Centre for Energy StudiesIndian Institute of Technology
New Delhi, June 4, 2 0 0 8
Carbon finance for Solar Energy Applications
Chandra Shekhar SinhaHead for Asia, Environmental Markets
I N T E R N A L
English_General
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Outline of the Presentation
Background Culprits of climate change
International agreements to address climate change
Market mechanisms in international agreements to address climate change
Carbon Markets: carbon credits or offsets and allowances
Impact of carbon credits on projects
Carbon finance for Solar Energy Application
Annex: Carbon Finance at JP Morgan
I N T E R N A L
Flow Diagram: Global Greenhouse Gas Emissions -- the “culprits” of climate change
Source: WRI, Baumert et al, 2005
I N T E R N A L
Cumulative Investment in Energy Infrastructure, 2005 - 2030
Source: IEA, WEO, 2006
I N T E R N A L
Incremental Coal-fired Investment
While there is no silver bullet solution for climate change – there is a single bullet that can kill…. COAL
CO2 emissions from electricity, largely from increases in coal, are projected to increase by 2/3 between 2004 and 2030, rising at about 2% a year.
This increase occurs in spite of efficiency improvements in coal fired generation (from 42% in 1990, to 46% today). Efficiency is expected to reach 51% in 2030.
7785 TWh
Source: IEA, WEO, 2006
I N T E R N A L
International Agreements to Address Climate Change
United Nations Framework Convention 0n Climate Change (UNFCCC) – 1992 Ultimate objective of stabilizing global greenhouse gas concentrations in the atmosphere
Developed countries (Annex I countries) to
aim to restore GHG emissions to 1990 levels
Support capacity building in, and facilitate technology transfer to developing countries to mitigate, and to adapt to climate change
Meet as a “Conference of Parties” in the future, consider progress
The Kyoto Protocol to the UNFCCC – 1997
38 Developed Countries and Economies in Transition (Annex B countries) agreed in 1997 to:
reduce GHG emissions by 5.2 % below 1990 levels in the commitment period 2008-2012
Create market mechanism to manage the cost of GHG reductions
Status: In force since February 2005
Coming into force: required ratification of 55 Parties to UNFCCC representing 55 % of CO2 emissions
United States (36% of GHG emission) is not a Party
Marrakech Accord: agreed in Nov 2001 sets rules of implementation
Total demand created for GHG Reductions: ~2800 or 4800 Mt CO2, including US
I N T E R N A L
Carbon Finance as a Market Instrument to Address Climate Change
Two Main drivers till date
Kyoto Protocol
European Trading Systems
Increasingly relevant in the future
Japans industries (Keidanren) voluntary action plan
Regional trading systems in the United States and Australia
Voluntary offset programs in Europe and United States
I N T E R N A L
Global treatyGlobal treaty
The Kyoto Protocol—Dominant international compliance market
The KP contains the following market mechanismsInternational Emissions Trading (IET): Trading blocks of
emissions credits between emissions-capped industrialized countries at the national level
Joint Implementation: Project-based trading between annex 1 countries (developed countries)—generate Emission Reduction Unit (ERU)
Clean Development Mechanism: Project-based trading between annex 1 and non-annex 1 countries—generate Certified Emission Reduction (CER)
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TimelineTimeline
European Emission Trading Scheme Phases
2005 2006 20112007 201220102008 2009
Feb 2005
Allocation of 2005 EUA’s
Jan 2005
Launch of EU ETS
Mar 2006
Verification of 2005 EUA’s
Jan 2011
Proposed introduction of aviation into EU
ETS
Phase II Phase IIIPhase I
Allocation of year’s EUAs is in February of that year
Verification of previous year’s EUA’s is in March
Surrender of previous year’s EUAs is in April
Feb 2008
Allocation of 2008 EUA’s
April 2006
Surrender of 2005
EUA’s
Mar 2009
Verification of 2008 EUA’s
April 2009
Surrender of 2008
EUA’s
Feb 2009
Allocation of 2009 EUA’s
