CDM from a legal point of view

Renewable Energy/Energy Efficiency and the CDM WorkshopJakarta, September 13 – 14, 2006

Mr. Douglas Tingey

Legal Issues

• Categories of issues• Legal issues relating to project qualification under the Clean

Development Mechanism and the trading of CERs• Legal issues relating to particular projects• Legal issues linking project participants, CDM investors and

buyers of CERs

• These “categories” overlap in complicated ways…and in more complicated ways the more complex the project structure

Clean Development Mechanism

• Legal issues relating to the Clean Development Mechanism and thetrading of CERs• Project Design - PIN/PDD (scale, baseline methodologies, additionality,

etc) – host country’s definition of sustainable development• Validation• Registration• Monitoring• Verification/Certification• Issuance and Distribution of CERs• Trading – transferring title, integration into national trading regimes• Retirement• Dispute Resolution

Projects

• Legal issues relating to projects• Project risk allocation and mitigation• Government entity, domestic or foreign investment company (FDI

Rules)• Shareholders/Joint venture agreement• Project financing• Integration with existing businesses• Operating licenses• Relationships with key third parties - Power Purchase Agreement• Tax planning

Linking Projects to the CDM

• Legal issues linking project, project participants and CDM investors and buyers of CERs• CDM drivers – compliance, CSR, commodity business• Distinction between CDM investor and Buyer of CERs• Investment contracts• Sale and Purchase contracts for CERs

Non Annex 1 Annex 1

CDMProject LFE

Buy-Sell

Invest

Buyers v. Investors

• Distinction between CDM investor and Buyer of CERs• An investor contributes value in support of the project in exchange for

value and access to CERs• Equity (joint venture or venture capitalist)• Debt financing (specialist investment fund)• Key services (CDM consultants)• Kind (Equipment/technology suppliers, land owners)• Off take contractors (e.g. state owned power monopolies)

• Project participants are offering parties that invest special access to CERs (participate in the initial issuance of CERs)

• Investors may also be Buyers (special access might mean a right of first refusal or an option to purchase project CERs or take CERs over and above their investment linked allocation)

Investors

• Investment contracts• Nature of the investment drives the type of contract• Risk and reward balance applies...higher risk investors will be

entitled to claim higher share of CERs• Distinction between project participant and CDM investor may

blur…e.g. ground floor “equity” CDM investor – we are investing because we believe in the profitability worth of the underlying business and want CERs

• We are willing to fund the project but we are not necessarily interested in becoming a shareholder

• Control and performance security• Specialized lending

• Loan and interest repayment made in kind (credits not cash)

Buyers

• Sale and Purchase contracts for CERs• Long term buy sell contracts – commodity contracts• Preliminary agreements (MOUs, letters of intent, term

sheets)• Options• Puts and calls• Right of first refusal• Spot and exchange sales...trading accounts

Due Diligence

• Due diligence• The approach is different depending on party’s

perspective• Certain underlying elements that go to project

participants governance standard and management practices are common to all

• Conditions precedent, representations and warranties and covenants (positive and restrictive)

• It is never too early to be prepared to be scrutinized…“Governance perceptions are very important”

ERPAs

• Emissions Reduction Purchase Agreement• Definitions• Sale and purchase• Price and payment• Delivery• Advance payment• Failure to deliver (replacement CERs)• Taxes (VAT and income taxes)• Force majeure• Termination (and consequences…liquidated damages?)• Dispute resolution

Aggregation PointsNon Annex 1

Annex 1 (e.g. Canada)

CDMProject

Project Participants

BuyersFund

Brokers

InvestorsFund

Buyers Fund

Brokers

InvestorsFund

LFEs

Government of Canada

Miscellaneous

• Emissions Trading• Insurance• Post 2012

Thank you.