Understanding Carbon Prices: Muyi Kazim - Standard Bank Group - February 2010

Understanding Carbon Prices: Muyi Kazim - Standard Bank Group - February 2010
Understanding Carbon Prices:

Muyi Kazim – Standard Bank Group

                               February 2010
Understanding Carbon Prices: Muyi Kazim - Standard Bank Group - February 2010

  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)

„ 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
Understanding Carbon Prices: Muyi Kazim - Standard Bank Group - February 2010
CER – Registration Risk and Primary Price
Understanding Carbon Prices: Muyi Kazim - Standard Bank Group - February 2010
Price of Exchange Traded Carbon from
March 2008 - Current

   • 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
        • Primary prices are less volatile – generally prices have ranged between €7 and €13.
Understanding Carbon Prices: Muyi Kazim - Standard Bank Group - February 2010
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
„   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 approach
Pricing 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: ISDA
Buying Carbon credits from a Project

„ 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 costs
Carbon Finance – Trade Finance

Transacting to purchase carbon credits from a project under Clean Development
„ 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 2012
Risks Associated with Carbon Credit Projects

                    Carbon reduction                                                  Carbon
                                                        Construction                                        Issue of credits
                      assessment                                                    transaction

Feasibility and                        Validation and                                             Verification and
  financing                             registration                                               certification

                          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 risks
Carbon Finance – Project Finance

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 transactions
Case Study – Structured Finance/Programmatic CDM

                     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
                                                      Tranche B

                    Project pool                      Tranche C

                                                   Up front payment

Best Trade Award
Camco Structured
Actions to improve carbon finance in Africa

„   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
      − 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 financing
Other External Factors Effecting CER Prices

„   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
„   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
„   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 projects
Standard Bank, also trading as Stanbic:
The largest financial institution in Africa

                 ƒ A global emerging markets bank, headquartered in South Africa
          ƒ   In terms of total assets, Standard Bank is the largest bank domiciled in Africa
                                    ƒ Full-service bank covering:
                                       − Personal & Business Banking
                                    − Corporate & Investment Banking
                                 − Investment Management & Life Insurance

 ƒ  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
                    ƒ The largest bank in Africa with presence in 17 countries
   ƒ 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
  ƒ Signed strategic partnership with the Industrial and Commercial Bank of China Limited (ICBC),
                      one of the largest banks in the world by market capitalisation

                   ƒ Total assets approximately US$162 billion (December 2008)
              ƒ   Market capitalisation of approximately US$14 billion (December 2008))
                            ƒ Present in 33 countries around the world
                       ƒ Employs over 50,000 people (including Liberty Life)

    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

  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 Africa
Contact Details

„   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


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