Investing in CDM and PoAs in LDCsExperiences of KfW

Matthias Börner

KfW Carbon Fund

EU Practitioners Workshop on Climate Change

Paris, 24th March 2011

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Topics

1. Why PoAs in LDCs?

2. CDM Experiences in LDC Countries

3. Experiences in the Design and Implementation of PoAs

a) Design of PoAs

b) Implementation of PoAs

c) Specific CDM / regulatory issues

4. Conclusions

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1. Why PoA’s in LDC’s? Reminder: Intention of CDM Programmes (PoA)

Figures / ESMAP 2007

Cook-stove

CFLsSWHMini-Hydro

Small Hydro

EXAMP L ES

CH4: Animal waste / WW /

landfill

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1. Why PoA’s in LDCs? Situation in LDCs

Only few stand alone CDM project types possible in LDCs

Project sizes tend to be (very) small

Bigger opportunity for programmatic intervention

Typical PoA types suitable for LDCs

e.g. cook stoves, solar home systems, solar lanterns, household biogas

digesters etc.

CDM can support sustainable development

In combination with or as a substitute for ODA support

CERs generated in LDCs shall be eligible under EU ETS 3

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2. CDM Experiences in LDCs

Up to now very few registered CDM projects in LDC’s

Reasons:

Small potential Low CDM capacity / knowledge of Implementing Agencies Lack of experience at national (DNA) level leads to long processes Few project developers / CDM consulatants are based in LDC’s

Less competition, higher prices, lower quality Financing of projects is a challenge Implementation takes longer than in other countries

But:

Situation is improving Development Impact of CDM is generally bigger than in other countries

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3. Experiences in the Design and Implementation of PoAs KfW Programmes

© KfW • KfW Carbon Fund

Carbon Programmes1. KfW Carbon Fund (1st Tranche) -

Vol.: EUR 84 million, closed

2. EIB-KfW Carbon Programme I - Vol.: EUR 88 million, closed

3. Belgian Carbon Purchase Programme - Vol.: EUR 20 million

4. Post-2012 Carbon Credit Fund - Vol.: EUR 125 million, (jointly with EIB, CDC, ICO NIB; external fund manager)

5. EIB-KfW Carbon Programme II - Vol. EUR 100 million- Purchase up to 2020- Focus on PoA and LDCs

POA Facility Since Oct. 2008 on behalf of BMU Disseminate PoA-expertise Develop PoA proposals in

partnership with implementing entities

Advise on implementation Grants for PIN and PDD

development

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3. Experiences in the Design and Implementation of PoAs PoA Pipeline of KfW

PoA Pipeline Start of 2011(34 projects)

Sector Region Operator (CE)

Energy Efficiency in Buildings

Poland, Estonia, Israel

Banks + Public Supply Company

Energy Efficiency inSMEs

Poland, India Banks

Household StovesBiogas

Nepal , Nigeria, Mexico China, India

NGO, Banks

Public Institutions

Renewable Energy (Solar Water Heater /

Mini Hydro)

South Africa, Central America,

Philippines, NepalVietnam, East Africa

Banks

Private companies

© KfW • KfW Carbon Fund

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3. Experiences in the Design and Implementation of PoAs a) Design of PoAs

Main elements:

Coordinating and Managing Entity

Incentive Structure

CDM Aspects

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3. Experiences in the Design and Implementation of PoAs a) Design of PoAs

Roles and Responsibilities of Coordinating and Managing Entity

● CDM Development of PoA (e.g. development of CDM documents, validation and registration of PoA, etc.)

