The Green Infrastructure Finance Facility (GIFF) Concept by World Bank Publications

he Green Infrastructure Finance Framework Report was recently published to address the investment and financing problem of clean energy. The proposed Green Infrastructure Finance Facility will be the implementing vehicle of the Framework which would subscribe an initial funding from international donors in order to support justifiable renewable energy projects. With parallel support from host governments, the facility would use its financial resources to close the financial viability gap of clean energy projects, while at the same time ensuring a high leveraging of private finance in each of the projects it supports. It will also deploy its instruments to reduce the risks associated with these technologies. One of the novel features of this approach is the deliberate blending of both concessional and carbon finance instruments within individual project structures in order to achieve maximum effectiveness for bringing RE projects to financial closure with majority participation from the private sector.

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The Green Infrastructure Finance Facility (GIFF) Concept Financial and Operational Considerations Relating to the Proposed Concept

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All rights reserved This volume is a joint publication of the staff of the International Bank for Reconstruction and Development/ The World Bank and Australian Aid. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of The World Bank, its Board of Executive Directors, the governments they represent, or Australian Aid. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Moreover, the statistical database and other country-related information is time sensitive and subject to updates and/or changes. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to the work is given. For permission to reproduce any part of this work for commercial purposes, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; Telephone: 978-750-8400; Fax: 978-750-4470; Internet: www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Task Team Leader, Aldo Baietti: The World Bank, 1818 H Street NW, Washington, DC 20433, USA; e-mail: abaietti@ worldbank.org.

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Table of Contents I.

Acknowledgements

GIFF Concept Summary

III.

The Financing Dilemma of Green Energy Investments

IV.

The GIFF Facility Concept

Principles for a Sustainable Business Model

The Role of Host Governments

II.

V. VI.

VII. VIII. IX.

XI.

Host Government Contribution to the Viability Gap

PPP-‐Anchored MRV Framework

Solicitation Strategy – Market Maker for Price Discovery

Carbon Market Linkages

Approach to Managing Risks

Demand Risk

Project Risk

Financial Exposure and Due Diligence

Carbon Monetization Risk

Assessment of Economic and Financial Justification

General Description

Reference Investments

Determination of the Financial Viability Gap

Determination of Justification

Capacity Factors

Financial Assessment of Transaction Structures

Implementation Strategy

The Pilot Phase

Phase 2: Global Operations

Annexes

Pilot Program Projected Cash Flows

Tax and Other Financial Incentives for Green Energy Development

Emerging Carbon Markets in East Asia

Acknowledgements This concept paper was prepared by Aldo Baietti, Lead Infrastructure Specialist (GWADR) with the assistance of Roberto La Rocca, Energy Specialist (GEEDR) and Amar Causevic, Consultant (GWADR). The team wishes to acknowledge the contributions of Karan Capoor, Senior Financial Specialist (GEEDR), Johannes Heister, Senior Environmental Specialist (GENDR) and Andrey Shlyakhtenko, Operations Officer (GCCBF). The team would also like to express its sincere gratitude to the Australian Agency for International Development (AusAid) for their continued support provided through the World Bank East Asia-‐AusAid Infrastructure for Growth (EAAIG) trust fund.

