Jari Vayrynen Operations Team Leader Carbon Finance Unit World Bank March 2007 World Bank ERPA Features and Risk Profile of JI Projects

World Bank ERPAs - purpose -key features

Generation of CERs & ERPA Generation of Emission Reductions Verification by an independent auditor (Independent Accredited Entity) Issuance of ERUs by the Host Country ERUs ERPA $$

Purpose of ERPA Record agreement Record agreement Identify responsibilities Identify responsibilities Establish rights Establish rights Manage risk Manage risk

Basics of World Bank ERPAs Goals: consistency, flexibility, reducing transaction costs Goals: consistency, flexibility, reducing transaction costs Two parts Two parts General Conditions - standard terms, conditions, rights/ obligationsGeneral Conditions - standard terms, conditions, rights/ obligations Negotiated agreement - purchase amount, price, payment terms, preconditions, representations and warrantiesNegotiated agreement - purchase amount, price, payment terms, preconditions, representations and warranties

WB ERPA Features Sale and Purchase agreement Sale and Purchase agreement Object is the commodity of ERsObject is the commodity of ERs Amount, Price and Delivery/Payment ScheduleAmount, Price and Delivery/Payment Schedule Defines who does what with regard to: Defines who does what with regard to: ValidationValidation RegistrationRegistration MonitoringMonitoring Verification & CertificationVerification & Certification Provisions on payment for ERs and preparation/supervision cost recovery (if any): Provisions on payment for ERs and preparation/supervision cost recovery (if any): Payment generally upon delivery, some advance payments possiblePayment generally upon delivery, some advance payments possible Recovery of cost, if any, capped and definedRecovery of cost, if any, capped and defined Events of Defaults and Remedies Events of Defaults and Remedies E.g. under delivery of ERsE.g. under delivery of ERs Other than for willful breach, no tough penalties, preferred option to amend ER delivery scheduleOther than for willful breach, no tough penalties, preferred option to amend ER delivery schedule WB ERPAs typically do not include delivery guarantee from sellerWB ERPAs typically do not include delivery guarantee from seller

Risk Profile of JI Projects - principle of risk allocation - key elements of risk - impact on pricing - some practical considerations

Risk Allocation between Buyer and Seller Risk is allocated to the party best able to bear it Risk is allocated to the party best able to bear it Three key risk categories: Three key risk categories: Underlying project risksUnderlying project risks Kyoto Protocol risksKyoto Protocol risks ERPA structuring/terms riskERPA structuring/terms risk Rules of thumb: Rules of thumb: Project risks borne by sellerProject risks borne by seller Kyoto Protocol risk primarily borne by either the seller (ERU) or buyer (VER)Kyoto Protocol risk primarily borne by either the seller (ERU) or buyer (VER) ERPA structuring/terms risk relatively less important and matter of negotiationERPA structuring/terms risk relatively less important and matter of negotiation

Kyoto Protocol Risks (1) Risk may be allocated either to seller or buyer: Risk may be allocated either to seller or buyer: VER: buyer takes Kyoto risk >> lower priceVER: buyer takes Kyoto risk >> lower price ERU: Project owner takes Kyoto (including host country compliance) risk >> higher priceERU: Project owner takes Kyoto (including host country compliance) risk >> higher price Important price determinant because if the project does not meet Kyoto requirements, it generates no asset for Kyoto compliance needs Important price determinant because if the project does not meet Kyoto requirements, it generates no asset for Kyoto compliance needs

Kyoto Protocol Risks (2) Main component is risk of project determination Main component is risk of project determination methodology, additionalitymethodology, additionality Letter of ApprovalLetter of Approval Other component ERU issuance risks Other component ERU issuance risks Risks related to proper monitoring and verificationRisks related to proper monitoring and verification Risks related to host country actually issuing and transferring the ERUs to buyerRisks related to host country actually issuing and transferring the ERUs to buyer

