Financing Energy Optimization Projects


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Presentation by Bikash Pandey, Deputy Chief of Party – USAID and the Director Clean Energy and Environment, Winrock International providing consultancy to Worldbank at a forum organized by Avanceon titled Financing Energy Optimization Projects with guaranteed IRR

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Financing Energy Optimization Projects

  1. 1. Avanceon Carbon Finance PoA Project Forum on Financing Energy Optimization Projects with Guaranteed IRR Bikash Pandey [email_address] Karachi, May 25, 2010
  2. 2. The Kyoto Protocol <ul><li>Entered into force 16 February 2005 </li></ul><ul><li>Developed countries must reduce carbon emissions by 5.2% from 1990 levels by 2008 – 2012 (1 st Commitment Period; 2 nd & 3 rd periods to follow). </li></ul><ul><li>A number of flexible mechanisms were agreed to: </li></ul><ul><ul><li>International Emissions Trading </li></ul></ul><ul><ul><li>Joint Implementation (JI) </li></ul></ul><ul><ul><li>Clean Development Mechanism (CDM) </li></ul></ul>
  3. 3. Clean Development Mechanism <ul><li>Dual objectives </li></ul><ul><ul><li>lower the overall cost of reducing GHG emissions </li></ul></ul><ul><ul><li>while also supporting sustainable development initiatives within developing countries. </li></ul></ul>
  4. 4. What does the CDM aim to achieve? <ul><li>A transfer of finances and contribution to sustainable development in the Host Country </li></ul><ul><li>Flow of Finances </li></ul>Annex I Country Host Country (Pakistan) Flow of Credits Industrialized Country with high abatement cost Developing Country with low abatement cost
  5. 5. What does it mean for projects? Project Conventional Output Conventional Revenue Environmental Benefits Revenue from CERs
  6. 6. What Makes an Attractive CDM project? <ul><li>Project which reduces GHG emissions into the atmosphere below the baseline situation, e.g. </li></ul><ul><ul><li>Energy efficiency measures that reduce energy use e.g. Industrial energy management, efficient lamps, waste heat recovery, improved insulation in boilers; </li></ul></ul><ul><ul><li>Renewable energy projects – wind, solar, hydro (reduce emissions in generation mix or replace diesel/kerosene off-grid); </li></ul></ul><ul><ul><li>Capture methane from landfills, or compost organic waste and reduce methane production; </li></ul></ul><ul><ul><li>Reforest or afforest barren areas to sequester carbon. </li></ul></ul>
  7. 7. Baseline 2002 2012 time Emission reduction Project Emissions Baseline (emissions without project) ton CO 2 e emission per year
  8. 8. Monitoring <ul><li>Clear Monitoring and Verification Plan is needed to record and verify annual emission reductions from project interventions. e.g. </li></ul><ul><li>Record of fuel use before and after, </li></ul><ul><li>Meter readings at wind or hydro plant, </li></ul><ul><li>Sample surveys of households showing, usage of CFLs and numbers of hours used, </li></ul><ul><li>Total land reforested and maintaining forest. </li></ul>
  9. 9. What Makes an Attractive CDM project? <ul><li>Project must be additional! </li></ul><ul><li>The project would not go ahead without the additional carbon revenue </li></ul><ul><li>CDM is not designed to reward all projects which reduce GHG emissions – only those which would not be implemented without carbon revenue . </li></ul><ul><li>CDM is designed to make feasible those low-carbon projects which are currently not the norm in the particular market and which are not attracting adequate investment. </li></ul>
  10. 10. Additional Value From ‘Clean’ Projects Implemented without CERs Not Additional With CERs not implemented Not implemented without CERs; Implemented with CERs CDM CER income