GIFF Concept Summary An initial capitalization of $100-‐$160 million is sought to implement the pilot phase of the Green Infrastructure Finance Facility (GIFF). The Facility would utilize this funding to bring private renewable energy (RE) projects with a financial viability gap to financial close. In exchange for this financial support the project proponents of each project would relinquish to the Facility their rights to the stream of future carbon and related environmental benefits that would be generated throughout their projects’ useful lives and in addition, agree to repay all financial obligations such as, subordinated concessional loans provided to it as part of the overall support. One novel feature of the approach is the deliberate blending of both concessional and carbon finance instruments within individual project structures, thus creating maximum effectiveness for achieving four financial objectives: (i) making RE investments financially viable and more attractive to donor governments; (ii) creating bankable financial structures by de-‐risking the positions of senior lenders; (iii) maintaining a high leveraging factor of private financing within each financing structure; and (iv) creating the opportunity for a financially sustainable business model for the Facility. The interventions of the Facility will bring RE projects to financial closure with majority participation from the private sector and with a majority portion of the financial support recoverable through repayment of concessional loans (up to 30%). The carbon payment would provide revenue enhancement if it is needed beyond the concessional loan. The opportunity to replenish the funding comes with the redemption or sale of the carbon benefits in either formal and emerging Emission Trading Scheme (ETS) markets, or through private placements of willing participating governments or voluntary carbon buyers. The Facility will endeavor to receive pledges from donor governments for a floor carbon price that will allow the Facility to breakeven on its operations. For the pilot phase, the breakeven per ton price is estimated at $1.75/ton. In addition, the Facility will also endeavor to sell forward its carbon contracts at callable prices. A $5/ton redemption price would allow the Facility to earn roughly a 7% Financial Internal Rate of Return (FIRR) on its total operations. The financial assessment for the Facility has been premised on conservative assumptions using reference investments for five RE technologies with viability gaps ranging between 36% and 67% of total CAPEX costs. Under the principle of co-‐benefit sharing, host governments would need to shoulder about half of the viability gap through their current or future package of financial incentives. The Facility would fund the remaining gap with the GHG value of the benefits as a reference. The Facility would be expected to achieve 10 financings, leveraging over $500 million in total investment and which would generate up to 20 million tons of avoided CO2. Price discovery would be carried out through competitive bidding and the service obligations of the proponent would be regulated through the Public-‐Private Partnership 4

II.

(PPP) frameworks of host country governments. During operations, the actual gaps can be effectively lower than assumed, thus improving considerably the financial performance of the Facility and its impacts. The Financing Dilemma of Green Energy Investments Renewable energy projects have difficulty in attracting private financing because they are generally more expensive than conventional projects. As such, while these projects can be justified from an economic perspective, they often exhibit a financial viability gap. This means that without public financial support, these investments are either not viable or are less attractive than the conventional polluting alternatives. Even in cases where governments provide a subsidy through the electricity tariff to fully cover the gap, it may still be difficult to raise private investment capital, especially commercial debt. This is because the capital costs of renewable energy projects are also more upfront loaded with longer payback periods and are often perceived to have higher technology and production risks than most conventional energy investments. These characteristics make these projects more risky to commercial lenders. For developing country governments, on the other hand, the problem is also one of political incentives. These governments face strong political imperatives to expand access to electricity among their populations, and affordability is often a major concern. The higher costs of renewable energy, combined with its technical requirements for grid connection and load management, makes it more difficult to choose renewable energy over the cheaper and more easily dispatchable conventional sources. Moreover, while governments may be able to justify the higher cost of renewable energy because they are less detrimental to their own environments, the global Greenhouse Gas (GHG) benefits are much more difficult to internalize. Many such governments feel that the industrialized nations and populous emerging economies should assume a greater burden for mitigating the effects of climate change as well as absorbing the associated costs. Finally, many of the poorer nations have public finance constraints as well as underdeveloped private financial markets which impose practical limits on their ability to expand and support investments in this sector. So while there is keen interest among developing countries to green their economies and reduce the effects of climate change, the reality tells another story. Among seven important economies in East Asia, only South Korea and Singapore were able to effectively increase their share of renewables to total energy output from 2000 to 2011. But even for these countries, this improvement is negligible when considering their absolute fossil fuel energy production. On the other hand, China’s share of renewable energy to the total production actually declined from 19.4% in 2000 to 10.9% in 2011 despite substantial absolute investments in the sector. Also disturbing are the trends in Indonesia, the Philippines and Vietnam. 5

