UNIDO VietnamSupport for CDM projects in the Industrial

sector: Pilot Project in Co-operation with the Austrian Industry

Training Sessions on the Kyoto CDM

The CDM Project Cycle with Practical examples of International CDM Projects &

Lessons for Vietnam Mike Bess

Hanoi, Vietnam26th and 27th June 2006

© ESD 2006

Summary• Normal Project Cycle• What is different between a ‘normal project cycle’

and a ‘CDM project cycle’?• Key steps needed for Vietnam CDM project cycle• Key steps needed for Vietnam CDM projects in

UNFCCC and in current & future CDM carbon market

• Lessons learned from other CDM projects relevant to Vietnam

• Roles of Industry, Government, NGO and International Institutions & Partnerships for Vietnam CDM

© ESD 2006

CDM Project Cycle• CDM project cycle incorporates all elements of

‘normal’ project cycle• But, there are several additional elements that increase

preparation &, if successful, increase returns, namely:– Develop baseline to establish ‘additionality’ &

emission reduction credit eligibility– Develop a monitoring & verification plan for the

crediting– Validate the baseline & monitoring plan (called the

PDD)– Register the validated project with the UNFCCC

CDM Executive Board– Verify project’s emission reductions year in, year out

© ESD 2006

CDM Project Cycle

© ESD 2006

Normal project cycle

Undefined transaction costs

• Government eligibility criteria (DNA)• Government capacity and investor capacity

Defined transaction costs

• PDDs•Baselines• MPs

• Validation (DOE)• Verification (DOE)

Percentage of total project cost?

Project Approval Process

© ESD 2006

PDD

CER Placement & Term

Sheet

2 Months

Validation

Host Government Approval

Registration

2 Months1-2 Months

M&V

ERPA

Documents

Investor Government Approval

Project Design

Best timescale!

Annual ?

Additional Finance from Carbon under CDM

• ‘Carbon assets’ are increasingly viewed as additional project revenue stream

• The number of CDM projects is growing fast, from almost none 2 years ago to dozens approved & hundreds in the pipeline today

• Emission Reduction Purchase Agreements (ERPAs), like Power Purchase Agreements (PPAs), are increasingly viewed as ‘collateral’, security by financiers

• Carbon assets are increasingly seen as a means to hedge project risk

• CERs are becoming known as source of project security, increased revenue, &, in some instances, source of institutional finance

© ESD 2006

Additional Finance from Carbon under CDM (cont)• Financial markets have responded very quickly & in full

to new carbon market opportunities• Concern even one year ago was that institutional (e.g.,

national government, World Bank) finance would ‘crowd out’ private finance

• This has not happened – private carbon finance is plentiful

BUT….• Major problem is lack of good projects – not a demand

side issue, but a supply side issue• Those who can develop good projects, good carbon

assets are in great position• It is now, & will remain for some time,

a sellers’ market© ESD 2006

Additional Requirements for Developing & Using Carbon Finance

© ESD 2006

Carbon finance requires the following steps:

• Identify your project as a CDM project as soon as possible

• Present your project as CDM to the local Designated National Authority (DNA)

• Get ‘buy-in’ from local community & national authorities

• Develop a project concept on CDM as soon as possible

Additional Requirements for Developing Carbon Finance (cont)

© ESD 2006

• Get ‘Letter of Approval’ (LOA) from your DNA as soon as possible

• Structure carbon revenues as key element of the project

• Develop the PDD (baseline & monitoring plan)• Get the project ‘validated’ by Designated

Operational Entity (DOE)• Register it with the UNFCCC Executive Board

Risks and Implications of JI & CDM for Project Finance

© ESD 2006

JI & CDM projects have ‘normal’ project risks, i.e. typical, standard costs and risks associated with investments in emerging / developing economies: Technical

• Financial • Geographic • Political • Other

So - STANDARD and ESSENTIAL in such projects to apply rigorous due diligence...

Risks and Implications of JI & CDM for Project Finance (cont)

© ESD 2006

Most risks associated with JI/CDM risks have diminished significantly

• Kyoto Protocol ratified & in force• UNFCCC Executive Board has registered many projects &

approved many methodologies => considerable body of ‘precedent’ has grown in past two years

• Validators have much more experience, costs & risks of validation have decreased

• Still some risk with government approval in some countries, but this is diminishing

JI & CDM are becoming ‘mainstream’ project finance elements

Case Study 1: CDMEast African Sugar Waste Energy

• Existing sugar factory is doubling cane production & processing capacity

• Potential exists to invest in new combined heat & power (CHP) unit

• Sufficient waste (bagasse) to sell 10MW into grid & provide factory with all electricity & heat

• Electricity sales to grid will displace 80 000 tonnes CO2 per year

• Great CDM project candidate• Carbon credits will provide additional revenues

of €600 000 to €700 000 per year for 10 years• Will improve project’s profitability by over 20%

© ESD 2006

Case Study 2: JIPolish Pulp & Paper Waste Energy

• Large pulp & paper mill currently using coal for process heat only

• Produces over 200 000 tonnes of wood waste every year

• Wood waste generates methane (CH4), over 20 times more potent than CO2

• Potential exists to invest in new combined heat & power (CHP) unit

• Sufficient waste to sell 20MW into grid & provide factory with all electricity & heat

• Electricity sales to grid will displace 150 000 tonnes CO2 per year

© ESD 2006

Case Study 2: JIPolish Pulp (cont)

• Use of waste will reduce 100 000 tonnes CO2 equivalent per year

• Combined methane reduction & grid CO2 displacement gives 250 000 tonnes CO2 equiv

• Great JI project candidate• Carbon credits will provide additional revenues

of €1.5 million per year for 5 years (2008 – 2012)

• Investment payback in less than two years• Does not jeopardise company’s EU ETS

position or obligations

© ESD 2006

Case Study 3: CDMChina Wind Energy

• Project to install 30MW of new wind turbines• Project in deep rural area• Project has good sustainable development

potential• Project is ‘additional’ & supports China’s

renewable energy strategy• Electricity sales to grid will displace 100 000

tonnes CO2 per year (wind for coal)• Great CDM project candidate• Carbon credits will provide additional

revenues of €700 000 to €850 000 per year for 10 years

• Will improve project’s IRR by several points

© ESD 2006

Case Study 4: JIBulgaria Landfill Gas

● Project to install 10MW electricity from methane (CH4) capture

● Carbon finance will provide cash to improve landfill waste management

● Use of methane for electricity will reduce CH4 greenhouse gas emissions equivalent to 100 000 tonnes of CO2 per year

● Electricity sales to grid will displace 50 000 tonnes CO2 per year (wind for coal)

● Combined CO2 equivalent displacement = 150 000 tonnes per year

● Great JI project candidate● Carbon credits will provide additional revenues

of €1 million per year for 5 years (2008-2012)● Will payback investment in less than 2 years

© ESD 2006

Conclusions

• Carbon finance has become ‘mainstream’• Carbon finance is a great way to add new revenue

streams to clean energy investments• Carbon finance should be an integral part of decision to

invest in any potential renewable, energy efficiency or CHP project

• No lack of carbon finance sources• Biggest ‘gap’ is lack of good projects• If you have a good project, let us help you valorise the

carbon asset & help you realise good carbon finance streams

© ESD 2006

Thank you!

Mike BessDirector, International Division

Energy for Sustainable Development Ltd.

+44 1225 816 808mike@esd.co.uk www.esd.co.uk

© ESD 2006