  11. 11. CDM Project Approval <ul><li>Project Proponent develops PDD and asks Host Country for Approval of CDM project </li></ul><ul><li>Project Proponent submits Project Design Document to Validator (Operating Entity) </li></ul><ul><li>(In case of New Baseline methodology: Validator submits Baseline Methodology to Methodology Panel of the CDM Executive Board ) </li></ul><ul><li>Validator evaluates Project Design Document and submits it for approval to CDM Executive Board </li></ul><ul><li>CDM Executive Board registers project activity as a CDM project </li></ul>
  12. 12. Project Cycle - timeline Initial Project Concept Project Implementation Feasibility Assessment - is project eligible as CDM? Final Project Design - full Project Design Document Validation, Registration, Approval Realisation of emission reductions Actual Payment for CERs – $$$ Carbon Contract Verification and certification
  13. 13. What Makes an Attractive CDM project? <ul><li>Project must be large enough to make it worth the transaction costs, </li></ul><ul><ul><li>At least 50,000 ERs per year, </li></ul></ul><ul><li>Upfront costs can range from $50K to </li></ul><ul><li>> $150K to prepare the PDD, Validate, and Register a project. </li></ul>
  14. 14. Registered CDM Projects & Pipeline (as of 1 March, 2010) CDM Statistics Annual Average CERs* Expected CERs until end of 2012** CDM project pipeline: > 4200 of which: N/A > 2,900,000,000 --- 2065 are registered 387,906,742 1,730,000,000 --- 46 are requesting registration 11,030,796 > 30,000,000 * Assumption: All activities deliver simultaneously their expected annual average emission reductions ** Assumption: No renewal of crediting periods
  15. 15. CDM Project activities globally
  16. 16. Registered Project Activities by Sector (as of Mar 1, 2010)
  17. 17. Approved Methodologies by Scope (150)    
  18. 18. High Potential Areas <ul><li>Industrial Energy efficiency and energy substitution: </li></ul><ul><ul><li>Brick manufacturing, vehicle transport, oil & gas, textile industry, fertilizer, cement, oil & steel, glass. </li></ul></ul><ul><li>Power Sector & Renewable energy: </li></ul><ul><ul><li>Hydropower, wind, biomass cogeneration, T&D Losses, domestic and municipal EE, combined cycle power plants, solar PV. </li></ul></ul><ul><li>Solid waste management and methane capture: </li></ul><ul><ul><li>Land-fill methane capture, composting, wastewater treatment, biogas. </li></ul></ul><ul><li>Fertilizers and other chemical industries; </li></ul><ul><ul><li>Catalytic N2O Abatement, nitric acid, waste heat recovery. </li></ul></ul><ul><li>Land use, agriculture and forestry. </li></ul><ul><ul><li>Afforestation/reforestation. </li></ul></ul>
  19. 19. Promising Energy Efficient Options for Industry <ul><li>Energy management </li></ul><ul><li>Waste Heat Recovery </li></ul><ul><li>Improved Boiler Efficiency </li></ul><ul><li>Fuel Substitution </li></ul><ul><li>Process Changes </li></ul>
  20. 20. Industry wise Total Abatement Potentials Abatement Sectors Potential for CO2 Abatement (Million Tons/ year) Brick Manufacturing 10.0 Transportation 8.8 Oil and Gas Sector 6.53 Textile Industry 5.62 Fertilizer Industry 5.03 Cement Industry 4.71 Iron and Steel Industry 1.78 Glass Industry 0.88 Inorganic Chemicals 0.3
  21. 21. PoA <ul><li>Programmatic CDM is designed to overcome many of the shortcomings of the project approach - </li></ul><ul><li>CDM Program of Activities: </li></ul><ul><li>a coordinated effort on the part of a private or public entity to implement a GHG reducing policy or measure via an unlimited number of emission reduction project activities that are dispersed over a geographic region and implemented over a period of time. </li></ul>
  22. 22. PoA: Intent of pCDM <ul><li>Broaden the scope of CDM to include: </li></ul><ul><li>Mitigation activities that are geographically and temporally dispersed (e.g. RE/EE in industries, homes and buildings, individual and family transport, CFLs) </li></ul>
