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Carbon: Risk Management

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Title: Carbon: Risk Management


1
Carbon Risk Management Financial Instruments
  • Carbon as a Commodity Corporate Impacts
  • Conference - London - January 2003

Gareth Hughes Marsh Marine Energy
2
Risk Management Axiom
  • Not managing risk can be the greatest risk of
    all.

--Enron Risk Management Manual, 2001
3
Financial Opinions
  • Climate Change is a Major Emerging Risk
    Management Challenge for Financial Institutions
  • Dresdner Bank
  • March 2002

4
Climate Change- Its Real, Its Here, It will
have MAJOR Financial Impacts
  • Points to Consider
  • In a carbon-constrained future, climate change
    becomes a financial issue- John Fitzpatrick,
    CFO, Swiss Re
  • Climate change will lead to a resurgence in
    infectious disease unseen since the 19th
    century- Paul Epstein, HMS
  • World-wide economic losses due to natural
    disasters appear to be doubling every ten years,
    have reached 1trillion over the past 15
    years. - Munich Re (3/2002)
  • US electric utilities could have to spend 2 -
    65 of their market cap on carbon mitigation-
    Innovest

5
Global Temperature the Past 20,000 Years, the
Next 100 Years
IPCC (2001) forecast 2-3oC, with band of
uncertainty

Black Death
Holocene Optimum
21st century very rapid rise ??
Medieval Warm
1940
Little Ice Age in Europe (15th-18th centuries)
-2
-3
-4
Younger Dryas
-5
10,000
2,000
1,000
300
100
Now
100
20,000
Number of years before present (quasi-log scale)
6
Question is Not IF Temperature Will Increase,
But HOW MUCH...
7
Costs of Extreme Weather Events
8
Extreme Weather Events by Region 1991-2001
9
Why this is important?
  • Climate change is a reality
  • Climate change is increasingly being accepted as
    (critically) important to corporate profitability
  • OPEC, World Petroleum Congress, World Economic
    Forum, World Energy Council
  • Government Policy and Regulation
  • Kyoto Protocol
  • UK, Germany, Netherlands, Denmark, Australia
  • Commercial demand
  • Institutional shareholder activism / Litigation
  • Chicago Climate Exchange
  • But.Not just driven by extreme weather events

10
Why Should Markets Care?
  • Carbon efficiency is usually related to energy
    efficiency
  • Energy costs directly affect bottom lines of most
    operating companies, but also entire industries
    such as utilities, autos, oil gas,
    petrochemicals
  • Climate Change will affect both underwriting
    losses and equity returns for insurers
  • There will be winners and losers within
    industries, as well across sectors

11
How Do You Find Winners Losers?
  • Handling Climate Change Risk is no different than
    managing other business risks
  • Thus, the winners will be the companies with
    superior management that can handle change
    successfully
  • The investment world is starting to realize that
    a companys environmental/social performance is
    an indicator of overall management quality, and
    thus measuring that performance has value to
    investors
  • This has led to a number of performance rating
    systems being developed and used by investors

12
CDP Concerns
We want to better understand possible material
impacts on investment value driven by climate
change related - Taxation and
regulation - Technology innovations - Shifts
in consumer sentiment
13
What are Investors starting to focus on ?
  • Regional Impacts Adaptation Capacity
  • Regional Mitigation Policies
  • Industrial Sector Impacts
  • Corporate Strategy and Capability
  • Company Impacts and Abatement Costs
  • Company Risk Management Expertise
  • Upside Opportunities

14
Climate Risk creates Business Challenges and
Opportunity
  • via EARNINGS AND CASH FLOW
  • via COST OF CAPITAL

Insurance Conditions
Debt financing
Credit Risk Ratings
Discount Rates
  • via INVESTMENT AND CORPORATE STRATEGY
  • via STOCK MARKET/BRAND PERCEPTIONS

15
At Different Investment Levels.
  • At Project Level
  • At Company Level
  • At Sector Level

16
5 Forces Analysis showing the implications of a
carbon constrained economy on market dynamics

THREAT OF NEW ENTRANTS Regulatory barriers
Competences Stranded Assets
RIVALRY Cost of Capital Competitive advantage
BARGAINING POWER OF CUSTOMERS Social
Responsibility
BARGAINING POWER OF SUPPLIER Abatement
technology
THREAT OF SUBSTITUTES Low carbon intensive
alternatives
17
Financial threats by delaying activity
  • Supply chain implications, a late reaction to a
    trend is more expensive than an early one
  • Demand for products
  • Lose out on early external abatement opportunities

