Avanceon Carbon Finance PoA Project

Forum on Financing Energy Optimization Projects with Guaranteed

IRRBikash Pandey

bikashpan@gmail.com

Karachi, May 25, 2010

The Kyoto Protocol

• Entered into force 16 February 2005• Developed countries must reduce carbon

emissions by 5.2% from 1990 levels by 2008 – 2012 (1st Commitment Period; 2nd & 3rd periods to follow).

• A number of flexible mechanisms were agreed to: International Emissions TradingJoint Implementation (JI)Clean Development Mechanism (CDM)

Clean Development Mechanism

• Dual objectives

lower the overall cost of reducing GHG emissions

while also supporting sustainable development initiatives within developing countries.

What does the CDM aim to achieve?

A transfer of finances and contribution to sustainable development in the Host Country

Flow of Finances

Annex I Country Host Country (Pakistan)

Flow of Credits

Industrialized Country

with high abatement cost

Developing Country

with low abatement cost

What does it mean for projects?

Project

Conventional Output

Conventional Revenue

Environmental Benefits

Revenue fromCERs

What Makes an Attractive CDM project?

• Project which reduces GHG emissions into the atmosphere below the baseline situation, e.g.– Energy efficiency measures that reduce energy use

e.g. Industrial energy management, efficient lamps, waste heat recovery, improved insulation in boilers;

– Renewable energy projects – wind, solar, hydro (reduce emissions in generation mix or replace diesel/kerosene off-grid);

– Capture methane from landfills, or compost organic waste and reduce methane production;

– Reforest or afforest barren areas to sequester carbon.

Baseline

2002 2012 time

Emission reduction

Project Emissions

Baseline (emissions without project)

ton

CO

2e e

mis

sion

per

yea

r

Monitoring

• Clear Monitoring and Verification Plan is needed to record and verify annual emission reductions from project interventions. e.g.

• Record of fuel use before and after, • Meter readings at wind or hydro plant,• Sample surveys of households showing, usage

of CFLs and numbers of hours used, • Total land reforested and maintaining forest.

What Makes an Attractive CDM project?

Project must be additional!The project would not go ahead without the additional

carbon revenue

CDM is not designed to reward all projects which reduce GHG emissions – only those which would not be implemented without carbon revenue.

CDM is designed to make feasible those low-carbon projects which are currently not the norm in the particular market and which are not attracting adequate investment.

Additional Value From ‘Clean’ Projects

Implemented without

CERs

Not Additional

With CERs not

implemented

Not implemented without CERs;

Implemented with CERs

CDM

CER income

CDM Project Approval

• Project Proponent develops PDD and asks Host Country for Approval of CDM project

• Project Proponent submits Project Design Document to Validator (Operating Entity)

• (In case of New Baseline methodology: Validator submits Baseline Methodology to Methodology Panel of the CDM Executive Board)

• Validator evaluates Project Design Document and submits it for approval to CDM Executive Board

• CDM Executive Board registers project activity as a CDM project

Project Cycle - timeline

Initial Project

Concept

Project Implementation

Feasibility Assessment - is

project eligible as CDM?

Final Project Design - full Project Design Document

Validation, Registration,

Approval

Realisation of emission reductions

Actual Payment for CERs – $$$

Carbon Contract

Verification and certification

What Makes an Attractive CDM project?

• Project must be large enough to make it worth the transaction costs,– At least 50,000 ERs per year,

• Upfront costs can range from $50K to

> $150K to prepare the PDD, Validate, and Register a project.

Registered CDM Projects & Pipeline (as of 1 March, 2010)

CDM Statistics

Annual Average CERs* Expected CERs until end of 2012**

CDM project pipeline: > 4200 of which:

N/A > 2,900,000,000

---2065 are registered 387,906,742

1,730,000,000

--- 46 are requesting registration 11,030,796 > 30,000,000

* Assumption: All activities deliver simultaneously their expected annual average emission reductions

** Assumption: No renewal of crediting periods

CDM Project activities globally

Registered Project Activities by Sector

(as of Mar 1, 2010)

Sectoral Scope Registered Projects

Energy industries (renewable - / non-renewable sources) 1523 Waste handling and disposal 0 Fugitive emissions from fuels (solid, oil and gas) 25 Agriculture 121 Manufacturing industries 64 Chemical industries 0 Fugitive emissions from production and consumption of halocarbons and sulphur hexafluoride

2 Energy demand 26 Mining/mineral production 7 Metal production 136 Transport 22 Afforestation and reforestation 0 Energy Distribution 458 Construction 13 Solvent Use 123

Approved Methodologies by Scope (150)

  

Number Of Methodologies*

( Large-scale (AM, AR-AM) , Small-scale (AMS, AR-AMS) , Consolidated (ACM) )

Energy industries (renewable - / non-renewable sources) (1) 40

Energy distribution (2) 2

Energy demand (3) 12

Manufacturing industries (4) 23

Chemical industries (5) 14

Construction (6) 0

Transport (7) 5

Mining/mineral production (8) 1

Metal production (9) 6

Fugitive emissions from fuels (solid, oil and gas) (10) 7

Fugitive emissions from production and consumption of halocarbons and sulphur hexafluoride (11) 5

Solvent use (12) 0

Waste handling and disposal (13) 14

Afforestation and reforestation (14) 16

Agriculture (15) 5

Scope

High Potential Areas• Industrial Energy efficiency and energy

substitution:– Brick manufacturing, vehicle transport, oil & gas, textile

industry, fertilizer, cement, oil & steel, glass. • Power Sector & Renewable energy:

– Hydropower, wind, biomass cogeneration, T&D Losses, domestic and municipal EE, combined cycle power plants, solar PV.