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Cap-and-trade proposals before senateCap-and-trade proposals before senate
U.S. Federal legislation is coming
Senate bill Scope of coverage Other details
Feinstein-Cooper, S.317,
introduced 01/17/07
Electricity sector, “downstream” regulation
Allocation is output-based for generators; auctioned amount increases with time
Kerry-Snow,
introduced 02/ 01/ 07
Economy-wide, point of regulation not specified
President determines allocation
McCain-Lieberman, S.280,
introduced 01/ 12/ 07
Economy-wide, large sources “downstream”, fuels “upstream”
EPA Administrator determines allocation
Sanders-Boxer, S.309,
introduced 01/ 15/ 07
Economy-wide, point of regulation not specified
Cap-and-trade is permitted, but not required
Bingaman, discussion draft
Economy-wide, “upstream” regulation
Allocation is specified for some sectors
Cap and trade, proposes carbon efficiency board
Lieberman-Warner S2192 most important introduced 10/ 07
Economy-wide, upstream and downstream
Allocation is specified for some sectors; auctioned amount increases with time
The next U.S. administrationThe next U.S. administration
GHG Target Auto Standard Ren. Energy CCS
Obama -80% by 2050 40 mpg by 2020; 50% improvement by 2025
25% by 2025 No ban on new coal
Clinton -80% by 2050 55 mpg by 2030 25% by 2025 All new coal w/ CCS; fund 10 demos
McCain -65% by 2050 35 mpg std. Opposed stds Support clean coal
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EmissionReduction
Specific place in host party
Specific place in host party
GH
G em
ission from coal
Fired pow
er plant
GH
G em
ission fromG
as-based power
Baseline Scenario Project Scenario
Host Party which does not have an
emission cap
Annex I Party (e.g EU country) which has an
emission cap
CER
Acquired CERs/ ERUs are added to the allowed emissions
Host Party benefits From technology and financial flows
$$
1. Kyoto creates binding greenhouse gas emission limit only for Industrialized countries and economies in transition
2. Allows a part of the emission reductions (Certified Emission Reductions) to be generated in developing (host) countries and Emission Reduction Units in countries with commitments
ERUs
ActualEmissions
Carbon Market and the Kyoto Protocol
I N T E R N A L
Market Volume Growth 2007 (World Bank assessment, May
2008)
(in MtCO2e)
Allowance Markets
Project-Based Transactions
EU Emission Trading Scheme
Chicago Climate
Exchange
New South Wales Certificates
CDM
551
23
25
2,061
Voluntary& Retail
42
SecondaryCDM
240
JI41
x 1.0
x 2.5
x 3
x 10
x 2 x 1.3
x 2
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Market Value Growth 2007 (World Bank assessment,
May 2008)
(in MUS$)
Allowance Markets
Project-Based Transactions
EU Emission Trading Scheme
Chicago Climate
Exchange
New South Wales Certificates
CDM
7,400
70
220
50,100
Voluntary& Retail
270
SecondaryCDM
5,500
JI500x
1.3
x 4
x 3.5
x 12
x 1 x 2
x 2
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Market size
Carbon Market Overview Regulatory framework Tradable units 2007 2012E
EU ETS EU Emissions Trading Scheme
Largest multi-national, GHG emissions trading scheme globally
Commenced operation on 01/ 01/ 05
J I and CDM credits eligible via “Linking Directive”
Compliance EUAs (EU Emissions Allowance)
46 325
Other Kyoto compliance
Protocol to the UN Framework Convention on Climate Change (UNFCCC)
Assigns mandatory emission limitations for the reduction of GHG emissions to the signatory nations Key nations include:
J apan
Canada
Kyoto driven compliance CERs (Certified Emissions Reduction/ ERUs (Emission Reduction Units)
20 140
North America pre-compliance voluntary
Entities (including corporations, governments, and individuals) voluntarily participate in the reduction of their GHG emissions
U.S. is key market
Potential compliance market based on cap-and-trade bills in the senate
Voluntary/ pre-compliance
Compliance
VERs (Verified Emissions Reduction)
0.2 3
42—1501
Total 66 510—618
$bn$bn
1 [Market value with carbon prices seen in EU-ETS, $30/tonne could be $150bn in 2012 and $250bn in 2015 (Warner-Lieberman Bill—Point Carbon Analyst Feb 2008]