18
Financial Implications
  • Innovest EcoValue21TM found exposure on 25 U.S.
    SP 500 electric utilities as measured as a
    percentage of market capitalisation ranges from
    2 to 65
  • Potential EPS impact on 25 U.S. SP 500 electric
    utilities varies from 32 cents to 14 per share
  • Climate change issues have already negatively
    affected the valuation of coal-based electric
    utilities..Scotia Capital Equity Research,
    January 2000

19
Value at Risk From Climate Change
Results of recent benchmarking exercise in the US
energy sector...
Source Value At Risk, CERES/Innovest, 2002
20
A Changing World for Corporate Decision Makers
Company Image Brand Value
Directors Officers Liability/Management
Responsibility
Balance Sheet Management
Erosion of Public Trust
Legislation and Regulation
Environmental Disclosures
Shareholder Value
Market Demands
21
The Purpose of Research/Ratings
Uncovering Hidden Value in Companies
22
What does this mean ?
  • Strategy
  • Business Processes
  • Investment
  • Risk
  • Brand

23
One Possible SolutionMore Integrated Corporate
Risk Management
Legacy Management
Operations Management
Strategic Management
  • Risk Identification Liability Quantification
  • Asset Recovery
  • Claims Resolution
  • Natural Resource Damage Assessments
  • Risk Finance/Transfer
  • Environmental Audits
  • Third-Party Evaluation
  • Environmental Management Systems
  • Training
  • Regulatory Advice
  • Risk Finance/Transfer
  • Sustainability Reporting
  • Enhancement of Shareholder Value
  • MA Strategy/Diligence
  • Business Systems and Strategy Integration
  • Risk Finance/Transfer

24
Transforming Clients Strategic Vision into
Appropriate Action
  • Analysis of strategic options
  • Identifying core competence's
  • Assessment of resources available
  • Strategic Change Management
  • Business Processes

25
Integrated Carbon Management
  • Identify Analyse Carbon Exposure
  • comprehensive enterprise wide risk identification
    analysis.and risk management
  • carbon profile modelling
  • company
  • industry
  • global

26
Carbon Risk Profiling
  • The objective in reviewing the process for
    development of the Groups business strategy
    regarding climate change is
  • to maximise return on asset investments and
    projects by considering threats and opportunities
    arising out of climate change policies and
    developing best practice responses.

27
Objectives
  • Improved awareness and understanding of the high
    priority risks associated with the Climate Change
    Policies
  • Enhanced decision making through a comprehensive
    understanding of the risks faced by wide range of
    stakeholders.
  • Improved opportunities for developing appropriate
    solutions to manage critical risks.
  • Development of a common risk language and
    perspective to allow consistent collaboration
    across interdependent stakeholder groups.
  • Improve awareness of the opportunities for energy
    management, renewable energy and emissions
    trading
  • At the participant level, opportunities to
    support and / or influence the development of
    future policy responses to energy management and
    Climate Change on a local, regional and global
    basis

28
Workshop Process
  • A Climate Change Workshop will assist
    participants to-
  • Identify through the workshop process, what the
    key risks are facing stakeholders
  • Identify which assets present the greatest risk
    or opportunity
  • Define materiality of negative consequences of
    risks
  • Quantify and prioritise all key material risk
    exposures to stakeholders
  • Uncover differing perceptions of risk
  • Identify both positive negative risk
    correlations
  • Facilitate an effective decision making process
    to enable the development of control measures and
    risk management solutions for selected high
    priority/impact risks.

29
Workshop Deliverables
  • Tangible output from the process is typically a
    written summary report. Including
  • Benchmarking Industry Data developed for the
    Workshop
  • Comparative analysis of how the risks differ for
    Climate Change Policies in different Host
    Countries and potential linkage
  • A summary of the key risks perceived by
    participants to be the most material (greatest
    financial impact and likelihood)
  • Transparent prioritisation and evaluation of
    material risks
  • Quantification of these, in terms of a risk
    likelihood and impact assessment for each
    material risk exposure
  • Analyses of potential control measures / risk
    management responses and recommendations on
    appropriate risk management strategies
  • High-level strategic planning recommendations
    and preparatory data for future workshops

