ecosecurities group ltd. 2002 confidential carbon finance and oil and gas context paul soffe –...
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
Carbon Finance and Oil and Gas Context
Paul Soffe – Senior Adviser
Africa Oil and Gas Conference April 2004
NOT AN OFFICIAL UNCTAD RECORD
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
1) What is the opportunity?
The owners of sustainable assets in energy, natural resources, and environmental technology have the potential to develop, capture and sell rights to thepositive environmental performance they engender.
The monetization of these environmental benefits isa rapidly growing business opportunity.
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
$$$ conventional
revenue stream
Clean energy or forestryinvestment
Carbon credits
1) Opportunity: An additional value from “clean” sector projects
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
Types of qualifying projects in the energy sector
Modification/ replacement of existing plant, equipment, infrastructure practice or process
E.g., fuel switching, energy efficiency, methane capture
“Retrofits”
Construction of new power plants to meet a growing demand for power
“Greenfield”
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
All things equal, carbon trading would enhance competitiveness of clean energy technologies
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
Country Project Type% IRR w/o
% IRR w/cer's
IRR Increase [% points]
% IRR Increase
Romania District heating 10.5 11.4 0.9 9Costa Rica Wind 9.7 10.6 0.9 9J amaica Wind 17.0 18.0 1.0 6Morocco Wind 12.7 14.0 1.3 10Chile Hydro 9.2 10.4 1.2 13Costa Rica Hydro 7.1 9.7 2.6 37Guyana Bagasse 7.2 7.7 0.5 7Nicaragua Bagasse 14.6 18.2 3.6 25Brazil Biomass 8.3 13.5 5.2 63Latvia Methane 11.4 18.8 7.4 65India Methane 13.8 18.7 4.9 36Source: World Bank, J uly 2001
1) Opportunity: Monetizing carbon credits can increase project IRR’s
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
A Fugitive Methane Project Example
BLUE Indicates Extra Debt Capacity
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
1) Opportunity: Leverage investment in ‘clean’ sectors
Project Equity
Carbon
Debt “Carbon capital”
could leverage a much larger amount of investment in the real assets
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
3) The carbon market: What is it and where is it ?
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
3) Market: CO2 market and environmental regulation (to 1998 only)
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
Pre-Unced Pre-CoP 1 AIJ PP Pre-Kyoto Post-Kyoto
Ave
rag
e in
ves
tme
nt
co
mm
itte
d y
ea
rly
(US
$ m
)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
Ave
rag
e p
ric
e o
f c
arb
on
(U
S$
/to
n C
)Investment committed
Price of carbon
Forestry projects, to 1998 only. Source: Moura Costa & Stuart 1998
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
Carbon market volumes (Source: Point Carbon: Global Market Outlook, 2003)
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
The greenhouse gas emissions trading market is expected to grow from $300 mm today to $15 billion annually by 2012
Estimated size of the market for GHG emissions trading
Carbon Transactions
0
5,000
10,000
15,000
20,000
25,000
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
US
$ m
illio
ns
Transaction Fees
Other Services
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Secondary markets and liquidity
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
Kyoto compliant • World Bank Prototype Carbon Fund (PCF) and BCF• Dutch Government ERUPT and CERUPT Programme: JI & CDM• Dutch government IFC and PCF funds• Obligated companies under the UK ET Scheme, & under EU ET
programme (2005) and other trading schemes• Private sector companies in Europe, Japan and Canada
Non- Kyoto compliant • US schemes, states and cities (Seattle, Oregon, Massachusetts, Chicago)
and federal levels• Canada – BC Hydro• Australia
3) Markets: Existing Buyers
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
Kyoto compliant • PCF – U$ 2.5 to 3.5 / t CO2 • ERUPT first round: € 5.00 to € 9.00• ERUPT 2 and CERUPT: expected max € 4.00• Private sector investors: U$ 3 to U$ 4
Non- Kyoto compliant • U$ 0.50 to U$ 2.00
EU trading system: • € 13-15 / t CO2 estimated
3) Markets: Current price range
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
4) Rules for participation : How does it work, and what are the requirements
-Additionality
-Host country approval
