International Finance Corporation Carbon Finance: Issues and Opportunities for the Private Sector MDL en Centro America San Salvador, El Salvador March 27 -28, 2003
What is IFC? • Private sector affiliate of World Bank Group • Promotes economic development through commercially viable, private-sector investments • Largest multilateral source of loan and equity finance for private enterprises in developing countries • Catalytic role in stimulating and mobilizing private investment
What does the IFC do? • Project finance - loans, equity, etc. – Departments: Power, Oil & Gas, Mining, Chemicals, Agribusiness, Funds/Private Equity, Communications & Information Technology, Manufacturing, Regional • Mobilization of capital • Capital markets development • Financial advisory work • Project development facilities • Special development initiatives
IFC’s Value Added • Direct funding with long-term staying power • Catalyst for other investors and lenders (+ possible concessional funding for alternative energy projects) • Honest broker/neutral partner – Reassuring presence for joint venture partners and host Government • Risk identification and mitigation • Potential access to funding for environmental projects
IFC’s Catalytic Role IFC acts as a catalyst to stimulate and mobilize private investment: + + IFC investments approved US$ 4. 0 billion IFC syndications US$ 1. 8 billion Other funding sources US$ 9. 7 billion Total project cost (for FY ending June 2002) (223 projects) US$ 15. 5 billion
Why does IFC make a special effort to finance environmental projects? Because accelerating market acceptance of environmentally beneficial technologies, products and services offers one of the best ways to meet IFC’s mission of improving people’s lives and reducing poverty
IFC Renewable Energy Portfolio • 11 projects in 7 countries + 1 regional + 3 global • Total project cost $860 million • Financing of $240 million for IFC’s account plus $200 million in syndicated commercial bank loans – – Hydro – 5 projects in Latin America + Nepal + Turkey Geothermal and biomass cogen in Guatemala Financial Intermediaries – Energia Global, REEF Energy Efficiency (includes distribution)
Potential Transactional Barriers for Renewable Energy ü Smaller project sizes ü Longer lead times ü Higher ratio of capital costs to operating costs ü Newer technologies ü Less experienced sponsors ü Unfamiliar to financiers ü Either excess or absence of concessional funding Higher transaction costs Higher development costs Need for longer-term financing at reasonable rates Higher operating risks Higher completion and operating risks Scarce/higher-cost capital Over-subsidized or under-competitive
Financing for GHG Reduction • Global Environment Facility (GEF) – UNFCCC • Carbon Finance/Emissions Trading – UNFCCC and Kyoto Protocol
IFC/GEF Climate Change Projects • Photovoltaic Market Transformation Initiative – • Solar Development Group (SDG) – • $21 M for SMEs from Costa Rica to Bangladesh Hungary Energy Efficiency Co-financing Program – • $65 M worldwide fund ($15 M IFC + $30 M GEF) Small and Medium Scale Enterprise Program – • $50 M global equity/BDS fund for PV ($6 M IFC + $10 M GEF) Renewable Energy and Energy Efficiency Fund – • $30 M to accelerate solar power in India, Kenya, Morocco $17 M partial guarantee facility ($12 M IFC + $5 M GEF) Commercializing Energy Efficiency Finance Program – $48 -93 M partial guarantee facility ($30 -75 M IFC + $18 M GEF)
Why is IFC interested in Trade of Emission Reduction Credits…. . • IFC specializes in project-based investments • New source of financing for projects in our pipeline and portfolio that will reduce GHG Emissions • Stimulate participation of developing country private sector in evolving market (non-IFC projects) • Lower marginal costs to reduce GHG emissions in developing and transitional countries • Facilitate transition to private sector intermediation and provision of value-added financial products
Impacts of Emission Reduction Sales • World Bank and others have found ER revenues can have an impact on Project IRR: For example, @ $3/mt. CO 2 e. . . – Energy efficiency / district heating – Wind 0. 9 -1. 3% – Hydro 1. 2 -2. 6% – Bagasse 0. 5 -3. 5% – Biomass with methane kick – Municipal Solid Waste 2. 0 -3. 0% up to 5. 0% > 5. 0%
IFC-Netherlands Carbon Facility (INCa. F) • Estd. Jan 2002 in partnership with Dutch Government • € 44 M to buy GHG emission reductions – from eligible projects in developing countries that reduce or avoid GHG emissions compared to BAU – under KP’s Clean Development Mechanism for benefit of Netherlands to use toward national obligations under KP • Target sectors – Renewable energy, Energy efficiency, Fuel switching – Waste management, Landfill gas and CBM utilization • Location – All developing countries except Central & Eastern Europe
General Requirements • Eligible sector and region • Project likely to close in short-term • IFC and non-IFC projects eligible – Non-IFC projects subject to due diligence and E&S review • Host country approval – KP ratification – Endorsement of project • Independent Audits focusing on: – Likelihood of project to achieve reductions – Achievement of actual reductions over time
What does INCa. F offer? • Cash in € – – – • Forward contracts – – • Additional revenue stream (enhancement) for projects ‘Upfront’ payments possible in some cases Can expect € 3 -5/mt. CO 2 e Payments over 7, 10, or 14 years Periodic certification of actual GHGs reduced Assistance (incl. financial) at all stages – – – Project design & baseline identification Monitoring & verification plan Validation and registration
Value Added for RE Projects • Improves competitiveness of power generation from landfills and other sources of methane • Can make some marginal RE projects bankable • Reduces investor/lender risk – Provides contracted flow of forex for seller – Cash flows from sale of ERs can provide security for lenders (e. g. , improved DSCR) • Advance payments can be critical to financial closure – Stricter standards apply • Transaction costs have to be managed
Current CDM Pipeline Letters of Intent Signed/Under Negotiation • • Industrial fuel switching – V&M Tubes, Brazil [€ 15 M] Waste-to-energy – South Asia 3 x 8 -10 MW biomass – South America Biogas – Southeast Asia 25 MW bagasse – Central America 3 x 12 -15 MW small hydro – South America 100 MW hydro – South America 2 x 20 MW bagasse – South Asia Sample Projects Under Review/Discussion • • • Waste-to-energy – South Asia 4 x 3 -8 MW small hydro – South Asia 70 MW biomass – Latin America 40 MW bagasse – Latin America Fuel switching – Africa
Transaction Costs • Key to expanded participation by private sector, and therefore, success of CDM • INCa. F’s early experience in reducing transaction costs – Purchase significant portion of ERs generated by project – Working with sponsors / investors who have contracted with advisors – Anchor buyer for projects generating large volume of ERs (ability for other smaller buyers to come in at significantly lesser costs) – Bundling of smaller projects to take advantage of common sponsor; sector; baseline – need a theme to wrap around – Processing with project & contract structuring / streamline Kyoto Protocol requirements
IFC’s Plans Going Forward • Establish a JI Facility • Intermediation: A few small CER (CDM) and ERU (JI) & AAU transaction structures and vehicles as private sector roles and activities increase – Prefer to partner with companies/FIs with long term interest in emerging markets • Value-added products – Use IFC ability to take long term credit risk – Develop project finance-related products in collaboration with other FIs to unlock the investment potential of ERPAs • Consider investing IFC capital in carbon market businesses and products
Carbon Finance: Issues and Opportunities for the Private Sector For additional information on IFC’s carbon finance activities, please contact: Sid Embree Consultant, Carbon Finance Environmental Finance Group International Finance Corporation Washington, DC USA phone: +1 202 473 1830 fax: +1 202 974 4404 e-mail: sembree@ifc. org web: www. ifc. org/carbonfinance
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