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Combining Project Finance with Trading
ERU’s?
Eric Boonman
Head of Environmental Markets
17 July 2015
Designator | author
1
Moscow Carbon Forum | April 29 2008 | 2
Kyoto protocol
The Kyoto protocol is the
fundamental international
agreement governing the
global carbon market.
The European Union has
established the EU ETS in
response to its member
states’ Kyoto obligations and
to help its industry to prepare
for the challenges and
opportunities presented by
global response to climate
change.
Moscow Carbon Forum | April 29 2008 | 3
The EU-ETS as part of the Kyoto target
Not ONE but multiple international agreements: 1992 United Nations Framework Convention on
Climate Change, 1997 Kyoto Protocol, 1998 EU Burden Sharing Agreement, EU ETS Directive 2000,
Marrakech Accords 2001
The European Union Emissions Trading Scheme
New assets, new liabilities, new values
Two main ways to reduce emissions under the EU ETS
-
Allowance trading sets a cap on emissions and companies can either buy or sell strictly European allowances depending on their
emissions and the cost of abatement.
-
Credit origination involves generating credits by investing in individual projects in developing countries that reduce emissions under
the Kyoto Flexible Mechanisms
The EU ETS covers ±40% of EU CO2 emissions
Penalty €100 (2008 to 2012)
Stringent 2020 European reduction target of 20% have been established
and currently new global targets are being negotiated according to the Bali Roadmap.
Moscow Carbon Forum | April 29 2008 | 4
Global supply and demand outlook
Japan
BAU short
~1,500Mt
EU non ETS
>50% emissions
Canada
BAU short
~1,500Mt
?
(100)
1,000
?
(700) 1,000
CER & ERU
2,000M
???
MtCO2
+/- 1,000M
~1,400
2,400
2,300
2,200
?
2,100
2,000
1,900
OTHERS
1,800
2005 2006 2007 2008 2009 2010 2011 2012
emissions
allocations
Phase II total ~1,400Mt short
US states,
Australia, NZ,
voluntary, …
PHASE III
Moscow Carbon Forum | April 29 2008 | 5
Fortis: new products for the emerging carbon markets
Carbon Financial Services
Trading Services
Accepting returns in carbon
Including carbon value in financing
and due diligence
CDM / JI project financing
Trading on demand or to order
Index based
procurement/divestment
CER / ERU purchasing and sales
Delivery date swaps (quasi repo’s)
Administration and Trust
Managing customers carbon
accounts
Custody of other Kyoto Compliance
Units
Fund custody and administration
Investing in and
developing funds
Co-sponsorship of the European
Carbon Fund to ensure reliable
deliveries of Kyoto Compliance
Units for customers
Clearing
CDP Climate Leadership 2006 – Top 50 Global
Eliminate counter party risk and
guarantee trades
Cross commodity correlation model
Co-sponsor and guaranteed placement CP for European Carbon Fund
Initiated index based position management contracts for customers
Trading on behalf of 300 customers
Cross selling successfully with trust, custody, escrow & settlement
Moscow Carbon Forum | April 29 2008 | 6
Fortis: a pioneering role in Carbon Banking
2004
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Fortis realizes first-ever trade of European Union Emission Allowances (EUA's) using an ISDAbased contract: Carbon Deal of the Year ( Euromoney)
Fortis becomes a co-sponsor of the European Carbon Fund, investing 15 million Euros to help
emerging countries combat climate change.
December 2004: the Fortis carbon trust and custody services is launched
–
–
–
Started offering carbon clearing services
October 2005 : won best diversified financial and made Climate Change Leadership Index
December 2005: concluded first index based carbon compliance contracts with clients
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January: European Carbon Fund awarded Most Promising investment Opportunity
February: Structured and executed first ever CER call option deal
April: Concluded first complete second phase strip transaction from 2008-2012
Jun: Executed first combined trading/trust/escrow/settlement carbon transaction
July: reached the 100th customer milestone with a record 4 new customers in 1 day
August: transacted and received ownership of issued CERs for the first time
October: executed first to second phase roll
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Launch of the Fortis Carbon Neutrality Program
March: start of global 24hr carbon banking services from Amsterdam, Hong Kong and Houston
June: Be selected as the FSP for the UNDP MDG Carbon Facility for its initial pipeline of 15MT
March: Best Trader 2008 reward according to Pointcarbon
–
2005
2006
2007
Fortis, has quickly established itself as the reference for the market,
serving more than 300 clients’ needs on a daily basis
Moscow Carbon Forum | April 29 2008 | 7
CDM project cycle
CDM project identification
+ service agreement
PIN
Project Design Document
International buyer search
Validation starts
ERPA
Letter of Approval
Validation ends
Registration
Monitoring
JI two options:
Verification + Certification
Track 1 via host country
Issuance
Track 2 comparable to
cdm
CER Distribution
An emission reduction project needs to go through a
lengthy procedure before being registered at the United
Nations CDM Executive Board and eventually receiving
CERs.