30
Integrated Carbon Management Benefits
  • Deliver Implement Integrated Strategic Carbon
    Solutions
  • emissions reduction options (internal/external
    abatement, trade, invest)
  • operational consulting e.g. project
    selection/appraisal
  • auction strategy
  • deal facilitation / realisation
  • investment in renewable generation
  • active involvement in policy and
    multi-stakeholder discussions
  • research and development
  • improved energy efficiency and operating costs

31
Other Benefits
  • Enhanced Shareholder Values Appreciation
  • Intellectual Property
  • Knowledge Management
  • Influence Policy Process
  • Better Recruitment / Retention of Staff

32
Why should an organisation participate ?
  • Best Case
  • Enterprise positions itself as a leader in its
    space and as a consequence influences the policy
    direction, both globally and in key markets,
    secures relative competitive advantage and
    derives new sources of value for its shareholders
  • Worst Case
  • Enterprise is reactive, is driven by regulation
    (rather than driving it), is unprepared for
    change and loses its competitive position in key
    markets

33
What Are The Opportunities
  • Emissions Trading
  • Emission Reduction Projects
  • JI
  • CDM
  • Carbon Funds
  • Renewable Energy
  • Hedge against compliance risks
  • Revenue opportunity from existing / planned
    activities
  • But there are risks..

34
Corporate Responses to Emissions Trading Programs
  • Recent NERA Survey of Corporate Responses to
    Emission Trading
  • Context how companies can take advantage of GHG
    trading
  • Key Results
  • Emissions trading changes the firms evaluation
    of emissions from its facilities
  • Changes from compliance view to market view

35
Corporate Responses to Emissions Trading Programs
  • Business decisions under market view for
    facilities with caps
  • What are options for internal reductions?
    (Marginal costs)
  • Should I be a buyer or a seller? (price, initial
    allocation)
  • What are trading options? (markets, project-based
    credits)
  • Uncertainties affect many elements of these
    decisions, creating additional risk management
    considerations
  • e.g., price volatility for allowances, products.

36
Key Conclusions Regarding JI/CDM and Company Risk
Management
  • Business experiences with previous emissions
    trading programs provide good indications of how
    companies will evaluate GHG emissions trading
    alternatives, including JI/CDM projects
  • Emissions trading leads to a shift in business
    view of its emissions from a compliance view to
    a market view
  • This market view includes the need to consider
    various market risks and thus develop a risk
    management policy
  • JI/CDM projects will be attractive as part of an
    overall GHG risk management portfolio if they
    provide a homogenous product with minimal
    transactions costs

37
Business Strategies Under Two Basic Responses
Under emissions trading, a facility would receive
a GHG allocation (that is, the right to emit a
certain amount of GHG emissions) 1. Compliance
view control GHG emissions so that emissions are
equal to that allocation
2. Market view control GHG emissions so that the
facilitys marginal cost equals the GHG market
price
38
Advantages of Market Response
Company can gain from participating in the
emissions trading market.
  • If seller gains money from sales
  • If buyer gains money from purchases (relative
    to reducing all itself)

39
Three Basic Factors Determine the Best Market
Strategy
  • 1. Marginal Cost Schedule (or Curve) for
    Reducing GHG Emissions

2. Initial Allocation
3. GHG Allowance Market Price
40
First Factor Marginal Cost
/Ton
C
30
B
20
A
10
80
70
75
CO2 Emissions
41
Second Factor Allocation
/Ton
Step 2 Allocation
CO2 Emissions
42
Third Factor Allowance Price
/Ton
Step 2 Allocation
Step 3 Allowance Price
CO2 Emissions
43
These Three Factors Determine Whether the Firm is
Buyer or Seller
  • Firm will buy allowances if
  • Marginal costs are high
  • Allocation is low
  • Market price is low
  • Firm will sell allowances if
  • Marginal costs are low
  • Allocation is high
  • Market price is high

