CDM: A Catalyst for Renewable Energy in Developing Countries? Lessons from Early Projects Veronique Bishop, Franck Lecocq World Bank, Carbon Finance Business & Development Economics Research Group International Energy Workshop Paris, 22-24 June 2004 The opinions expressed in this presentation are the sole responsibility of the authors. They do not necessarily represent the views of the World Bank, its executive directors or the countries they represent, nor do they necessarily represent the views of the Carbon Finance Business or the
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CDM: A Catalyst for Renewable Energy in Developing Countries? Lessons from Early Projects Veronique Bishop, Franck Lecocq World Bank, Carbon Finance Business.
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CDM: A Catalyst for Renewable
Energy in Developing Countries?Lessons from Early Projects
Veronique Bishop, Franck Lecocq
World Bank, Carbon Finance Business &
Development Economics Research Group
International Energy WorkshopParis, 22-24 June 2004
The opinions expressed in this presentation are the sole responsibility of the authors. They do not necessarily represent the views of the World Bank, its executive directors or the countries they represent, nor do they
necessarily represent the views of the Carbon Finance Business or the Participants in the funds it manages.
Motivation
• About $5,000,000,000 of investment in power generation and transmission required over next 30 years to meet electricity demand in developing countries (IEA, WEO 2003)
• To do so, private capital is needed, but private investment flows have been decreasing steadily since 1997
• Can the CDM help overcome barriers to investment in clean energy, especially renewables, in developing countries?
Outline
1. Introduction
2. The CDM: Definition and activity
3. Direct cash-flow Benefits of CDM on renewable energy projects
4. Indirect benefits of CDM contracts
5. Conclusion: Replicability of early project examples
The Clean Development Mechanism (CDM)
• Flexibility mechanism of the Kyoto Protocol.
• Project-based mechanism by which…
• an entity in Annex B can participate in the financing of a project which is located in a non-Annex B country…
• and reduces emissions compared with what would have happened otherwise…
• to get emission credits (CERs) in returns.
Can the CDM contribute to renewables penetration?
• S. Mathy, J.-C. Hourcade & C. de Gouvello (2001): the CDM can leverage development because
1. It puts a value on the global environment benefits of projects which reduce GHG emissions (direct cash-flow benefits)
2. And it provides foreign capital, which is cheaper than domestic capital (indirect benefits)
• Do early CDM experience in renewables support the MHG hypothesis?
The CDM So FarVolume traded in CDM and JI transactions, million tCO2e
(Jan-May)
Source: Lecocq F. (2004) State and Trends of the Carbon Market 2004, Washington DC
0
20
40
60
80
2000 2001 2002 2003 2004
Technology DistributionIn percent of volume purchased from Jan. 2003 to May 2004
LFG18%
Hydro11%
Wind6%
Biomass14%
HFC31%
N2O1%
Fuel Switching
4%
EnergyEfficiency
6%
LULUCF4%
Other5%
Source: Lecocq F. (2004) State and Trends of the Carbon Market 2004, Washington DC
Impact of Payment for Carbon on Projects IRRs
Technology IRR @$4/tCO2e
Hydro, Wind, Geothermal 0.5 - 2.5%
Crop / Forest Residues 5 - 7%
Municipal Solid Waste 5 - 15+%
HFC23 destruction > 100%
Sources: PCF (2003) PCF Annual Report, Washington DC, Authors’ calculation
Renewables: Carbon Revenues per Unit of Output
Fuel Displaced Generic Emissions Factor
(tCO2e/MWh)
Carbon Revenue US$/MWh at US$4/tCO2e
Gas 0.50 $2.00
Coal 0.85 $3.40
Diesel 0.75-1.50 $3.00 - $6.00
Source: PCF (2003) PCF Annual Report, Washington DC
Direct Benefits of CDM on Project Finance: Summary
• At current prices ($4/tCO2e), direct cash-flow impact of CDM is significant for projects mitigating non-CO2 gases
• For renewable energy, on the other hand, the impact is positive but small
not sufficient, in general, to make project viable
• In addition, CERs paid on delivery in most contracts (commodity model) and not upfront as postulated in MHG:
The upfront financial gap persists
Indirect Benefits of CDM
• Emission Reduction Purchase Agreements (ERPA) generate high quality cash-flow
– OECD – sourced– Investment-grade payor (usually governments or
highly rated private companies)– $- or €- denominated Exchange Rate Risk can be eliminated
• In addition, financial engineering can help tap additional upfront capital through monetization of ERPA