Project Risks Risk of the underlying project Risk of the underlying project Construction, operation, delays, licensing/permitsConstruction, operation, delays, licensing/permits Reliability and level of complexity of the technology usedReliability and level of complexity of the technology used Generally borne by Project Entity but can be limited by e.g. Generally borne by Project Entity but can be limited by e.g. conservative ER estimatesconservative ER estimates Also a very important price determinant as has direct impact on likelihood and timing of the physical ERs being generated Also a very important price determinant as has direct impact on likelihood and timing of the physical ERs being generated

Risks related to ERPA Structure (1) ERU delivery guarantees required by buyer or not: ERU delivery guarantees required by buyer or not: 3 rd important price determinant3 rd important price determinant If guarantees provided by seller, can get 10%-30% higher price but a big risk to takeIf guarantees provided by seller, can get 10%-30% higher price but a big risk to take Large variation on how delivery guarantee definedLarge variation on how delivery guarantee defined WB ERPAs typically do not include delivery guarantee from sellerWB ERPAs typically do not include delivery guarantee from seller Advance Payments: Advance Payments: Risk to buyer that the project is not completed and does not deliver the emission reductionsRisk to buyer that the project is not completed and does not deliver the emission reductions The price may be discounted to reflect this risk taken by buyerThe price may be discounted to reflect this risk taken by buyer Can be mitigated by the seller providing a guarantee for the advanced amountCan be mitigated by the seller providing a guarantee for the advanced amount

Risk Related to ERPA Structure (2) Preparation costs: Preparation costs: If buyer pays for them, may discount the price to reflect thisIf buyer pays for them, may discount the price to reflect this Structure of delivery: Structure of delivery: If buyer has rights to all/first ERUs generated, likely to pay a higher priceIf buyer has rights to all/first ERUs generated, likely to pay a higher price

Some practical considerations/lessons learned

Other practical considerations that can manage risk and expedite process (1) Prepare technical and financial (pre-)Feasibility study Prepare technical and financial (pre-)Feasibility study Ensure clear commitment from company management (and not just operational staff): Ensure clear commitment from company management (and not just operational staff): E.g. included in the business planE.g. included in the business plan Establish clear institutional set up between project owner, advisers, and technology provider/sub-contractor important Establish clear institutional set up between project owner, advisers, and technology provider/sub-contractor important Advanced stage of negotiations with equity and debt financiers is helpful Advanced stage of negotiations with equity and debt financiers is helpful Compliance with environmental regulations, including transparent stakeholder consultations Compliance with environmental regulations, including transparent stakeholder consultations

Application of an already approved CDM methodology makes a big difference: Application of an already approved CDM methodology makes a big difference: Cuts down JI preparation time and reduces risk of non- DeterminationCuts down JI preparation time and reduces risk of non- Determination Typically point source reductions or clearly defined systems are easier: Typically point source reductions or clearly defined systems are easier: e.g. landfill gas flaring, N20 catalyzer, utilization of coal mine methanee.g. landfill gas flaring, N20 catalyzer, utilization of coal mine methane e.g. wind power project displacing coal in the national gride.g. wind power project displacing coal in the national grid Dispersed or multi-component/measure projects tend to be more challenging: Dispersed or multi-component/measure projects tend to be more challenging: expect a longer preparation timeexpect a longer preparation time e.g. transportation, household level energy efficiencye.g. transportation, household level energy efficiency e.g. complicated industrial energy efficiency improvement programs or complex district heating system upgradese.g. complicated industrial energy efficiency improvement programs or complex district heating system upgrades Other practical considerations that can manage risk and expedite process (2)

Other practical considerations that can manage risk and expedite process (3) Consider your commercial strategy for ER sales carefully: Consider your commercial strategy for ER sales carefully: Sell all ERs or part of the ERs, save some for sale at the spot market?Sell all ERs or part of the ERs, save some for sale at the spot market? Sell all ERs to one buyer or to several buyers?Sell all ERs to one buyer or to several buyers? What is the delivery schedule of the ERs to the buyer(s)What is the delivery schedule of the ERs to the buyer(s) E.g. deliver all of them in the first 2 year of the project OR, for example, deliver 400,000 ERs/year over five years? E.g. deliver all of them in the first 2 year of the project OR, for example, deliver 400,000 ERs/year over five years?

Thank you