44
Illustration Non-Market Response Control to
Allocation of 80 tons
/Ton
A1
P 30
Control Costs
80
CO2 Emissions
45
Market Response Gain from More Control and Sale
of Allowances
/Ton
A1 Seller
P 30
Net Gain From Sales
Additional Control Costs
Control Costs
70
80
Sell 10 Allowances
CO2 Emissions
46
Illustration Non-Market Response Control to
Allocation of 60 tons
/Ton
A2
P 30
Control Costs
60
CO2 Emissions
47
Market Response Gain from Less Control and
Purchase of Allowances
/Ton
A2 Buyer
Net Gain From Purchase
P 30
Permit Payments
Control Costs
60
70
CO2 Emissions
Buy 10 Allowances
48
Risk Management Issues Add to the Complexity of
Market View
  • Many risks complicate determination of the best
    market response
  • Financial risks created by volatility of fuel
    input (e.g., natural gas), product (e.g.,
    electricity) and GHG allowance prices
  • Additional risks related to value of
    co-benefits (NOx, SOx),
  • These risks affect the evaluation of market
    alternatives (e.g., /ton CO2 for
    repowering--coal to gas CC--can vary by a factor
    of three)
  • Risk management procedures can be applied to GHG
    markets
  • Identifying and assessing
  • Quantifying/modeling (e.g., Monte Carlo)
  • Hedging/insurance/financial products

49
CDM Projects Provide Another GHG Market
Alternative
  • CDM and JI credits add to GHG market alternatives
  • Credits for emission reductions
  • Key difference need for pre-certification
  • Risk management concerns suggest key attributes
    for successful CDM/JI projects
  • Homogeneous product
  • Low transactions costs

50
Reasons for Optimism Regarding CDM Credits
  • Successful experience with key baseline
    determination in other programs
  • World Bank Prototype Carbon Fund (PCF) and other
    efforts
  • Create portfolios and develop experience
  • Possible rating procedures for GHG credits
  • Create homogeneous products and reduce
    transactions costs

51
Conclusions and Implications for CDM Projects
  • Corporate demands for CDM credits will be
    incorporated into a general analysis of how to
    gain from emissions trading
  • Previous experience provides a guide to the key
    factors that affect Corporate decisions on GHG
    trading
  • Initial allowance (how determined)
  • Marginal cost curve for internal GHG reduction
    options
  • Prices for GHG allowances
  • Prices for certified CDM credits

52
Conclusions and Implications for CDM Projects
(cont.)
  • Uncertainties in all of these factorsincluding
    CDM/JI creditsmake risk management tools
    important
  • Risk management tools allow firms to analyze
    relevant risks and determine optimum emissions
    trading portfolios, including CDM/JI credits
  • Corporates may have demands now for CDM credits
    as part of a risk management strategy in light of
    emerging GHG regulatory programs
  • CDM/JI projects will be more valuable as elements
    of firms risk management portfolios to the
    extent that the projects
  • Develop more homogeneous products (e.g.,
    aggregation of projects, project rating
    procedures)
  • Provide lower transactions costs

53
Carbon Project Risk Management Financial
Instruments
54
Risk Management should be considered throughout
the lifetime of the project
Issue of Carbon Credits ROCs
Carbon Assessment
Carbon Transaction
Validation Registration
Verification Certification
Feasibility Assessment/ Financing
Project Implementation / Commissioning
Construction / Erection
Permit Delivery
Project Design
Potential Risk Existence
Credit Risk
Permit Quantity Risk
Verification Risk
Counterparty Risk
Technology / Efficacy Risk
Business Interruption
Natural Peril
Permit Price Volatility Risk
Political Risk
Carbon Related Project Cycle
Conventional Project Cycle
It should be noted that many of the above risks
may exist individually or in
combination throughout the project cycle
55
The Risk Transfer Challenge
56
Existing Insurance Solutions
  • Property Damage and Business Interruption (BI)
  • Contractors all risks and Advanced Loss of
    Profits (ALOP)
  • Efficacy or Performance guarantees for technology
    failure / machinery breakdown
  • Environmental Impairment Liabilities
  • Credit
  • Political
  • All can be extended to include GHG related
    activities and revenues but singly do not provide
    protection against the non delivery or shortfall
    of permits

57
Adjusting Risk And Insurance To A Changing World
?
New Risks
Extend Claim Triggers (?Definitions?)
Conventional Insurance CAR, ALOP BI, PD
Extend Mitigation (but match the loss?)
Existing Risks
New Consequences
Existing Consequences
58
Characteristics of Demand
  • GHG Emissions Reductions Projects are currently
    typically
  • Small (relatively)
  • Marginal returns
  • Innovative
  • technology
  • companies
  • Forward sales
  • Limited bankability for Carbon Credits
  • Host Country location

59
The Supply-side Barriers to Risk Transfer
  • Structural problems with the insurance market
  • Types of Risk
  • Efficacy / Technology Risk
  • Credit Risk
  • Political Risk
  • Insurers understanding of the GHG markets
  • Market conditions

