• US state Renewable Portfolio Standards (RPS) are C & C architectures
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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hypothetical C & C data plant 1 plant 2 plant 3
cap assigned t-CO2/ yr 10,000 10,000 10,000
actual t-CO2/ yr 10,000 9,000 12,000
carbon balance equal/ below/ above 0 1,000 -2,000
t-CO2/ yr below cap 1,000
t-CO2/ yr above cap 2,000
Table # 1 Hypothetical C & C Emissions Data f or 3 EU Fossil Plants
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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EU Cap and Trade-C & T
• Basis for C & T is the “command” from C & C
• Used by EU ETS
• Voluntary emissions schemes do no significantly reduce C-emissions--not good for selling LA wind CER
• Each EU power plant is given cap (max t-CO2/yr that it can emit)
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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EU Cap and Trade-C & T
• Each plant must have an EUA for each t-CO2/yr it emits up to its cap
• Assigned cap offset with EUA or, perhaps, by LA wind CER
• Plants get EUA from market purchase, government auction or government distribution
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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EU Cap and Trade-C & T
• Government auctions greatly increase EUA cost-very good for LA wind CER
• Auctions very good for planet Earth • Table # 2 shows C & T emissions data for
same 3 EU fossil power plants• Plant 1 is even on EUA• Plant 2 is long EUA• Plant 3 is short EUA
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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EU Cap and Trade-C & T
• Since plant 2 has < efficiency than plant 3, economy better (in general equilibrium) if allowing EUA trading between plants 2 & 3
• C & T helps reduce EU fossil electricity’s cost advantage by carbon cost of the fossil electricity (€, MX$ or US$ per MWh)
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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hypothetical C & T data plant 1 plant 2 plant 3
EUA-given/ traded 10,000 10,000 10,000
actual t-CO2/ yr 10,000 9,000 12,000
EUA balance 0/ long/ short 0 1,000 2,000
EUA f or Sale 1,000
EUA must Buy 2,000
Table # 2 Hypothetical C & T Emissions Data for 3 EU Fossil Plants
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Carbon Cost of Fossil Electricity
• In EU C & T, the carbon content
(t-CO2/MWh) of fossil electricity must offset with EUA, or LA Wind CER
• Carbon cost of fossil electricity depends on its carbon content and the cost of a EUA (CER)
• Higher the EUA price, the greater the carbon cost, the better it is for LA wind CER
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Carbon Cost of Fossil Electricity
• Table # 3 below shows carbon cost for EU coal, natural gas and wind electricity
• Carbon cost of wind is given as a comparison
• Carbon content of fossil electricity from my 2004 Global Wind Power Conference Paper
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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hypothetical C & T data Coal Gas Wind
t-CO2/ MWh 0.996 0.372 0
€/ EUA 22.35 € 22.35 € 22.35 €
carbon cost-€/ MWh 22.26 € 8.31 € 0.00 €
MX$/ EUA $ 350.91 $ 350.91 $ 350.91
carbon cost-MX$/ MWh $ 349.50 $ 130.54 $ 0.00
US$/ EUA $32.29 $32.29 $32.29
carbon cost-US$/ MWh $32.16 $12.01 $0.00
Table # 3 Hypothetical C & T Carbon Cost for Coal, Gas and Wind Electricity
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Cost of EUA (CER)
• UE ETS has no public EUA (CER) markets with transparent prices for long-term contracts or for current (spot) trades
• EUA (CER) prices and volumes not in public domain
• European Climate Exchange (ECX) only provides public access to transparent prices for EUA (CER) futures and options
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Cost of EUA (CER)
• ECX EUA/CER Dec 08 futures
30 Sept 08 month-end settlement prices used as proxy EUA/CER prices
• EUA settlement price: 22.35 €
• CER settlement price: 18.45 €
• EUA-CER spread: 3.90 € or 17.4%
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Cost of EUA (CER)
• 1 € = MX$ 15.70046 (30 Sept 08)
• 1 € = US$ 1.4445 (30 Sept 08)
• Converted proxy EUA (CER) € prices into proxy EUA (CER) MX$ and US$ prices
