climate finance and voluntary carbon markets

Executive Climate Change and

Carbon Trading Workshop

Africa Carbon Exchange

Climate Finance and Voluntary

Carbon Markets

Presentation

1. Introduction to Viability Africa

2. Climate Finance Mechanisms

3. Project Components for Success

4. Venture Components for Success

5. Accessing Finance through Voluntary Carbon Markets

6. Case Studies

Viability Africa, LLC’s overriding objective is to operate as the

leading development and financial advisory firm for clean

technology projects and ventures across East Africa. Viability Africa

will support investments that exhibit economic, technical,

environmental, and social viability and sustainability. The growth of

our team will focus on the recruitment and development of East

Africans seeking to become the future business and political leaders

of their country and region. Our Founders have committed to

reinvesting a significant portion of the company’s earnings to ensure

the company will have long-term sustainability and impact, and to

solidify Viability Africa as a resource available to the market for

years to come as the clean technology sector grows in relevance

and impact across East Africa.

Our Vision

Viability Africa, LLC

Carbon Energy Environment

• Asset Development• Transaction Management• Asset Monitoring

• Feasibility Studies• Project Financing• Financial Advisory• Project Management

• Environmental and Social Impact Assessments

• Environment Audits

Founded in 2009, Viability Africa has headquarters in Nairobi, Kenya with near term expansion plans to establish offices in Dar esSalaam, Tanzania. Our current portfolio crosses a number of countries in sub-Saharan Africa and includes a diverse range of innovative technologies and solutions.

Presentation

1. Introduction to Viability Africa

2. Climate Finance Mechanisms

3. Project Components for Success

4. Venture Components for Success

5. Accessing Finance through Voluntary Carbon Markets

6. Case Studies

Climate Finance Mechanisms

1. Carbon Markets

2. Focused Equity Funds

3. NAMAs

4. Direct Grants

5. Other

Carbon Markets

• Regulatory Markets – Clean Development Mechanism

• Price Volatility• Registration Risk• General Viability

• Voluntary Markets– Gold Standard

• Premium Pricing• Sustainable Impact Monitoring and Measurement

– Verified Carbon Standard• Popular Mechanism• Lower Price Point

– Others

Carbon Markets

• Commonalities

– Challenging and costly registration process

– Intense data monitoring requirements

– Requirements for external parties (Consultants, Auditors, Brokers, etc)

– Uncertainty

Carbon Markets

• Transaction Structure

– Difficult to get creative with today’s pricing, but traditionally:

• Fixed Forward

• Floor + Floating Percentage

• Pure Floating

• Floor + Floating Percentage with Cap

• Forward Payments (Rare)

– Costs Covered

Carbon Markets

• Sub-Saharan Africa Premium

– Few projects

– Sustainable impact

– Least Development Countries (LDCs)

– Innovative Solutions for Rural Populations

• Market Drivers

– Demand Participants

– Supply Constraints/Regulations

Regional Distribution

Climate Finance Mechanisms

1. Carbon Markets

2. Focused Equity Funds

3. NAMAs

4. Direct Grants

5. Other

Focused Equity Funds

• Impact Equity Investors– Social Metrics– Environmental Metrics– Financial Returns

• Additional Focus– Renewable Energy– Clean Technology– Climate Innovation

• Most investors are cautious to base investments on returns from carbon markets, so underlying investment must provide viable returns and sustainability

Focused Equity Funds

• InReturn East Africa Climate Venture Fund

– $10-20 million in size

– Focus on early stage investments in promising climate friendly projects and ventures

– Average initial investment size $200,000

– Average investment size $1,000,000

– Experienced team in investing locally and in clean technology space

Climate Finance Mechanisms

1. Carbon Markets

2. Focused Equity Funds

3. NAMAs

4. Direct Grants

5. Other

NAMAs (Nationally Appropriated Mitigation Actions)

• Set up policies and actions a country takes to reduce or eliminate GHG emissions

• Acknowledges that all countries will be impacted in different ways by climate change, but that all will be impacted

• Emphasizes need for developed countries to provide financing to developing countries

• Priority on economic and social development and focus on eradicating poverty

• Responsibilities and capabilities differ by country• As of September 2012, 50 countries had submitted NAMA

based applications/proposals to the UNFCCC– Varied greatly

NAMAs versus regular CDM

NAMAs versus regular CDM (continued)

NAMAs (Nationally Appropriated Mitigation Actions)

• Fears

– Impact on Carbon Markets

– Government Control

• In developing world, can government be trusted to channel the financing most efficiently and effectively?