60
The needs to be met
  • The risks associated with ER projects are wide
    and vary in complexity
  • Monetising GHG returns improves economic
    viability of projects
  • Reduce the Permit price risk discount -
    particularly for forward streams of permits
  • Insurance products / markets currently limited in
    ability to respond to the risks associated with
    ER projects
  • Allow JI / CDM investors to diversify away any
    specific risk

- Permit Delivery Guarantee
61
Emission Permit Delivery Guarantee
TRADE Immediate Settlement (10/tCO2e)
Potential Forward Transaction
Carbon Transaction
Validation registration
Carbon Assessment
Issue of Carbon Credits ROCs
Project implementation/ Commissioning
Feasibility Assessment /Financing
Construction/ Erection
Surplus Credits
Verification certification
Permit Delivery Guarantee
Emission Reduction Project
Credit / Counterparty Risk
Political Risks
Hazard Risk
Added value 8 t/CO2e
Delivery uncertainty Discounted carbon price
2tCO2e
Permit delivery / volume uncertainty
Business Interruption
Audit error omission
Technology / Efficacy Risk
Permit Price Risk
Insurance Wrap
It should be noted that many of the above risks
may exist throughout the project cycle.
For a trade of nominal value 10 /tCO2e
62
PDG Enhanced Trade
Phase 4 - GHG Trade Offer
Phase 3 -Insurance Wrap
INSURER (80 Delivery Guarantee
Enhanced Permits (Primary insurance)
Co-insurance
Insurance wrapping
Phase 2 - Portfolio Development
10 buffer zone
Project Portfolio
Potential forward transaction
Phase 1 - Project Selection and Risk Management
Issue of Carbon Credits ROCs
Carbon Assessment
Carbon Transaction
Validation Registration
Verification Certification
Feasibility Assessment/Financing
Project Implementation/ Commissioning
Construction /Erection

Project Design
Permit Delivery
63
The Structure Of The PDG
  • Maximising the number of projects
  • Essential to pooling of risk is that the
    insurance pool encompasses a large number of
    independent and identically distributed events
    that may cause a random loss
  • Bundling of risks will offset those less
    attractive risks with more palatable risks
  • Portfolio diversification
  • Type of Kyoto mechanism
  • Abatement technology (renewable, energy
    efficiency, fuel switch etc.)
  • Type of GHGs
  • Country
  • Self insurance and co-insurance
  • Bundling of buyers and seller will reduce
    transaction costs
  • Data quality

64
The Benefits
  • Guarantee to the buyer / financier that
    contracted permits will be delivered
  • Delivery risk transfer to insurance market
  • Enhanced access to, and reduced cost of capital
  • Opportunities to access additional capital to
    finance growth potential
  • Premium / added value to permit selling price
  • Enhanced marketability ( price comparability,
    transparency)
  • Accelerated implementation of project through
    improved economic feasibility
  • Reduced transaction costs

65
Developer Benefits of credit enhancement include
  • Reduced development time and costs
  • Reduced debt-service cost
  • Use of longer-term debt
  • Higher yields
  • Access to more and larger sources of capital
  • Increased leverage opportunity
  • Facilitation of Off-Balance-Sheet financing
  • Conservation of corporate capital (through
    improved debt/equity ratios)

66
General Market Benefits
  • More projects in-the-money
  • Facilitate project investment
  • Increased market liquidity
  • Increased market efficiency

67
Users Of The PDG
  • Wide range of buyers and markets that could be
    potentially interested to take out PDG coverage.
  • Institutional Multilateral e.g. World Bank PCF,
    IFC, Asian Development Bank
  • Public Sector Unilateral e.g. Dutch ERUPT
    programme
  • Private Sector
  • Bilateral transactions
  • Kyoto / non Kyoto markets (UK ETS, CCX)
  • Renewable energy markets (RECs, ROCs, Green
    Certificates)

68
OUTLINE CONCEPTMARKET RISK PROTECTION FOR A UK
WIND PARK PROJECT DEVELOPMENT
  • A facility (Structured Risk Finance Product)
    arranged for the purposes of protecting the debt
    finance structure of the project against 'Market
    Risk' which could prevent the servicing of the
    debt as scheduled.
  • The facility will have two components 'a Market
    Risk Surplus Reserve and a Market Risk
    Subordinated Loan'.