Size of the environmental markets
With growing linkages between these markets and the advent of a regulated US market,the environmental products market could approach $550+bn by 2012
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EUA and CER Market Overview
Current Market StatusCurrent Market Status
EUA Dec-08 and CER Dec-08 Historical Prices (€/MT)EUA Dec-08 and CER Dec-08 Historical Prices (€/MT)
0
5
10
15
20
25
30
35
J un-06 Aug-06 Nov-06 Feb-07 May-07 J ul-07 Oct-07 J an-08 Apr-08
CER Dec 08 EUA Dec 08 EUAs/CERs Spread
Source: JPMorgan, data as of April04, 2008
0
5
10
15
20
25
30
35
J an-06 Apr-06 J ul-06 Oct-06 J an-07 Apr-07 J ul-07 Oct-07 J an-08 Apr-08
Dec-06 Dec-07 Dec-08 Dec-09
EUA Historical Prices (€/MT): Dec-06, Dec-07, Dec-08, Dec-09
EUA Historical Prices (€/MT): Dec-06, Dec-07, Dec-08, Dec-09
Designed as an entity-based domestic cap and trade emissions allowance programme that started operation on January 1, 2005
Allowances allocation in accordance with a national allocation plan (NAP I,II and III) Phase I (2005-07) - Learning Phase 2006: $24.5 billion market Phase II (2008-12) – Next Operational Phase Phase III (Post 2012) – Review of the Directive: policy
NAP I (long), NAP II (short ?), NAP III (could be very short)
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11 12 13 144 16 17 18 192 20 21 22 23 24 25 26 273 5 6 7 8 9
0
10
20
30
40
-10
-100
-110
-90
-70
-80
-20
-30
-40
-50
-60
-120
-130
-140
1010
-150
-160
15
There are significant opportunities to achieve needed abatement at costs of less than €40/tCO2e
Insulation improvements
Fuel-efficient commercial vehicles
Lighting systems
Air Conditioning
Water heating
Fuel-efficientvehicles
Sugarcanebiofuel
Nuclear
Livestock/soils
Forestation
Industrialnon-CO2
CCS EOR,new coal
Industrial feedstock substitution
Wind,lowpen.
Forestation
Celluloseethanol CCS,
new coal
Soil
Avoided deforestationAmerica
Industrial motorsystems
Coal-to-gas shift
CCS, coal retrofit
Waste
Industrial CCS
Avoided defores-tation Asia
Co-firingbiomass
Solar
Source:McKinsey
Stand-by losses
Smart transitSmall hydro
Industrial non-CO2Airplane efficiency
COST OF ABATEMENT, EUR/t CO2e, 2030
AbatementGt CO2e/year
Uncertainties which could decrease abatement supply
Uncertainties which could increase abatement supply
• Regional or no participation
• Technology
• Consumer behavior
• More nuclear
• CSS (retrofit)
• Consumer behaviors
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All CDM Projects in the Pipeline in Brazil + Mexico + India + China
as a fraction of all projects
0%
20%
40%
60%
80%
100%Q
1-04
Q2-
04Q
3-04
Q4-
04Q
1-05
Q2-
05Q
3-05
Q4-
05Q
1-06
Q2-
06Q
3-06
Q4-
06Q
1-07
Q2-
07Q
3-07
Q4-
07Q
1-08
Pro
ject
s
Mexico
Brazil
China
India
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Number of projects in Asia by type
Affore-station & Refore-
station0%
Renew ables
39%
Supply-side EE8%
Demand-side EE
12%
HFC & N2O reduction
6%
Agriculture1%
Fuel switch1%
Landfill etc33%
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Carbon Fund
Carbon Fund
$$ $$
22 22
Emission ReductionPurchase Agreement
BanksInvestor
DebtEquity
Power Purchase Agreement
$$
Electricity
$$
CarbonCredits
Nature of Carbon Financing Contract
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Impact of Carbon Finance
5y ('08-'12) 7y 10y 14y 21y Impact per Unit$5.00 0.5% 0.6% 0.8% 1.0% 1.2% $3.16 / MWh
$10.00 1.0% 1.4% 1.7% 2.1% 2.3% $6.33 / MWh$15.00 1.6% 2.1% 2.7% 3.1% 3.3% $9.49 / MWh$20.00 2.2% 2.9% 3.6% 4.1% 4.5% $12.65 / MWh
5y ('08-'12) 7y 10y 14y 21y0.58 tCO2e/tSW 0.74 tCO2e/tSW 0.93 tCO2e/tSW 1.11 tCO2e/tSW 1.29 tCO2e/tSW Impact per Unit
$5.00 17.9% 24.1% 29.2% 31.7% 32.8% $41 / MWh$10.00 52.3% 59.1% 62.4% 63.5% 63.8% $82 / MWh$15.00 88.2% 93.3% 95.4% 95.9% 96.0% $124 / MWh$20.00 123.7% 127.3% 128.6% 128.8% 128.9% $165 / MWh
*tSW = ton solid waste
5y ('08-'12) 7y 10y 14y 21y$5.00 110.8% 112.3% 112.7% 112.7% 112.7%
$10.00 176.7% 177.3% 177.4% 177.4% 177.4%$15.00 227.3% 227.6% 227.7% 227.7% 227.7%$20.00 270.0% 270.2% 270.2% 270.2% 270.2%
