Understanding Carbon Prices: Muyi Kazim - Standard Bank Group - February 2010
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Understanding Carbon Prices:
Muyi Kazim – Standard Bank Group
February 2010
INTRODUCTION
2
Preamble:
Without knowledge of the market it can be difficult to tell
what the right carbon price is for a CDM project.
(Having said that don’t worry too much about determining
price by yourself)
Topics:
The different factors affecting carbon prices and indications of a
likely contract price for the credits you generate.
Factors affecting future market prices will also be discussed.
Our Approach to pricing
About Standard Bank
CER – Registration Risk and Primary Price
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Price of Exchange Traded Carbon from
March 2008 - Current
4
• Prices have been as high as €24 a tonne for guaranteed delivery CERs – traded on the ECX
• Alternatively they have been as low as €7.50 in early 2009 – as a result of the global economic
downturn reducing production rates in manufacturing and thus lowering power consumption
• Primary prices are artificially held up by the Chinese government ruling the lowest price €8 up to
2012.
• Primary prices are less volatile – generally prices have ranged between €7 and €13.
Factors Affecting Market Prices
Next 12 Months 2010 and Beyond 5
Size of the recovery and developments for the post 2012 environment,
post COP 15.
If there is no agreement for post 2012 and Europe adopts a lower target
2013 - 2020 then prices will fall as there will be less demand from that
period to soak up excesses from this period.
UNFCCC bottlenecks/approval innovations
DOE suspensions/delays
GDP and therefore manufacturing etc will be the main driver behind
prices, a quick pick up in GDP will lead to a quick pick up in carbon
prices.
In the EU more manufacturing – more power required – more emissions
– more requirement to purchase offsets
SB Trading desk view is that we may well see a sell off in carbon prices
in the first half of this year before they find some support. Expect to see
prices rise in 2011 and 2012.
The above said there will remain a premium for African/LDC CERs even
in the short – medium term due to demand still outstripping supply.
New sources of supply from LDCs and Africa; ie Re/Afforestation,
Biofuels, Programmatic approachPricing of CERs via trades
With Risk Factors 6
Spot trade:
− Wait until issuance and then sell
− Highest price but exposed to price movement risk until issuance
− Documentation: Spot ERPA or ISDA confirmation
Forward:
− Sell now for future delivery and payment
− Avoids price risk but no up-front finance
− Discounted price compared to spot but buyer takes price risk
− Documentation: ERPA
Futures
− Enter a derivative contract for a fixed future price
− Hedges price risk but penalties for non-delivery and need
sophisticated trading arrangements
− Documentation: ISDABuying Carbon credits from a Project
7
Standard Bank have one of the most active trading desks in the carbon markets,
based in our office in London
Due to our high level of experience in market and sophisticated valuation tools we
can accurately price primary project risk and offer competitive price on primary
carbon projects
Alternative pricing tools under ERPA agreements
Fixed price over the term of ERPA – both pre and post 2012.
Floating price over the period (On every delivery the current market price – less %
is paid)
Floating price with a floor and cap (limiting downside – showing possible financing
a minimum income)
Guaranteed delivery of a portion of the volume (this has a potential downside for
the project owner)
Ability of SB to prepay and cover CDM costsCarbon Finance – Trade Finance
8
Transacting to purchase carbon credits from a project under Clean Development
Mechanism
Purchase under an ERPA Agreement
Deliveries are only ‘expected’ volumes
Payment made only on delivery
This creates a requirement for funding of either the project itself, the CDM costs or both.
Trade Finance (Pre- Payments against carbon credits)
CDM Specific Costs
► Project Development (PDD completion)
► DOE fees (validation and verification)
► UNFCCC fees (reviews, registration)
► Consultants (Feasibility Studies, Brokers)
Carbon Specific
− Pre pay expected deliveries of credits
► Risk of non-registration
► Risk of non-delivery
► Risk of under-delivery
► Risk of delayed delivery
► Counterparty Risk – credit standing of counterparty, possible Step-In/ Novation
► Regulatory risk – post 2012Risks Associated with Carbon Credit Projects
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Carbon reduction Carbon
Construction Issue of credits
assessment transaction
Feasibility and Validation and Verification and
Commissioning
financing registration certification
Resources
Counterparty Natural Business
Political risk and supplies
credit risk hazards interruption
delivery risk
Conventional project cycle Technology Eligibility and Delay in start Validation and
Carbon related project cycle
risk approval up reporting
Project risks
Carbon risksCarbon Finance – Project Finance
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Project Finance (Debt financing against projects)
Finance of the project itself - Higher price potential for CERs
− Standard Bank has a large capability in renewable project finance
► Protected by the assets of the project
► Possible recall over other assets of the owner
► Project has an off taker with a signed Power Purchase Agreement
Debt finance against carbon
− As with the above, finance given is protected by assets or transaction flows
within the project.