Normally, 6-10 months is needed to get a project through
the process.
An independent consultancy is normally hired to provide
an in-depth analysis of the project’s emission reduction
potential, methodology, feasibility and social impact.
The expected emission reduction is detailed in the PDD
(project design document).
The standard contract of forward CER purchase
transaction is named ERPA (Emission Reduction
Purchasing Agreement).
After the validation by a Designated Operational Entity and
the approval by a Designated National Authority, the
project is submitted to the United Nations’ CDM
Executive Board for registration.
If the project gets officially registered at the UN CDM EB, it
is recognized as a CDM project. Following that,
verification & certification occurs every 1-3 years.
Upon verification, a corresponding number of CERs will be
issued by the UN CDM EB. This quantity will vary
compared to the planned quantity in the PDD.
Moscow Carbon Forum | April 29 2008 | 8
Nature of carbon finance for a typical JI project
Capital Markets
(Financial Institutions, Private Equity,
Hedge Funds...)
Equity
and/or Debt
Ownership + Dividend
and/or Principle +
Interest
Power
Purchase
Agreement
ERUs
Cash
Global Carbon
Market
Cash
By-product:
ERUs
Main product:
Electricity
Moscow Carbon Forum | April 29 2008 | 9
CDM and JI project’s risk assessment
Fortis Bank Environmental Markets has
undertaken significant research in the field
of CDM and JI project risk assessment.
Technological
Risk
A thorough understanding and assessment of
the JI project’s delivery risk will enable us
to maximize our investment return by
constructing a diverse CER and ERU
portfolio in terms of technology, stage, size
and geography.
Country
Risk
Delivery
Risk
Operational
Risk
Counterparty
Risk
Fortis Environmental Markets’ desk has
developed a highly objective and autoimproving Delivery Risk Model to screen
most CDM and JI projects.
This model combines a serie of quantitative
and qualitative metrics to help us gauge a
potential CDM and JI project’s expected
performance.
Moscow Carbon Forum | April 29 2008 | 10
Custody Agreement
The Custody agreement transfers economical and legal ownership
Custodian receives power of attorney from seller and buyer and will become focal point
The pdd CERs or ERUs are inputted into delivery risk model
Outcome will be taken as collateral within financing package
Mitigating counter party risk
To build up investor confidence a similar role for ji projects is recommended
Moscow Carbon Forum | April 29 2008 | 11
Fortis JI project selection criteria
Project size: The project should generate an expected quantity of at least 500,000 tonnes of ERUs up to
and including 2012. We accept bundled smaller scale projects. There are no upper limits to the project
size. We could consider smaller projects based on other merits such as sustainability advantages.
Technology: The project should use an approved methodology by the United Nations
GHGs: The emission reduction should be created by abating GHGs defined by the Kyoto protocol, e.g.
CO2, CH4, N2O, HFCs, PFCs and SF6
Sectors: Renewable energy, energy efficiency, methane recovery and utilization, industrial processes,
waste management and fuel switch
Start date: Projects that have already started or plan to start operation over the next 1-2 years
Purchasing period: We purchase ERUs forward 2008-2012
Moscow Carbon Forum | April 29 2008 | 12
Conclusion
To date, many of the world’s premier institutional investors have invested in CDM and JI projects. This
strong interest is mainly due to CDM and JI projects’ unique return profile and superior diversification
benefits due to its total lack of correlation with traditional securities market.
The window of opportunity for purchasing CDM credits from low hanging fruit type projects has passed but
in JI there is still low hanging fruit
The next wave of carbon reduction projects will need to account for the value of carbon abatement in their
discounted cash flow models, and in part rely on the carbon credits for repayment, especially for CDM
projects.
Due to the volatile nature of the international carbon market, significant risk discounting on the future value
of carbon credits needs to take place, but there is enough confidence in the carbon market to be able to
use carbon credits as collateral.
However, given the nature of carbon project proponents, a custody agreement governing the legal and
economic ownership and title of forward carbon streams can strongly mitigate counterparty risks, leaving
primarily technological risks.
Thank you
[email protected]
+31 653258817
17 July 2015
Designator | author
13