*65% tax applied on carbon revenues
ER PricesPurchase period
INCREMENTAL IRR - CARBON FINANCERenewable Energy
Purchase period
INCREMENTAL IRR - CARBON FINANCESolid Waste
ER Prices
ER PricesPurchase period
INCREMENTAL IRR - CARBON FINANCEHFC23
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Potential Opportunities in the Power Sector
Generation Generation from renewable energy (hydro, wind, geothermal, biomass, solar)
— Limitations on large (>20MW) hydro Fuel switching from coal and oil to natural gas Investment in super critical / ultra super critical power generation for coal Replacement of equipment such as turbines and boilers to improve efficiency
Power Transmission and Distribution Decentralized power generation (mini-grids or off-grid applications) Electricity loss reduction from transmission and distribution networks
Reduction of leakage of SF6 in transformers and switch gears
Energy (end-use) Efficiency Measures Energy efficient lighting Municipal water pumping
Power SectorPower Sector
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Solar Energy Applications and Carbon Finance
A Solar Thermal or PV power project connected to the grid might affect:
The choice and/or timing of new power plants (or life extension of existing ones), i.e. the build margin, and/or
The operation of existing power plants, i.e. the operating margin
The methodology for estimating the emission reduction (ACM0002) uses “combined margin” approach, or average of averages with different subsets of power plants, but averages at the end
Calculate a baseline emission factor EFy as the average of the Operating Margin emission factor (EF_OMy ) and the Build Margin emission factor (EF_BMy,):
EFy = 0.5 * EF_OMy + 0.5 * EF_BMy
CEA database in TCO2e/MWh (December 2007) availabale at http://cea.nic.in
Power Generation – Grid ApplicationsPower Generation – Grid Applications
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2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
North 0.72 0.73 0.74 0.71 0.71 0.71 0.72
East 1.09 1.06 1.11 1.10 1.08 1.08 1.03
South 0.73 0.75 0.82 0.84 0.78 0.74 0.72
West 0.90 0.92 0.90 0.90 0.92 0.87 0.85
North-East 0.42 0.41 0.40 0.43 0.32 0.33 0.39
India 0.82 0.83 0.85 0.85 0.84 0.82 0.80
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Solar Energy Applications and Carbon Finance
Contribution of carbon finance to the cost of electricity
Power Generation – Grid ApplicationsPower Generation – Grid Applications
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US cents/kWh
Carbon credit price ($/TCO2e)
2006-07 10 15 20 25 30 35
North 0.72 0.72 1.08 1.45 1.81 2.17 2.53
East 1.03 1.03 1.54 2.05 2.57 3.08 3.59
South 0.72 0.72 1.08 1.44 1.79 2.15 2.51
West 0.85 0.85 1.28 1.70 2.13 2.55 2.98
North-East 0.39 0.39 0.58 0.78 0.97 1.16 1.36
India 0.80 0.80 1.20 1.60 2.01 2.41 2.81
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Solar Energy Applications and Carbon Finance
Can be for solar thermal or PV power generation for capacity < 15MW Default emission factor: 0.8TCO2e/MWh or where there is adequate justification:
Power Generation – Off- grid ApplicationsPower Generation – Off- grid Applications
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Carbon credit price ($/TCO2e) US cents/kWh
EF 10 15 20 25 30 35
2.40 2.40 3.60 4.80 6.00 7.20 8.40
1.20 1.20 1.80 2.40 3.00 3.60 4.20
0.80 0.80 1.20 1.60 2.00 2.40 2.80
I N T E R N A L
Solar Energy Applications and Carbon Finance
Small-scale methodology applicable for thermal generation capacity up to 45MW for thermal devices (co-firing is permitted) that supply individual household or users. Solar thermal water heaters, dryers and solar cookers would fall in this category. Methodology I.C is applicable.
Baseline emission: fossil fuel that would have been used in the absence of the solar technology. IPCC default emission factors can be used. Cogeneration application is permitted. Equivalent electricity (from grid or captive
generation) and thermal energy is used for estimation of the baseline emissions.
