Financing ERPAs: A Case Study of the Nova Gerar Landfill Gas Project Bruce Usher, CEO EcoSecurities Group Limited Carbon Finance Risk Mitigation Workshop Public-Private Infrastructure Advisory Facility & CDCF- Plus 19 November 2003 Paris in Oxford, New York, Los Angeles, Rio de Janeiro, Sydney, The Hague
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Financing ERPAs: A Case Study of the Nova Gerar Landfill Gas Project Bruce Usher, CEO EcoSecurities Group Limited Carbon Finance Risk Mitigation Workshop.
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Financing ERPAs: A Case Study of the Nova Gerar Landfill Gas Project
Offices in Oxford, New York, Los Angeles, Rio de Janeiro, Sydney, The Hague
Nova Gerar (“New Generation”) is a joint venture between SA Paulista and EcoSecurities
SA Paulista, a Brazilian engineering and waste management company, with the concession to manage the Marambaia and Adrianopolis landfills on the outskirts of Rio de Janeiro
• SA Paulista’s core business is in traditional heavy construction sectors such as highways, railways, airports, ports, industries and sanitation.
• SA Paulista manages the largest domestic waste transfer station in South America (Transbordo Ponte Pequena) responsible for 60% of all domestic waste from Sao Paolo
EcoSecurities, a multinational environmental finance company, specializing in greenhouse gas mitigation
• 28 employees devoted exclusively to the GHG market, currently working on 32 CDM projects
• Exclusive cooperation agreement with Standard Bank in Africa, Russia and the Middle East
What is Nova Gerar?
The objective of the Nova Gerar joint venture is to develop the landfill gas collection system on the landfills managed by SA Paulista, called Marambaia and Adrianopolis.
This involves investing in a gas collection system, leachate drainage system, and a modular electricity generation plant at each landfill site (with expected final total capacity of 12 MW), as well as a generator compound at each site.
The generators will combust the methane in the landfill gas to produce electricity for export to the grid. Excess gas, and all gas collected prior to a grid connection will be flared. Combustion and flaring combined reduce emissions of 11.8 million tons of CO2 equivalent over 21 years.
Currently, 76% of the total waste generated in Brazil is disposed in ‘rubbish dumps’ with no management, gas collection, or water treatment whatsoever.
Marambaia is a typical case, where the previous operators have deposited waste for more than 15 years without any environmental licensing or following any environmental regulations.
The remaining 24% of waste is disposed in ‘controlled’ landfills and subject to regulation by the environmental authorities. Current Brazilian legislation, though, does not require that landfills collect and dispose of landfill gases. Adrianopolis is one of the first in Brazil designed to collect and utilise all the gas generated.
Methane Production at Marambaia and Adrianopolis
Project Description
Waste production (households, industry etc)
Waste collection, sorting and transportation
Landfill
Landfill gas production
Fugitive emissions
Flaring
On site use of electricity produced on-site
Electricity generation
Electricity to grid
End use
Landfill gas collection
NovaGerar Project has Two Phases
Phase 2, refers to electricity generation in both landfills. Modular electricity generation plants will be installed in the Marambaia and Adrianopolis landfills to start producing and selling electricity in early 2005.
– Marambaia plant capacity starting with 1MW expected to produce electricity until 2010.
– Adrianopolis plant capacity, starting with 2MW will evolve towards 12 MW in 2016 by the addition of 1 MW units and is expected to produce electricity beyond 2021.
Phase 1, to be initiated in December 2003 refers to the flaring of the biogas generated in the Marambaia and Adrianopolis landfills. Flaring will generate emissions reductions of 2.5 millions tons of CO2 equivalent from 2004 to 2012.
Nova Gerar is negotiating an ERPA with the World Bank to purchase all of the emissions reductions generated by the Nova Gerar project up to 2012, and a right of first refusal for emissions reductions generated beyond that date. The World Bank is purchasing the emissions reductions as trustee for the Netherlands Clean Development Facility (NCDF), a CDM project facility.
How attractive is carbon financing in Landfill Gas projects?
Counterparty Risks – mitigate with strong deal structure and documentation• ERPA survives bankruptcy by developer (risk is low for RE projects)
• ERPA payments flow into a debt reserve account or directly to the lender
• ERPA is fixed price, hard currency contract coming from developed country buyer
Political Risks• Kyoto Protocol, Host country approval and CDM – mitigate with contingent documentation
or with VER structure (World Bank PCF)
• Hedge with third party option
Country Risk• Country risk insurance (if necessary given very low risk of impact)
Timing Risk • confirm completion of CDM approval process and ERPA documentation prior to loan
disbursement.
Gray Market Risk – not a risk, but an opportunity
Constraints
Complexity • lack of standardization under Kyoto Protocol and CDM mechanism• documentation and back office procedures
Deal Size • “Trash to cash” LFG projects are the most attractive emissions reduction projects, but are still relatively small (financing <$10 mm)
Market Structure• CDM has multiple, conflicting objectives (GHG reduction + sustainable development)• Conflicts created through participation of non-profits and multilaterals (crowding out, competitive issues)• Time pressure, or lack thereof• No incentives for early participation / creation of liquidity.
Real Opportunity
High yield / low risk investments:
• Developed country project finance type risk
• Mezzanine, developing country type returns
High value-added financial service – complex, differentiates banks, rapid growth
Requires financial institutions with both local & international expertise
Compare to derivatives market in 1980’s
Financing ERPAs: Conclusions
CDM is moving from concept to reality, creating an arbitrage opportunity for aggressive financial institutions to earn emerging market yields with developed market risks
Risks are overstated: most risks are not real and/or can be mitigated
Market constraints are understated
Financing ERPAs: A Case Study of the Nova Gerar Landfill Gas Project