• Opportunities

– Increase in climate related financing

– Specific measures with outcomes, targeted focus

Climate Finance Mechanisms

1. Carbon Markets

2. Focused Equity Funds

3. NAMAs

4. Direct Grants

5. Other

Grants

• Number of programs, large and small– USTDA (United States Trade Development

Agency)

– AECF (Africa Enterprise Challenge Fund)

• Typical Characteristics of Grant Programs– “Free” money, so many bidders/applicants

– Timely process for review

• Are subsidies sustainable?– For the right projects

Climate Finance Mechanisms

1. Carbon Markets

2. Focused Equity Funds

3. NAMAs

4. Direct Grants

5. Other

Other Climate Finance Mechanisms

• High Net Worth Individual Donations

• Foundation Support

• Direct Corporate Support

• Intergovernmental Financing

• Micro-finance Climate Programs

• Crowd Funding

• New Mechanisms on the Rise

Presentation

1. Introduction to Viability Africa

2. Climate Finance Mechanisms

3. Project Components for Success

4. Venture Components for Success

5. Accessing Finance through Voluntary Carbon Markets

6. Case Studies

Clean Technology Project Finance in sub-Saharan Africa

• Fundamentals• Project Company

• High leverage (60-80%)

• Debt service dependent on future cash flows, not necessarily assets

• Non-recourse Financing

• Main security in project contracts

• Investors• Equity

• Lender

• Developer

Project Finance Characteristics

• Special purpose vehicle (SPV), “ring fenced” project

• Finite life

• Often formed in later stages of development and assets are transferred (not recommended if can be avoided)

• Appealing as it keeps financing exposure limited to the project

• Traditional for infrastructure projects such as power plants, toll roads, etc but also can be applied to agriculture projects and innovative distribution programs (financing against fixed service or product delivery contracts)

Project Documents

• Traditional Required Documentation• Feasibility Study

• EPC Contract

• Off-take (PPA)

• Land Agreements

• Environmental Requirements (EIA, Licenses, Water Permit, etc)

• Input Supply (Biomass Project)

• Operations and Maintenance Contract

• Government Support Agreement

Project Example

• 5 MW Hydro Project Documents• EIA Approved• Feasibility Study• EPC Draft• ERPA Signed• PPA Executed

• However…

• Timeline• “Delays” that should have been anticipated• Trust your partners (lender, adviser, sponsor)• Government Negotiations

Lessons from Project Finance Transaction in sub-Saharan Africa

• Bring a lender into conversations on PPA and other project documents (EPC) before execution

• Ensure land is acquired/rights secured early

• Do not underestimate importance of EIA

• Be prepared to review and revise almost every document to meet satisfaction of financiers

• Accept that as a developer with limited funding you will have to give up majority ownership

• Do not get greedy!

Project Finance: Recommendations

• As a Developer

– Make a “checklist” and be realistic in what you will need to develop a project and what you will ultimately receive when it is fully financed

• Many developers spend all of their money, fall short of getting the project to a “bankable” state, and ultimately make nothing

• As a Lender/Investor– Diligence, diligence, diligence…

• Land, PPA, EPC, Developer Capabilities, Developer Attitude

Presentation

1. Introduction to Viability Africa

2. Climate Finance Mechanisms

3. Project Components for Success

4. Venture Components for Success

5. Accessing Finance through Voluntary Carbon Markets

6. Case Studies

Small and Medium Size Businesses in sub-Saharan Africa

• Investment Criteria

o Quality of Management Team

o Business Case

o Growth Potential

o Unique Competitive Advantages

o Exit Potential

Small and Medium Size Businesses in sub-Saharan Africa

• Barriers to Access to Finance

o Unclear Vision/Strategy

o Lack of Competitive Advantage

o Incomplete Business Plan and Model

o Unprofessional

o Recommend Consultant

o Proof of Concept

Small and Medium Size Businesses in sub-Saharan Africa

• Funding Options

o High Net Worth Individual/Angel Investor

o Venture Capital

o Private Equity/Growth

o Debt

• Groupso InReturn Capital

o GroFin

o Invested Development

o Many options emerging in the market…

Small and Medium Size Businesses in sub-Saharan Africa

• Negotiation Tips

o Seek a “Fair” Deal for both Parties

o Accept Help

o Consultants and Investors

o Weigh Options

o Give Yourself Time

o The more in a rush you are, the more you will either agree to terms that are not in your favor or scare away the investor

o Be Prepared from the Start

Presentation

1. Introduction to Viability Africa

2. Climate Finance Mechanisms

3. Project Components for Success

4. Venture Components for Success

5. Accessing Finance through Voluntary Carbon Markets

6. Case Studies

Accessing Financing Through Voluntary Carbon Markets• Markets/Standards

o Verified Carbon Standardo Gold Standardo American Carbon Registryo Climate Action Reserve