When non-renewable biomass was used for thermal energy and is displaced (instead of fossil fuels) by the renewable technology (such as solar cooker), use small-scale methodology I.E Some limitations (e.g. non-renewable biomass in use since 31 December 1989) Assume that equivalent fossil fuel likely to be used by similar consumers instead
of the non-renewable biomass (using IPCC default values) Need to ensure that definition of non-renewable biomass and of renewable
biomass is met
Solar Thermal ApplicationsSolar Thermal Applications
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Solar Energy Applications and Carbon Finance
Carbon markets have developed rapidly, driven by the EU Emissions Trading System and the Clean Development Mechanism of the Kyoto Protocol India has been at the forefront of this development
Solar technologies have seen limited benefits of the carbon market Carbon prices have been low till very recently Solar technologies have been relatively expensive and only now does it seem
that cost reduction potential may be achievable
While there are some uncertainties about the size of the carbon market, the long term prospects are very promising In India the development of promotional policy and addressing of institutional
issues may permit rapid expansion and diffusion of the solar technologies, partially aided by carbon finance.
ConclusionsConclusions
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Chandra Shekhar SinhaHead for Asia, Environmental Markets
JP Morgan Chase NA,
Mafatlal Centre (9th Floor), Nariman Point, Mumbai.
T: +91-22-6719-8084
I N T E R N A L
JPMorgan’s activity in the carbon market
Environmental Markets are a growth business within the JPMorgan Energy BusinessEnvironmental Markets are a growth business within the JPMorgan Energy Business
Emission Trading: JPMorgan can provide transactional support services for the compliance and pre-compliance/voluntary
carbon markets
Emission Distribution: JPMorgan benefits from its extensive Global Energy Franchise and has, so far, built a solid distribution
platform of secondary-market Certified Emissions Reduction (CERs) to compliance buyers in Europe and Japan
Emission Origination: In order to originate quality CERs in specific markets, JPMorgan is working with selected quality
specialists that combine:— Local presence and knowledge of doing business in their local emerging markets— Have the relevant expertise in Clean Development Mechanism (CDM) methodology and
execution Origination agreements established with a number of leading suppliers of registered CERs in Asia,
Africa and Latin America
Climate Care acquisitionClimate Care acquisition
JPMorgan has significantly expanded its team capabilities to address growing client demand. As part of this build out, the bank has hired highly experienced staff and also recently acquired Climate Care, a pioneer in carbon emission reductions; offering carbon offsets to businesses and individuals.
Combined strength provides a strong platform for JPMorgan to invest in large-scale carbon emission reduction projects and renewable energy credits that meet high quality requirements.
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Environmental markets are a growth business within JPMorgan’s commodities business
Power Coal and emissionsOil and
refined productsGas
Actively trading since 1997
WTI, Brent, Tapis, Dubai and Urals
Also present in light products, distillates and fuel oil, covering and offering a wide range of products and services
Experienced team with strong relationship with major producers and consumers worldwide
Actively trading since 2004
Rapidly developing business
Supply power to utilities, retail power suppliers and end users
These activities are quickly establishing JPMorgan as a top tier player in the electricity derivatives and risk management marketplace
Actively trading since 1997
Significant presence in NYMEX futures and options
Basis—large number of locations actively traded
Actively trading since 2004
Coal, including PRB and Central Appalachian
Emissions allowances (SO2, NOx)
EU ETS carbon
Kyoto Protocol Driven CDM and JI Carbon Credit origination
Voluntary emission reductions
Renewable energy credit and RPS risk management
Physical and financial capabilities
JPMorgan Energy TradingCatherine Flax and Ray Eyles
Bruce Tozer Global Head
Environmental Markets
Global Commodities Blythe Masters
Note: Please refer to annex for acronyms
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Our environmental markets team has both depth and experience
Principal Investments
Trading and riskmanagement
Mansoor Sheikh, Head European Energy, London, 44 207 7774392
Nigel Felgate, Executive Director, London, 44 207 7779925
Sales
Bruce Tozer, Global Head Environmental Markets, London, [email protected], 44 207 7771531
Donnatella Cuocci, Vice President, London, 44 207 7774005
Charlie Pool, Analyst, London, 44 207 777 3674
Kedin Kilgore, Head Environmental Markets Americas, [email protected], 1 212 834 6387
Bhavna Prasad, Vice President, New York 1 212-834-2231
Tina Reine, Vice President, New York 212 834 4281
Chris Neidow, Head of Energy Sales and Marketing Asia, Singapore, (65) 68822107
Daniel Rosetto, Vice President, Sydney, 61 2 9220 1503
Project origination
and structuring
Odin Knudsen, Managing Director, Policy and Business Development, D.C., [email protected], 1 202 585 3785
Chandra S. Sinha, Head for Asia, Mumbai, 91 22 6719 8084
Fernando Cubillos, Vice President, Origination, Santiago
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Climate Care
Mike Mason, founder of Climate Care, Oxford
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Tom Morton, Head of Origination, Nairobi
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