CDM and project overview

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Carbon Trading opportunities for Power
sector 3rd Aug 2006

Pamposh Bhat Head, GTZ CDM - India Indo German
Energy Programme Bureau of Energy Efficiency
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Carbon Trading
Global Carbon Market- 415 - 1250 MTCO2/ yr CDM
- 150 MTCO2/ yr worth 750 - 1500 million Euro
w.r.t current prices of 5-10 Euro/t CO2 Source
Grubb 2003
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CDM Process
http//www.carbonmetrics.com/cdmprojects.html
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CDM in India

• India Signed Kyoto Protocol in December, 1997
  ratified in August, 2002
• Established DNA in December 2003
• Effective institutional framework is established
  with proactive DNA which issues Host Country
  Approval in 60 days of the project submission
• Active participation of the private sector
• India has consolidated its position among
  non-Annex-I Countries in CDM implementation

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GTZ CDM India CB activities

• Established GTZ CDM - India office in August 2003
  in collaboration with BEE
• Capacity building of project consultants other
  stakeholders
• Provided financial support to project developers
  for preparation of PDDs
• Trained upto 50 consultants to develop PDDs as
  per UNFCCC guidelines.
• Organized three Capacity Building missions for
  different sectors Cement, Pulp Paper, Iron
  Steel, Power, Petrochemical (Reliance IOC),
• Established Technical Cell in Climate Change
  Division, MoEF, Govt. of India.
• Developed and maintaining the website of Indian
  National CDM Authority along with project
  portfolio. www.envfor.nic.in/cdm
• Developing a standard Emission Reduction Sellers
  Agreement which will be made available on the
  NCDMA website www.cdmindia.com
• Provides free advisory services evaluation of
  new CDM Projects long term MoU with CMA, RIL,
  NTPC and CEA

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Contn

• MOU with Cement Manufacturing Association for
  technical cooperation upto 2008
• Help build capacity of Reliance Industries Lmt
• In-house CDM cell established resulting
• 4 Projects accorded for the host country
  approval (HCA)
• 24 Potential Projects identified, Business
  Diversification
• Management decision taken to explore CDM
  opportunities for all new future projects
• National power tariff policy guidelines for CDM
  published
• Consultants to NTPC for developing PDD
  methodology of two projects, RM and new
  supercritical Thermal power Project .
• Ministry of Power/Central Electricity Authority
  instructed PSUs to examine the CDM potential in
  all new POWER projects
• Development of national baseline for power
  sector with CEA.
• Capacity building in Rural Electrification
  Corporation, MOP to examine CDM potential in all
  future projects.Policy decision recorded.
• Linkage established between gtz cdm with KFW TA
  grant to REC.

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Indian CDM Projects- Summary

• No of DNA approved Projects -330
• No of Registered Projects -79
• No of Projects Requested for Registration-32
• Projects under Validation Stage- 200
• CERs Issued from Indian Projects -6,114,592

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CDM Statistics (as on 17th March 2006)
Projects registered 142 Of which located in
India 28
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Challenges
Issue 1 PDD Development

• Need for better quality, transparent
  comprehensive documentation of the projects for
  CDM approval
• Removal of deficiencies in the existing PDD
  development scenario to reduce the risk of
  approval processes at DOE/ EB level
• Encourage inhouse capacity building of larger
  corporates, PSUs, institutions, chamber of
  commerces, industry associations, Co-ops

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Challenges
Issue 2 Challenges to integrate CDM Business
with main business

• Requirement of in-house capacity building
  programmes
• Training and development of specialized human
  resource for CDM for reaching out to all Indian
  industry sectors
• Organizing biannual, certified CDM managers
  training programme with support of international
  assistance
• Integrating CDM into mandatory energy audits
  under the Energy Conservation Act of GoI

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Challenges
Issue 3 Project Investment Issue

• Number of Bilateral CDM projects need to be
  increased with more foreign investment for
  project funding

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Challenges
Issue 6 Imbalance in CERs Demand Supply

• To prevent opportunistic buying of cheap CERs
  from India
• More dedicated Annex I capacity building funds
  need to be allocated for creating awareness
  disseminate information about CDM opportunities
  among industry sectors
• Carbon asset financing is not attractive any more
  as cheap bait for sourcing projects, since the
  number of informed Indian CDM developers
  increases fast

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Who are the Buyers?