● Regular Monitoring of ER in accordance with CDM methodology ● Communication with UNFCCC● Technical Implementation of PoA (e.g. selection of technology, appointment of suppliers,

awareness / marketing campaigns, necessary approvals etc.)● Supervision and maybe support in operation● Management of Cash Flows● Financing Concept

Experiences:

● Most CMEs do not have the capacity to fulfill all these tasks and need support● Some tasks can be outsourced to experts (e.g. consultants)● Careful assessment of CME and evaluation of strengths and weaknesses is necessary

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3. Experiences in the Design and Implementation of PoAs b) Design of Incentive Structure

Program Participants (e.g. households, SMEs, etc.) need to be incentivized to participate in PoA

Possible Incentive Structures:

●CDM revenues subsidize interest on loans ( seed funding needed) ●Investment Costs are subsidized by CDM revenues ( seed funding needed) ●Maintenance contracts or guarantees are financed by CDM revenues●Payment on Delivery

Experiences:

●Ideal incentive structure needs to be identified for each individual PoA●However, “ideal” incentive structure may be too complicated and risky●Balance between complexity and incentive power needs to be found

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3. Experiences in the Design and Implementation of PoAs c) CDM Aspects

CDM requirements need to be assessed

Important CDM aspects:

●Is methodology available and suitable for PoA type?●Complexity of Baseline establishment●Can monitoring requirements be implemented in a PoA? ●Is Carbon Impact big enough to finance PoA specific costs (CME administration etc.) and incentive scheme? ●Validation issues (e.g. liability, complexity of validation etc.)

Experiences:

●Baselines and Monitoring requirements often very complex in PoAs●PoAs should be simplified as much as possible, even if this leads to smaller CER volumes (e.g. some methodology allow simplified monitoring systems based on default values)●Carbon Impact at current CER-prices often hardly sufficient (depending on PoA type)●Validation is expensive, challenging and often needs to be supported

121212© KfW • Thema der Präsentation • Ort • Datum

3. Experiences in the Design and Implementation of PoAs Example of two extremes

● e.g. CFL Programmes● Additionality: Mainly Financial● Programme requires external funding● Incentive: Subsidy of CFL costs● Repayment depends (mainly) on delivery and sale

of CERs● High risk for financing institution due to:

Possible CER delivery shortfalls Future CER-price is unknown

● Risks are sometimes taken by private investors● Financing:

Private Investors Development Aid if private / commercial

funding is not possible

CDM revenue is main revenue of the programme:

CDM revenues form only small part of programme revenues

● e.g. Energy Efficiency / RE Programmes in SMEs● Short repayment period of investments through

energy savings● Incentive: Payment on Delivery● Additionality: Mainly Barriers● Risk for financing of investment measures similar

to normal project financing risk● Financing Options:

Commercial financing for Investments Seed Funding may be needed Additional Subsidy (e.g. Development

Financing) may be needed if incentive through CDM revenues is not sufficient

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3. Experiences in the Design and Implementation of PoAs Example of PoA structure

KfW CarbonFund

SIDBIPoA coordinator

Role Structure – SIDBI as coordinator (Option II)

Manufacturers / Installers

IndustryAssociation

SMESteel industry

Registration/selection

ERPA

Purchase, sale and installation of systems

Transfer of CER ownership

Marketing / Identifying units/ Monitoring

Shar

e of

CER

reve

nues

Loans

Debt service

Share of CER revenues

ISTSL

Marketing

Marketing support

Share of CER revenues

Prov

idin

g ex

ecut

ion

of C

DM

task

s

Exchange on CDM issues

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4. Conclusions

Recommendations:

● PoAs need to be carefully identified, designed and structured● Generally strong support is needed at all levels● Know how for organization and implementation of projects in developing countries is

needed● Financing possibilities often needed

Opportunities for Development Organizations:

● Expertise of such organizations is often needed● Additional funds for development programs can be raised through CDM● PoAs are a stepstone on the way to NAMAs and Sectoral Appraoches, Experiences can

be gained

CDM Projects in LDCs are challenging.

CDM PoAs are very challenging.

What about CDM PoAs in LDCs???

Thank you for your attention!

Matthias BörnerPrincipal Manager

KfW Carbon Fund

KfW BankengruppePalmengartenstraße 5-9D-60325 Frankfurt

Tel.: +49-69-7431-3717matthias.boerner@kfw.de