1. Catalyzing Clean Infrastructure Investment Veronique Bishop World Bank Workshop on Risk Management Tools in Carbon Finance November 19-20, 2003

2. Outline Investment constraints How carbon finance can help Risk sharing Combining CF with other instruments Workshop objectives & organization

3. Investment constraints Capital intensity Intermittency Poor offtaker creditworthiness Illiquidity of (many) local FIs Technology, scale Environmental externalities undervalued Green premium? Kyoto?

4. Capital intensity [Chart showing discounted cost per kWh for range of generation sources]

5. How carbon finance can help Increased cash flow boosts returns

6. Impact of Carbon Finance at $3/tCO2e – PCF Experience Technology  IRR (%) Fossil Fuel Displacement1 –2 ½ Energy Efficiency - District Heating0.9-2.0 Wind0.9-1.3 Hydro1.2-2.6 Bagasse~0.5 Gas Flare Reduction2-4 FF Displacement + Methane mitigation Biomass/Bagasse with methane kick3.6 - >5.0 Municipal Solid Waste with methane kick>5.0

7. Annual DataUgandaCosta Rica Chile off-grid grid ERs (000 t) 49 61 79-138* Net Gen.(GWh) 30 75 160 CO2 ERs/GWh1664 807 494-860 ER (USc/kWh) 0.50 0.24 * Gas vs. 0.15-0.26 coal BL Grid- vs. Off-grid Hydro ($3/tCO2e)

8. LFG Capture & Power Generation Assumptions: –6m 3 LFG/ton waste/ann –LFG = 50% methane –33% generation efficiency –10.02 kWh / tonne waste ERs (tCO 2 e): Per 1000t waste Per MWh –Flaring 41 4.06 –Power displacement 4-10 0.4-1.0 –Total 45-50 4.5-5.0 –Value at $3/tCO 2 e $135-$151 $13-$15

9. Power generation from gasification of solid waste 15 MW plant, 95 GWh/ann, $38m cost ERs from: –Power generation displacing fossil fuel (40%) –Methane capture & conversion (60%) Project IRR Equity IRR Without carbon finance14% 16% With carbon finance19% 25% Methane Abatement: India SWM

10. Impact of Carbon Finance

12. Increased cash flow boosts IRRs High quality cash flow reduces risk Impact of Carbon Finance

13. Increased cash flow boosts IRRs High quality cash flow reduces risk –OECD - sourced –$- or €- denominated –Investment grade payor  Eliminate currency convertibility or transfer risk Impact of Carbon Finance

14. Increased cash flow boosts IRRs High quality cash flow reduces risk –OECD - sourced –$- or €- denominated –Investment grade payor  Eliminate currency convertibility or transfer risk Financial engineering helps access capital markets Impact of Carbon Finance

15. Host Country Lenders Sponsor/ Project CF ERPA Financing Agr.’s Engagements re: Regulation (e.g. tariffs) Kyoto Protocol compliance Ltr. of Approval ERs Basic Deal Structure ER payment Debt service

16. Host Country Lender Sponsor/ Project PCF ERPA Financing Agr.’s Ltr. of Approval ER payment SPV ERs Permits, etc. Future Flow Structure

17. Brazil Plantar Project ER payments are used to amortize commercial loan.

18. Risk sharing in WB CF deals Project risk: assumed primarily by Seller Kyoto & Baseline risk: primarily by CF –Delivery = VERs (not CER/ERU) –JI VERs backed by AAUs –Early crediting –Switch to first track if eligible Market risk: assumed entirely by CF Country risk: shared –Letter of Approval (ERPA) –Host Country Agreement (JI)

19. Combining CF with other instruments Guarantees Subsidy funds

20. Host Country Lenders Sponsor PCF ERPA Financing Agr.’s Engagements re: Regulation (e.g. tariffs) Kyoto Protocol compliance Ltr. of Approval ER payment Project Future Flow + Guarantee SPV ERs Guaran- tor Counter-guarantee Guarantee Agr.

21. Uganda Lenders Energy Fund PCF ERPA Financing Agr.’s, Loan Host Country Agr. ER payment Project Uganda Hydro: Energy Fund SPV ERs IDA Credit Agr. Concession, Subsidy $ $ $

22. Conclusions Carbon finance can:  Improve returns, esp. non-CO2 GHGs  Provide a bankable revenue stream (like PPA)  Reduce subsidy required for renewables ERPA minimizes lenders’ “Kyoto” exposure How can we increase lending:  Improve ERPA?  Combine with risk instruments?

