Carbon Finance: Structure & Barriers

J-D SymingtonJ-D Symington

“Carbon Finance”

• Project Development

2

• Project Development• Integrated Finance

Carbon Finance: Funding Solutions

Developed Nations

Developing Nations

3

Effects of Climate ChangeRenewable Energy

��

��

�������

�� ����������������

�� ����������������

Integrated Solution

Carbon

Funding:Cash Advance

against the Forward

Purchase of CERs

Trading:Carbon

• Funding Supply

• Buying and Selling CERs on behalf of Clients

• Brokerage Services

• Administration• Project

4

Carbon Projects

Trading:Emissions Reductions

CarbonDevelopment

Cost

Development • Brokerage Services• Risk Mitigation by

providing Floor Prices

• Client incurs no upfront cost for Carbon Development

• Project documentation

• Validation• Registration

Barriers to Carbon Financing

• Project Finance.....Applicable?

• Volatility in Carbon Markets

• Financial Resources

5

• Bank Specific Factors

• Local Content

Project Finance...Applicable?

• Project finance is different from traditional forms of finance because the financier principally looks to the assets and revenue of the project in order to secure and service the loan. In contrast to an ordinary borrowing situation, in a project financing the financier usually has little or no recourse to the non-project assets of the borrower or the sponsors of the project. In this situation, the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project.

• Project Finance = Expensive to deliver = Minimum Project Size of R200m

6

• Project Finance = Expensive to deliver = Minimum Project Size of R200m

• A large % of Carbon Projects in the Grey area

– Not sufficient collateral to justify secured lending

– Too small to justify cost of project finance

Volatility in Carbon Market

• Projects requires stable markets to flourish

• Banks treat Carbon as a commodity, monetise and fund against

future flows

7

• Therefore very difficult to provide longer dated funding against

Carbon

Volatility in Carbon Market

8

Challenges for the future of Carbon Markets

Increased focus to develop

projects in LDC countries from

2013

Increased focus to develop

projects in LDC countries from

2013

Lack of Lack of

Relative uncertainty around the

extension of the Kyoto Protocol beyond 2015

Relative uncertainty around the

extension of the Kyoto Protocol beyond 2015

9

Limit on developing

nations CDM projects beyond 2012 (including South Africa)

Limit on developing

nations CDM projects beyond 2012 (including South Africa)

Weakening of the EU’s

economic climate will cut

demand for and price of

CER’s

Weakening of the EU’s

economic climate will cut

demand for and price of

CER’s

Lack of commitment to

the Kyoto protocol by the USA, Australia, New Zealand,

Canada, Japan, Russia

Lack of commitment to

the Kyoto protocol by the USA, Australia, New Zealand,

Canada, Japan, Russia

Factors driving Compliance carbon markets

• Commitments for voluntary and compliance emissions caps driving green development investment

• Development of domestic carbon instruments and markets

• Durban roadmap leading to a new legal framework to be agreed by 2015 that will involve “all countries” in combating climate change, for legal processes to be in place as from 2020

Definition of a new market

instrument by 2015 for

adoption in 2020

National voluntary and compliance emissions reduction

commitments

10

•EU has determined that only CERs arising from CDM projects registered prior to end 2012, and new projects registered post 2012 in LDCs will qualify as compliance offsets

• Additional compliance buyers will increase demand and improve liquidity

• Multiple compliance exchanges should increase market certainty, limiting reliance on the EU

Concentration of LDCs in

sub-Saharan Africa

Potential additional

Carbon markets in Australia, China and

others

Factors driving Voluntary carbon markets

• US state and other national emission reduction schemes recognition of offsets from various International voluntary carbon standards are driving demand for certain credits

• Corporate social responsibility and brand differentiation are a key driver for support of voluntary carbon projects.

• Charismatic projects command high carbon price Pressure to

enhance corporate

image

Growth in US regional carbon

schemes and acceptance of

non-CDM offsets

11

• Anticipated acceptance of carbon credits arising from forestry and forestry protection projects are increasing the awareness of, and interest in voluntary REDD and A/R project activities

• Micro-scale projects cannot economically adhere to international project standards

• Voluntary buyers often use some offsets from local projects accepting the limited assurance provided by a less formal project process

International accord

expectation for forestry

protection (UN REDD+)

Ability of standard to

economically support small scale projects

Financial Resources

• Lack of equity is one of the primary reasons why good ideas do

not result in projects.

• Commercial Banks require sufficient equity to be pumped into

12

projects before releasing debt funding.

Bank Specific Factors

Project Developer

Carbon Team

• Risk Committees not familiar with Carbon concept

• Carbon does not have an established track record as a financial instrument

• Global uncertainty in financial

13

Internal Risk Committees

Approval

• Global uncertainty in financial markets about Carbon

• Capital Allocation: Bank Appetite for Carbon Exposure driven by perceived risk

Local Content

• Specific challenges affecting the local market

– PPAs

– Foreign Exchange

14

– Cost of Capital

THANK YOU