• EU ETS Compliance Buyers Companies obliged to
  reduce CO2 emissions under the EU Emissions
  Trading Scheme
• Private Carbon Funds Financial institutions or
  other firms purchasing CERs in order to sell to
  clients or third parties with compliance needs
  under the EU ETS or another regime.
• National carbon funds Government-backed funds
  purchasing CERs to meet national compliance
  obligations under the Kyoto Protocol.

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3 Billion (INR 17,500 crore) Committed to Buy
CERs
Source State of the Carbon Market 2005, The
World Bank, Washington, DC USA
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Who are the Sellers?

• Project developers include
• Private industrials
• Metals
• Cement
• Chemicals
• Pulp paper
• Independent / Public power producers
• Wind
• Hydro
• Biomass
• Municipalities

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Over 200 Projects Registered with the CDM
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450 Million CERs Expected from CDM Registered
Projects Until 2012
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The Role of Intermediaries

• Elaborate a sales / purchase strategy (sell / buy
  side)
• When to sell?
• At what price?
• Penalties and other conditions
• What type of buyer?
• Facilitate the transaction (sell / buy side)
• Find a suitable Buyer
• Structure the transaction
• Execute the contract
• Assist with contract implementation (sell / buy
  side)
• Regular reporting
• Operational support
• Troubleshooting

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Sales Strategy (1)
Analyze the risks associated with the project?

• 3. Counterparty risk
• Credit risk of the Seller
• Fraud / willful misconduct
• Country risk
• 4. Market risk
• Price
• Fungibility of CERs

• 1. Registration risk
• Baseline methodology
• Validation
• Host country approval
• Registration by EB
• 2. Performance risk
• Completion (construction)
• Technology
• Resource availability
• Force majeure (e.g., floods)

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Sales Strategy (2)

• Intermediaries support Sellers / Buyers in
  deciding
• When to sell / buy before or after
  registration?
• Whether to sell / buy at a fixed or floating
  price?
• What price to expect?
• How much to sell / buy everything or forward or
  some on the spot market?
• Who to sell to / buy from nature of the
  counterparty?
• What delivery guarantees should be provided /
  required?
• Whether to give / take any up-front financing?

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Historical CER prices

• Registered project w/ a firm delivery guarantee

• Registered project w/o a firm delivery guarantee

• Non-registered project with no delivery guarantee

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Implementing the ERPA

• Once the ERPA is signed, the game is not over!
  CERs still need to be delivered
• Intermediaries are often asked to support Buyer /
  Seller in faciliating contract implementation b/c
  they know both Parties
• Quarterly or biannual reports
• Project performance
• Projected emissions reductions
• Changes in credit status of the Seller / Buyer
• Opeational support
• Facilitate communication with the CDM EB and
  national authority
• Faciliate communication between Buyer / Seller
  and verifier of emissions reductions
• Troubleshooting
• Faciliate exchange of information between Buyer
  and Seller to avoid mis-understandings
• Problem solving

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Contd

• Strong demand for CERs many Buyers many
  transactions in the last 2 years
• CER prices have been increasing and are
  stabilizing between 10-15 / t CO2, depending on
  project type, counterparty, and timing of sale
• CDM transactions are complex, and require
  detailed structuring and tailoring to the
  project, Buyer and Seller needs / preferences
• Intermediaries perform a valuable function in
  bringing willing Buyers and Sellers together, and
  help to structure, execute and even implement
  contracts.

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Thank you for your attention
Pamposh Bhat (Ms.)HeadCDM-IndiaA-33, Gulmohar
ParkNew Delhi - 110049. IndiaPh
0091-11-26611021, 26528840Fax
0091-11-26537673E-mail pbhat_at_cdmindia.comWebsit
e www.cdmindia.comNCDMA www.envfor.nic.in/cdm