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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EU ETS Reduces Fossil Electricity's Cost Advantage
• Table # 5 below shows the amount by which the after carbon cost of EU fossil electricity is less (more) than EU wind electricity
• Cost of generation is the levelized cost of generation; not the wholesale price (discussed below)
• Cost of carbon is from Table # 3 above
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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EU ETS Reduces Fossil Electricity's Cost Advantage
• Total is the sum of the cost of generation and the cost of carbon
• Fossil < wind is amount that fossil electricity total cost is less (more) than total cost of wind electricity
• Hydro column without data requires further study
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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hypothetical data coal gas wind hydro
1. cost of generation-€/ MWh 41.00 € 49.00 € 60.00 € 0.00 €
2. cost of carbon-€/ MWh 22.26 € 8.31 € 0.00 € 0.00 €
3. total- €/ MWh (1+2) 63.26 € 57.31 € 60.00 € 0.00 €
4. f ossil < wind-€/ MWh -3.26 € 2.69 € 0.00 € 60.00 €
1. cost of generation-MX$/ MWh $ 653.84 $ 781.42 $ 956.84 $ 0.00
2. cost of carbon-MX$/ MWh $ 349.50 $ 130.54 $ 0.00 $ 0.00
3. total-MX$/ MWh (1+2) $ 1,003.34 $ 911.95 $ 956.84 $ 0.00
4. f ossil < wind-MX$/ MWh $ -46.50 $ 44.88 $ 0.00 $ 0.00
cost of generation-US$/ MWh $61.66 $73.69 $90.24 $0.00
cost of carbon-US$/ MWh $32.16 $12.01 $0.00 $0.00
total-US$/ MWh (1-2) $93.82 $85.70 $90.24 $0.00
f ossil < wind-US$/ MWh ($3.58) $4.53 $0.00 $0.00
Table # 5 The eff ect of the Kyoto Protocol on ETS Fossil Electricity’s
Cost Advantage over ETS Wind Electricity
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Cost of Generating Electricity
• No public domain data (IEA, EIA) on the actual cost of generating EU, MX and US fossil, wind and hydro electricity
• Cost of generating electricity not transparent
• Without transparent costs, the efficient market hypothesis (EMH) does not hold in these wholesale electric markets
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Cost of Generating Electricity
• US, MX and EU costs of generation are converted from proxy € values published a January, 2008 Wind Power Monthly (WPM) article and graphs
• Used WPM 8% cost of capital € values
• Readers can use their own values
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Reliable Cost Data
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Reliable Cost Data
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Cost of Generating Electricity
• Appendix Table #2 below estimates the proxy MX$ and US$ cost of generating coal, natural gas and wind electricity using the WPM € prices
• Used average daily €/MX$ and €/US$ exchange rate for the 366 day period 1 Oct 07 → 30 Sept 08
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Cost of Generating Electricity
• 1 € = MX$ 15.9472 (366 day average)
• 1 € = US$ 1.50393 (366 day average)
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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FX rate FX rate
€/ MX$ ↓ €/ US$ ↓0.06271 € 0.6649 €
MX$/ € ↓ US$/ € ↓$ 15.94729 $1.50393
8% coal gas wind
€/ MWh 41.00 € 49.00 € 60.00 €
MX$/ MWh $ 653.84 $ 781.42 $ 956.84
US$/ MWh $61.66 $73.69 $90.24
Appendix Table # 2 Estimated EU, MX and US 2007 Cost of Generation
based on WPM Prices f or coal, gas and wind
2008 average F/ X rate
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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CDM Reduces LA Grid Electricity's Cost Advantage
• CER income that LA CDM wind plant receives decreases the cost of wind
• Reduces LA grid electricity’s cost advantage
• Table # 6 below shows the amount by which after CER income of LA CDM wind electricity is more (less) than LA grid electricity
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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CDM Reduces LA Grid Electricity's Cost Advantage
• Cost of generation is from Appendix Table # 2 above
• CER cost is from Slide # 43 above
• Total is the cost of generation minus the CER income
• LA Grid < wind is the amount total cost of LA grid electricity less (more) than the cost of CDM wind electricity