  23. 23. CPA= Several measures Several sites Multiplicity of activities to reduce GHG . The sites could be located within one or more city, region, or country, as long as each involved country submits a Letter of Approval (LoA). The GHG-reducing activities do not necessarily occur at the same time. A program can have a duration of up to twenty-eight years. Managing entity. The program is coordinated or managed by one entity, which can be private or public. CPAs. A program is implemented via an unlimited number of CPA’s. All CPA’s must apply one approved baseline and monitoring methodology. PoA CPA CPA CPA
  24. 24. Avanceon PoA <ul><li>Title of the Small-scale PoA: Energy Optimization Solutions for Industries in Pakistan and UAE – Program of Activities </li></ul><ul><li>Technologies being used: iWater, iBoiler, iDC and any additional future proprietary products. </li></ul><ul><li>Geographic coverage: Multi-country: Pakistan & UAE </li></ul><ul><li>Small-scale: CPAs have to stay within the energy saving limits dictated by the small scale methodology (60 GWhe or 180 GWhth) </li></ul><ul><li>Methodology: AMS II.D. “ Energy efficiency and fuel switching measures for industrial facilities ”, version 12. </li></ul><ul><li>Crediting Period: 7 years, twice renewable </li></ul>
  25. 25. Additionality <ul><li>Carbon revenue required for Avanceon to: </li></ul><ul><ul><li>be profitable (investment barrier), </li></ul></ul><ul><ul><li>be able to offer to its clients “guaranteed savings” – Avanceon must fund everything upfront while the client incurs no cost, </li></ul></ul><ul><ul><li>Overcome ‘common practice’ barrier which stands in way of industries adopting energy efficiency measures. </li></ul></ul>
  26. 26. Energy Optimization Solutions for Industries in Pakistan – CPA-1 Six projects have been included in Avanceon’s first CPA (CDM for Program of Activities) for year 2010 / 2011
  27. 27. USAID Energy Efficiency and Capacity Project Develop an Energy Services Industry in Pakistan <ul><li>Private sector led DSM/EE has proven effective & sustainable </li></ul><ul><ul><li>Best Practice: USA, China, Thailand, Vietnam </li></ul></ul><ul><li>Creating an energy services industry means creating buyers and sellers: </li></ul><ul><ul><li>Build capacity to provide energy audits & projects </li></ul></ul><ul><ul><li>Create demand for these services </li></ul></ul><ul><li>Target: Select and build capacity of 10 Energy Services Companies, including 3 women-owned or operated </li></ul><ul><li>First set of training carried out in May 2010 in Lahore and Islamabad. </li></ul>
  28. 28. ESCO Models Low service/risk High service/risk <ul><li>Full service ESCOs designs, implements, verifies and gets paid from actual energy saved (aka “Shared Savings”) </li></ul><ul><li>Energy supply contracting , takes over equipment O&M and sells output at fixed unit price (aka “Chauffage”, “Outsourcing”, “Contract Energy Management”) </li></ul><ul><li>ESCOs w/third party financing , designs/implements project, and guarantees minimum level of savings (aka “Guaranteed Savings”) </li></ul><ul><li>ESCO w/variable term contract , act as full service ESCO, but contract term varies based on actual savings (aka “First Out Contract”) </li></ul><ul><li>Supplier credit , equipment vendor designs, implements and commissions project and is paid lump-sum or over time based on estimated savings </li></ul><ul><li>Equipment leasing , similar to supplier credit except payments are generally fixed (based on est. energy savings) </li></ul><ul><li>Consultant w/performance-based payments , agent assists client to design/ implement project and receives payments based on project performance (fixed payment w/penalties or bonuses) </li></ul><ul><li>Consultant w/fixed payments , where consultant helps the client design and implement the project, offers advice and receives a fixed lump-sum fee </li></ul>Source: World Bank 2005
  29. 29. <ul><li>Thank You </li></ul>