• Sub-Saharan Africa Popular Project Typeso Efficient Cook Stoveo Water Purificationo Solar Lightingo Rural Household Biogaso Clean Energy Generationo Forestationo Industrial Energy Efficiency

Accessing Financing Through Voluntary Carbon Markets• Process

o Identify Project

o Identify Methodology/Standard

o Local Stakeholders Consultation

o Project Design Documentation

o Validation Audit

o Registration

o Monitoring/Evaluation

o Verification

*Transaction can be structured at almost any stage beyond identification, but typically the later the stage the lower the discount on the price.

Structuring a Transaction

• Create Marketing Material

o Project Idea Note

o Project Presentation

o The more the buyer can connect to the local community impact, the stronger the sales pitch

o Background of Implementers

o Including a credible carbon asset developer and strong operational plan

Structuring a Transaction

• Know What You Have, What You Want, and What You Needo Understand the strong sell points of your project

o Analyze what pricing structure is ideal

o Forward sale

o Price and years

o Prepayment

o Total amount and time to “repay” in credits

o At Issuance

o Higher risk, potentially higher price

o How much funding does the project need, and when does it need it?

Structuring a Transaction

• Identify Buyers/Brokerso Although market pricing difficult, still many buyers interested in

certain types of projects in sub-Saharan Africao Identify as many market players as possible

o Likely best to utilize your carbon asset development consultant for this activity

o Careful not to alienate the marketo Some projects are over-shopped and lose value/appealo Compete based on terms and counterparty risk, but do

not go back and forth too mucho Buyers vary by pricing structures

o Not all voluntary buyers have the same business model and risk appetite

Structuring a Transaction

• Voluntary Emission Reductions Purchase Agreement (VERPA) Negotiationo Terms

o Price and Periods

o Penalties for non-Delivery

o Milestones

o When agreeing to meet certain milestones at specific dates, be very cautious and remember that the carbon asset development process is very bureaucratic

o Delivery details are often missed, which exposes the seller to potential penalties

o What happens if the buyer goes out of business?

Structuring a Prepayment Transaction

• What will the prepayment be used for?o Carbon Asset Development Costs

o Implementation Costs

o Monitoring Costs

• When will the prepayment come?o Registration

o Project Milestones

o First Issuance

• What happens if the project never moves forward?o Repayment

o Penalties

Additional Thoughts: Monitoring and Verification• Risk in Monitoring

o Lack of Data

o Higher On-the-Ground Costs

o Lack of Usage

• Risk in Verificationo Costs

o Time

o Quality of Monitoring

• Risk at Issuanceo Time

o Fees

Presentation

1. Introduction to Viability Africa

2. Climate Finance Mechanisms

3. Project Components for Success

4. Venture Components for Success

5. Accessing Finance through Voluntary Carbon Markets

6. Case Studies

Voluntary Carbon Case Study: Safe Water Team Kenya

• GS 1124• Implementation of 2,000 water filters in rural households in Siaya and

Bondo (Nyanza, Kenya). One year rollout implementation timeline, goal to establish the area as a distribution hub for future projects.

• Project Registered• Prepayment Model

o First payment at Registrationo Project Milestones o Carbon and Implementation Costs

• Scalable Modelo Three Micro-Scale PoA (Central America, East Africa, West Africa)

• Took Time to Developo 10 Months Registrationo 6 Months Transaction

Voluntary Carbon Case Study: AquaClara

• GS 1068

o Entrepreneur based model with tens of thousands of biosand filters set to be installed. AquaClara manages the supply chain to ensure the entrepreneurs have access to a sustainable source of input requirements as well as marketing and education resources. Focus is in Rift Valley area but targeting numerous communities in Kenya.

• Large Scale Project

• In Validation

• Transaction Closed (Forward Agreement)

o Fixed Pricing, Upside Potential

o Forward Sale Structure

Voluntary Carbon Case Studies: Lessons Learned• Transparent Relationship

o Developer – Buyero Consultant – Developero Consultant – Buyer

• Realistic Expectationso Timelines always seem to be overaggressiveo Costs are difficult to anticipateo Maintain Conservative Approach

o Tonnageo Costs

• Communication

Questions?

Kyle Denning

Managing Director

Viability Africa, LLC

www.ViabilityAfrica.com

Kyle.Denning@ViabilityAfrica.com