-Sustainable development benefits
-Project cycle
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
4) Rules: Additionality and Baseline G
HG
em
issi
ons
Time
Project commissioned
“With project” emission level
“Without project” emission level Carbon
credits
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
4) Rules: CDM project cycle
Pre-investment phaseProject design:Baseline reportPDD
Project validation / host country approval
Project registration
Monitoring
Verification
Issue of CER
Implementation
Certification
Investment & Operation
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
5) Sectors and Project Types under the CDMEnergy Supply Side - Renewables, Technological Upgrades, Biomass, Fuel Switching
Energy Demand Side - End Use Efficiency
Fugitive Methane Emissions Control - Landfill Gas, Coal Mine Methane, Water Treatment, Anaerobic digestion Agriculture Wastes
Sinks - Forestry, Land Use Change, CO2 Scrubbing, Long Term Sequestration
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
Oil & Gas Options
1. Energy Efficiency E.g., – BP & Shell have used carbon trading as driver to improve energy efficiency (oil & gas processing and delivery)
E.g., Rang Dong, oil production, gas flaring Why? Saves money, makes money, makes sense. 2. Clean Technologies – Renewables E.g., – Petroleum Company of Jamaica – wind project E.g., - Fiji Electricity Authority – building wind, hydro, geothermal plants Why? Increasing cost of oil, security of supply, national interest, environmental concern, carbon finance
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
The Economics of waste to energy projects are especially attractive
Wind farm project:
20 MW installed capacity
50,000 t CO2 ER’s p.a.(10 years)
Project costs: US$20m (+)
Carbon value:
@ $3/ t CO2 = $1.72m
@ $5/ t CO2 = $2.87m
Proportion of project costs:
@ $3/ t CO2 = 8.6%
@ $5/ t CO2 = 14.35%
Waste to energy project:
2 MW installed capacity
>50,000 t CO2 ER’s p.a.(10 years)
Project costs: US$3.5m
Carbon value:
@$3 /t CO2 = $1.72m
@$5 /t CO2 = $2.87m
Proportion of project costs:
@ $3/ t CO2 = 49.1%
@ $5/ t CO2 = 82.0%
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
NovaGerar Landfill gas-to-energy Project – Brasil
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
Jamaican Wind Project
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
Olkaria geothermal project in Kenya
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
Pipeline: Transactional Services
Project Country Type CO2e(t/yr) Status
Okaria 3 Kenya Geothermal 75,000 LOI with World BankFelda Malaysia Biomass 50,000 in negotiationPhilBio Philippines Anaerobic Dig. 150,000 In negotiationLicorcia Nicaragua Anaerobic Dig. 100,000Patagonical Argentina Landfill 500,000AT Biopower Thailand Biomass 200,000 LOI with IFCV&M Brazil Biomass 1,000,000 ERPA with IFCEEN El Salvador Biomass 30,000SWI Thailand Anaerobic Dig. 250,000 In negotiationNobracel Brazil Biomass 100,000 Buyer term sheet signed.Unidos Brazil Forestry 100,000NovaGerar Brazil Landfill 300,000 ERPA agreed with
World Bankt
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
In summary:
Flexibility mechanisms have the potential to provide a substantial boost to clean energy sector
The market for ERs will be in the U$ billions, leveraging even more in other forms of capital
There is the potential for a large number of good projects to be developed
Need for policy certainty
Need to support entrepreneurial early movers
Need to support small scale projects
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
For further information, please contact:
[email protected] 01862 297489www.ecosecurities.com
EcoSecurities Group Ltd.
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
Paul Soffe at EcoSecurities
5 years employment since leaving EcoSecurities Difficult market & risky – how risky – Russian ratification or EU Burden sharing
agreement Activities – policy analysis & development, project development & structuring. Particular
interest in transaction side of the business: Recent Activities
EcoSecurities & Standard Bank London Carbon Fund for European Government
Spoke last week in Moscow at Carbon Forum – Illarionov!
Finalising Jamaica CDM Wind Project – Executive Board and buyer.
Capacity building – guidelines for a bank, workshops in ACP countries
Fiji hydro project CDM development
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EcoSecurities Group Ltd. 2002 CONFIDENTIAL
A Wind Project Example
BLUE Indicates Extra Debt Capacity