69
OUTLINE CONCEPT - MARKET RISK PROTECTION FOR A
UK WIND PARK PROJECT DEVELOPMENT
  • Market Risk Surplus Reserve (MRSR) - a percentage
    of the (quarterly, biannual or annual tbd) excess
    surplus after payment of the scheduled debt will
    be paid to RFCo and held specifically as the
    first layer for payment of any triggered losses.
  • Market Risk Subordinated Loan (MRSL) - is a
    subordinated loan (maximum amount tbd) with terms
    arranged at inception and which can be drawn
    after exhaustion of the MRSR by the same
    triggered loss.
  • Drawdown from either the MRSR or MRSL will only
    be made in line with the Scheduled Debt Service
    Insufficiency (a formula will be provided once
    the terms of the senior debt are known).
  • Interest to be paid on the MRSR and charged on
    the MRSL rates (to be determined)

70
OUTLINE CONCEPT -MARKET RISK PROTECTION FOR A UK
WIND PARK PROJECT DEVELOPMENT
  • A Commitment Fee will be charged in relation to
    the amount of MRSL and a management fee will be
    charged on the MRSR.
  • Term of the total facility is to be discussed
    once senior financing terms are known.
  • The balance of the MRSR plus accrued interest
    will be paid back at the end of the facility
    term.
  • The MRSL will have a defined maturity date if
    triggered.
  • Prepayment of the MRSL can be made without
    penalty.
  • Collateral for the MRSL will be in the form of a
    second lien/charge.

71
OUTLINE CONCEPT - MARKET RISK PROTECTION FOR A
UK WIND PARK PROJECT DEVELOPMENT
  • Market Risk covers Power Pricing
    Regulatory/Political Risk
  • Credit/Default Risk by Off-taker can be included
    as defined event
  • In that there is an obligation to repay any
    amounts that would be drawn down the product is
    really more of a Financial 'Risk' Product rather
    than an insurance product.
  • However in that the RiskFinCo would be taking
    ultimate default risk on the insured arising out
    of covered 'event' there should is sufficient
    risk in this that it should satisfy contract for
    insurance purposes.
  • Liability strands which would include technical
    performance risks can be wrapped around the core
    product which if structured properly would
    support 'contract for insurance' treatment to
    enable tax relief for the 'premium' and also
    capital growth tax deferral until a claim or
    profit commission event.

72
JI Project Credit Delivery Guarantee Example
  • Company owns and operates a number of thermal
    power stations in CE Europe.
  • Proposed Project to integrate modern gas turbine
    generators into the existing thermal cycle of the
    power station, both generating additional 'clean'
    electricity and improving the overall efficiency
    of the power station. Total project cost c55m,
    additional capacity 65MWe.
  • Through JI, the company wishes to sell the
    overall carbon savings generated by the project
    to the Dutch government through its ERU-PT
    scheme, and intend to offer the project to the
    Dutch in the current tender round (closes January
    30th 2003).
  • Initial estimates are that the project will
    generate 1,500,000 ERU's between 2008-2012. At
    approx price of 5/tonne 7,500,000 funding
    through JI.

73
JI Project Credit Delivery Guarantee Example
  • Risk Profile focused on the contractual risks
    related to non-delivery of ERU's during the
    period 2008-2012.
  • Risk of non-delivery is directly related to
    operating risk - if the plant runs it delivers
    ERU's, but nevertheless, the possible exposure
    could be significant as the Dutch are requesting
    a penalty of 5 times the offer price for non
    delivery.
  • For this type of power risk using known
    technology with well defined financial limits
    terms can be secured for a 'traditional' risk
    transfer solution on the basis of covering the
    non delivery penalty to the Dutch based upon
    failure to deliver due to "normal property,
    mechanical breakdown or technology non
    performance risks" .

74
JI Project Credit Delivery Guarantee Example
  • This would be structured with the option either
    to pay the penalty or deliver equivalent
    acceptable reduction certificates.
  • The aim would be to have the trigger at the end
    of the compliance period when a final
    certification of the amount of real reduction
    achieved can be calculated.
  • Pre-Kyoto ratification coverage for non delivery
    due to political and financial credit risks, if
    required, it will be more difficult to arrange
    and it would have to be on a structured risk
    finance basis i.e. largely 'funded' out of free
    cash-flow and or secured by some other means.

75
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