• Solid waste management and methane capture:– Land-fill methane capture, composting, wastewater

treatment, biogas. • Fertilizers and other chemical industries;

– Catalytic N2O Abatement, nitric acid, waste heat recovery. • Land use, agriculture and forestry.

– Afforestation/reforestation.

Promising Energy Efficient Options for Industry

• Energy management

• Waste Heat Recovery

• Improved Boiler Efficiency

• Fuel Substitution

• Process Changes

Industry wise Total Abatement Potentials

Abatement Sectors Potential for CO2 Abatement (Million Tons/ year)

Brick Manufacturing 10.0

Transportation 8.8

Oil and Gas Sector 6.53

Textile Industry 5.62

Fertilizer Industry 5.03

Cement Industry 4.71

Iron and Steel Industry 1.78

Glass Industry 0.88

Inorganic Chemicals 0.3

PoA

• Programmatic CDM is designed to overcome many of the shortcomings of the project approach -

CDM Program of Activities: a coordinated effort on the part of a private or public entity toimplement a GHG reducing policy or measure via an unlimited

number of emission reduction project activities that are dispersed over a geographic region and implemented over a period of time.

PoA: Intent of pCDMBroaden the scope of CDM to include:• Mitigation activities that are geographically and

temporally dispersed (e.g. RE/EE in industries, homes and buildings, individual and family transport, CFLs)

PoA

CPACPACPA

CPA=Several measures

Several sites

Multiplicity of activities to reduce GHG. The sites could be located within one or more city, region, or country, as long as each involved country submits a Letter of Approval (LoA). The GHG-reducing activities do not necessarily occur at the same time. A program can have a duration of up to twenty-eight years.

Managing entity. The program is coordinated or managed by one entity, which can be private or public.

CPAs. A program is implemented via an unlimited number of CPA’s. All CPA’s must apply one approved baseline and monitoring methodology.

Avanceon PoA

• Title of the Small-scale PoA: Energy Optimization Solutions for Industries in Pakistan and UAE – Program of Activities

• Technologies being used: iWater, iBoiler, iDC and any additional future proprietary products.

• Geographic coverage: Multi-country: Pakistan & UAE• Small-scale: CPAs have to stay within the energy saving limits

dictated by the small scale methodology (60 GWhe or 180 GWhth)• Methodology: AMS II.D. “Energy efficiency and fuel switching

measures for industrial facilities”, version 12.• Crediting Period: 7 years, twice renewable

Additionality

• Carbon revenue required for Avanceon to: – be profitable (investment barrier),– be able to offer to its clients “guaranteed

savings” – Avanceon must fund everything upfront while the client incurs no cost,

– Overcome ‘common practice’ barrier which stands in way of industries adopting energy efficiency measures.

Energy Optimization Solutions for Industries in Pakistan – CPA-1

Six projects have been included in Avanceon’s first CPA (CDM for Program of Activities) for year

2010 / 2011

USAID Energy Efficiency and Capacity Project Develop an Energy Services Industry in Pakistan

• Private sector led DSM/EE has proven effective & sustainable – Best Practice: USA, China, Thailand, Vietnam

• Creating an energy services industry means creating buyers and sellers:– Build capacity to provide energy audits & projects– Create demand for these services

• Target: Select and build capacity of 10 Energy Services Companies, including 3 women-owned or operated

• First set of training carried out in May 2010 in Lahore and Islamabad.

ESCO Models

Low service/risk

High service/risk

– Full service ESCOs designs, implements, verifies and gets paid from actual energy saved (aka “Shared Savings”)

– Energy supply contracting, takes over equipment O&M and sells output at fixed unit price (aka “Chauffage”, “Outsourcing”, “Contract Energy Management”)

– ESCOs w/third party financing, designs/implements project, and guarantees minimum level of savings (aka “Guaranteed Savings”)

– ESCO w/variable term contract, act as full service ESCO, but contract term varies based on actual savings (aka “First Out Contract”)

– Supplier credit, equipment vendor designs, implements and commissions project and is paid lump-sum or over time based on estimated savings

– Equipment leasing, similar to supplier credit except payments are generally fixed (based on est. energy savings)

– Consultant w/performance-based payments, agent assists client to design/ implement project and receives payments based on project performance (fixed payment w/penalties or bonuses)

– Consultant w/fixed payments, where consultant helps the client design and implement the project, offers advice and receives a fixed lump-sum fee

Source: World Bank 2005

Thank You