23. Workshop objectives Break down risks faced by clean tech projects Examine risk instruments Consider how to tailor risk instruments to CDM/JI projects Agree to move forward

24. Workshop programme Overview Case studies Risk instruments –Plenary –Breakout groups –Rapportage Next steps

25. Thank you! www.carbonfinance.org

26. Carbon Prices Source: PCF estimates, based on database assembled with Natsource,Co2e.com and PointCarbon

27. Small, risky asset High Quality ASSET QUALITY CERs VERs COMPLIANCE QUALITY No Penalty for non- delivery Penalty for non- delivery DELIVERY RISK ERs Risk allocation AAUs ERUs Price ETS ERs Contract for CERs Contract for VERs

28. What accounts for the price range? Supply & demand Compliance quality Asset quality Allocation of risks

29. 1. Supply and demand Willingness to pay: –price signals / announcements C/ERUPT tender signals penalties: UK >= £20/tCO2e; Denmark max €5/tCO2e tax benefits expectations –additional environmental/social benefits Market imperfections: –information –uncertainty esp. Russia, US –short-term supply/demand factors e.g. UK market

30. 2. Compliance quality Government allowances Eligibility: KP, ETS,“green certificates” 2008-12 ERUs/CERs Pre-2008 VERs

31. 3. Asset quality Delivery risk: –quality of carbon asset (baseline risk) –financial viability of: project entity sponsor (recourse) offtaker (strength of offtake contract or market) –construction period –contract duration Country risk

32. Pricing as a function of: –Market conditions (current and projected) –Project, sector and country risk –Volatility of projected ERs (generally related to baseline and resource risk) –Degree of overcollateralization –Whether KP has been ratified by host country –Upfront payments –Credit enhancement CF Carbon Prices

33. Country/PCF ProjectPrice/tCO2eRationaleVolume 000tCO2eValue US$m Bulgaria: Biomass 3.50JI with HCA; resource risk 500 1.75 Mexico: Inelec Hydro 3.50CDM: pooling of 4 projects; OECD count.1,857 6.5 Moldova: Soil Conservation 3.50CDM: low risk but 15 yr delivery; option 1,456+ opt =1,800 5.10 Vietnam: HCMC Landfill 3.50CDM: strong sponsor, financing2,500 8.75 Costa Rica: Rio General Hydro 3.50CDM: strong sponsor, financing1,800 6.30 Romania: Afforestation 3.60JI with HCA; low risk but 15 yr delivery 777 2.80 India: ABIL MSW 3.75CDM: strong sponsor1,500 5.63 Mexico: Fuerza Eolica Wind 3.75CDM: strong sponsor, OECD country2,000 7.50 Guatemala: El Canada Hydro 3.75CDM: strong sponsor; fin. closure2,000 7.50 South Africa: Durban MSW3.75+0.20 CDM: Low risk + social ben ’ s 3,800 15.01 Colombia: Wind3.50+0.50 CDM + social ben ’ s 800 3.20 Bulgaria: District Heating 4.00JI with HCA; ERPA with Municipality 1,000 3.50 Uganda: Small Hydro (2001) 3.00CDM; semi-fixed payments 1,300 3.90 Brazil: Seq. & Biomass 3.50CDM 1,514 5.30 Chile: Small Hydro – firm 3.50CDM 1,000 3.50 Costa Rica: Renewables 3.50CDM : umbrella; small projects 547 wind +172 hydro 1.92 +0.60 Chile: Small Hydro – option 3.50+0.75CDM 750 3.19 Latvia LFGTE (2000) 4.11+JI : Minimum guaranteed by Host Country 388-602 2.47

34. www.carbonfinance.org

35. World Bank Carbon Finance Vehicles BioCarbon Fund Netherlands CDM Facility

36. Development + Carbon = Carbon with a human face

37. BioCarbon Fund Harnessing the carbon market to sustain ecosystems and alleviate poverty

38. Reduced tillage JI Countries only 1 st Window: Kyoto-Eligible Sustainable Forest Management Afforestration/ Reforestration CDM & JI CountriesJI Countries only 2nd Window: Over the horizon” Revegetation Soil Carbon Management Landscape Management CDM Countries