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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hypothetical data coal gas wind hydro
1. cost of generation-€/ MWh 41.00 € 49.00 € 60.00 € 0.00 €
2. CER-€/ MWh 0.00 € 0.00 € 18.45 € 0.00 €
3. total- €/ MWh (1-2) 41.00 € 49.00 € 41.55 € 0.00 €
4. LA grid < wind-€/MWh 0.55 € -7.45 € 0.00 € 0.00 €
1. cost of generation-MX$/ MWh $ 653.84 $ 781.42 $ 956.84 $ 0.00
2. CER-MX$/ MWh $ 0.00 $ 0.00 $ 289.67 $ 0.00
3. total-MX$/ MWh (1+2) $ 653.84 $ 781.42 $ 667.16 $ 0.00
4. LA grid < wind-MX$/MWh $ 13.33 $ -114.25 $ 0.00 $ 0.00
1. cost of generation-US$/ MWh $61.66 $73.69 $90.24 $0.00
2. CER-US$/ MWh $0.00 $0.00 $26.65 $0.00
3. total-US$/ MWh (1-2) $61.66 $73.69 $63.58 $0.00
4. LA grid < wind-US$/MWh $1.92 ($10.11) $0.00 $0.00
Table # 6 The eff ect of CER I ncome on LA grid Electricity's
Cost Advantage over CDM Wind elctricity
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Advantages of CDM to Finance LA Wind Plants
• CER revenue• EU ETS, on a county by county basis,
can accept CER to cover a % of their carbon cap
• EU ETS will only meet its 2008-12 emissions cap with CDM & JI link
• There is an EU ETS market for CER• EU ETS will reduce GHG 20% by 2020
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Advantages of CDM to Finance LA Wind Plants
• Present value (PV) of a stream of future LA CDM CER can be used to directly finance the construction of a CDM wind plant
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Difficulties Using CDM to Finance LA Wind Plants
• EU ETS, on a county by county basis, can restrict the % of their cap that can be covered with CER
• Market price for CER are 3.90 € below the cost of EUA.
• 17.4% EUA-CER spread • Conceptual integrity of certain CER has
been suggested, increasing the risk to CER holders (and writers) and reducing CER market value
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Difficulties Using CDM to Finance LA Wind Plants
• Other CDM projects that have conceptual integrity do not use wind
• CDM NOX reduction projects reduce carbon emissions but do not use wind
• CER are created over time as CDM wind electricity is generated
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Difficulties Using CDM to Finance LA Wind Plants
• Writer of PV of a CER revenue stream must have sufficient capital to cover any shortage of CER caused by the usual problems (lack of wind, gearbox failures, cracked blades, etc) at a LA CDM wind plant
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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EU ETS Conclusions that apply to Financing LA CDM Wind Plants
• By itself, EU ETS only one driver in lowering the cost spread between EU fossil and wind electricity
• Specific EU Protocol actions against global warming more significant drivers
• Wind feed-in-tariffs in Germany, Spain, etc., very effective in financing EU wind plants
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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EU ETS Conclusions that apply to Financing LA CDM Wind Plants
• World’s first wind feed-in-tariff was in California USA under the first Governor Jerry Brown
• EU transmission and siting regulations supported by EU Green Parties have allowed EU ETS wind to develop
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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LA Government Policies to Help CDM Wind During “Kyoto-II”
• LA feed-in-tariffs
• Regulations that require wind access to the LA grids
• Smart grids that store wind in hydro
• Kyoto-II starts to list certain LA countries in Annex B
• Additionality principal more clearly defined
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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More LAU-Indiana Dunes USA US ladybug wishes you good luck!
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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Download Lecture Points Handout
• My website: www.michaelstavy.com
• User Name: Mexico2008
• Password: Jalisco1531
• Must use capital M & J
LAWEA 2008 Michael Stavy, Consulting Energy Economist
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My Contact Information
• www.michaelstavy.com
• 312-832-1631
• 432 N Clark ST STE 204, Chicago, IL 60654 USA
06 Nov 08