► Power purchase Agreement in place
► Carbon Credit Off take in place (In-house /higher price)
► Creditworthy Off takers for both the above
► Can be worked against single or multiple transactionsCase Study – Structured Finance/Programmatic CDM
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Structured Finance (multiple financing tools)
• A multiple of financing tools can be used together to achieve a pre-payment for project owners
•POA/CPA (CDM Program of Activities could also benefit from this approach)
A “first to market” transaction where we assisted an aggregator
of carbon credits (Camco), structured and placed a proportion of
their primary credit portfolio in the market
Project Tranche A
1,2,3,4…9
Tranche B
Project pool Tranche C
2008
Up front payment
Best Trade Award
Camco Structured
DistributionActions to improve carbon finance in Africa
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African CERs are more isolated from regulatory risk than (for example)
Chinese CERs. Good and Bad for pricing
− Ability to use LDC CERs post-2012
Standard Bank is making a major effort to boost sub-Saharan African
CDM
− Specific Team dedicated to Carbon Origination in Africa
− Working internally and with other African FIs to develop financing
capacity in programmatic projects, small-scale projects and less
‘conventional’ project types and methodologies
− JV with UN agencies aimed at supporting CDM process financing,
supplying access to consultants, both at no cost
Requires cooperation across private and public sector
− To meet challenges of
1. Feasibility study financing
2. Early stage Equity financingOther External Factors Effecting CER Prices
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There are over 10,500 installations throughout Europe that have been allocated
emission ‘caps’ and have the obligation to remain within their caps on an annual
basis
In order to achieve emission reduction targets the ‘cap’ set for each installation will
reduce every year, thereby forcing the installation to reduce emissions by internal
abatement or by them compensating by buying allowances to ‘offset’ their excess
emissions
There is therefore the ability for a polluting power station in Europe that would find it
very costly to reduce emissions to purchase credits from projects in non-Annex 1
countries under the Clean Development Mechanism (CDM)
In order to promote a certain amount of internal abatement however the EU
countries have set limits on the amount of CERs that compliance buyers can use in
conjunction with their EUA allowances – for example
UK limit = 9%,
Germany = 20%
This means that an installation in the UK with a cap of 100,000 tonnes per year that
intends to emit exactly to their cap, may replace up to 9,000 tonnes a year of their
EUAs with CERs
There is a financial incentive to do this as historically CERs have traded at a varying
discount to EUAs. Penalties are expensive ie EUR100, plus CC purchase price.
Limit in CERs leads to ongoing price differential, but demand for African CERS still
outstrips supply due to low CER production from African projectsStandard Bank, also trading as Stanbic:
The largest financial institution in Africa
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A global emerging markets bank, headquartered in South Africa
In terms of total assets, Standard Bank is the largest bank domiciled in Africa
Full-service bank covering:
− Personal & Business Banking
− Corporate & Investment Banking
− Investment Management & Life Insurance
Leading financial services provider in South Africa – one of the fastest growing emerging market
banking sectors. Growing market share across all sectors and a consistent track record of
increasing profitability and franchise value
The largest bank in Africa with presence in 17 countries
Global reach on the ground in 16 countries outside Africa with distribution capabilities in the
world’s leading financial centres – New York, London and Hong Kong
Signed strategic partnership with the Industrial and Commercial Bank of China Limited (ICBC),
one of the largest banks in the world by market capitalisation
Total assets approximately US$162 billion (December 2008)
Market capitalisation of approximately US$14 billion (December 2008))
Present in 33 countries around the world
Employs over 50,000 people (including Liberty Life)Awards
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2005 - 2008 2008 2007 2008
Best bank for Best Trade Finance Carbon Credits
payments and Bank in sub-Saharan Emerging Markets Best Trade Award
collections in Africa Africa Bank of the Year Camco Structured
Distribution
2006, 2007, 2008 2008 2006 – 2007, 2009 2008
Best overall bank Leading Trade Services
Best debt research Africa Bank for cash management Bank in sub-Saharan
house in of the Year in Africa Africa
South AfricaContact Details
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Africa
Muyi Kazim (Lagos)
Muyideen.kazim@stanbic.com +234 802 042 0070
Trading, Structuring and Placement
Fenella Aouane, Geoff Sinclair, Mark Codling +44 20 3145 6888
fenella.aouane@standardbank.com
geoff.sinclair@standardbank.com
mark.codling@standardbank.com
CO2@standardbank.comDisclaimer
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