These countries weigh the trade-‐offs between a greener and healthier environment against the added energy cost which reverberates throughout the entire economy, particularly the exporting industries. This dilemma has been the focus of much of the climate finance discussion over the years and a number of recommendations and approaches have been introduced (e.g. incremental costs, additionality, business-‐as-‐usual etc.) in order to rationalize incentives from financial, environmental as well as political perspectives. While these approaches have shown some promise, they have largely failed to create a broad shift towards accelerating global investments in clean technologies and mainly remain theoretical constructs to address how much donor money can be tapped for projects in developing countries. Reversing this trend is not a simple matter. It requires an approach that can effectively bring clean energy investments at par with their lower cost polluting alternatives. To make it work, they not only have to be attractive to private lenders but also to host governments. The approach must also be fully inclusive with a capability to effectively deal with the systemic financial viability gaps of economically different justifiable RE projects which can effectively reach between 30% to 65% of the total upfront investment cost. The approach, like many that have been tried in the past cannot rely solely on selecting only the “low hanging fruit” as this will not reach the volumes needed to achieve the impact needed. Finally, the approach has to be equitable and economically and financially robust. 6

III.

The GIFF Facility Concept The Green Infrastructure Finance Framework Report1 was recently published to address the investment and financing problem of clean energy. The proposed Green Infrastructure Finance Facility will be the implementing vehicle of the Framework which would subscribe an initial funding from international donors in order to support justifiable renewable energy projects2. With parallel support from host governments, the facility would use its financial resources to close the financial viability gap of clean energy projects, while at the same time ensuring a high leveraging of private finance in each of the projects it supports. It will also deploy its instruments to reduce the risks associated with these technologies. One of the novel features of this approach is the deliberate blending of both concessional and carbon finance instruments within individual project structures in order to achieve maximum effectiveness for bringing RE projects to financial closure with majority participation from the private sector. A concessional loan, subordinate to the senior private debt would be the principal instrument from a development aid perspective. Its concessionality features can effectively reduce or totally eliminate the viability gap by reducing the weighted average cost of capital3 in a typically privately financed project, address the upfront financing burden that has discouraged commercial lenders, and tailor its repayment terms to accommodate longer payback periods. This instrument however carries an element of project risk and could substantially crowd out private finance, depending on the size of the gap and the concessionality of the terms offered. The carbon offtake payment, on the other hand is the principal instrument utilized in the carbon finance space. This instrument would provide a performance-‐based payment to the project for actual power generation which in turn, equates to the GHG benefits realized against the alternative polluting technology. By virtue of this feature the carbon payment eliminates project risk and maximizes the leveraging effect. However, it cannot address some of the unique financing challenges of renewable projects like concessional finance can -‐-‐ such as, reducing the risk of the senior lender, particularly when involving underdeveloped private finance institutions. Another major weakness of the carbon payment has been its dependency on both formal and voluntary carbon markets for the pricing of carbon benefits. The 1 The Green Infrastructure Finance Framework is described in the publication entitled Green Infrastructure Finance Framework Report, World Bank, 2012 and summarized in the publication entitled A Public-Private Participation Approach to Climate Finance, World Bank, 2013. 2 While energy efficiency investments can also be accommodated under the GIFF approach, the initial focus will be on renewable energy investments. 3 Depending on the concessionality of the loan, this instrument can reduce the average cost of capital by as much a 4 percentage points when inserted into a typical private financing structure. This reduction can equate to a total cost reduction in present value terms of $15 million for a 30MW wind investment or half of the total financial viability gap.

IV.

monetization risk can be substantial as carbon prices have been extremely volatile since emission trading schemes were established. This volatility has created major uncertainty over carbon finance as an important financing source and has been dubbed more as a “sweetener” rather than an essential component of the financing arrangements for green energy. Its overreliance has undermined the investment potential in green energy over the last decade. Generally, besides country-‐level based incentives such as Feed-‐in-‐Tariffs (FiTs) and tax and other financial incentives, past approaches to externally support green investments have exclusively targeted either one form of finance or the other, but seldom have these instruments been strategically combined in the way the Facility proposes. Yet, a flexible approach of blending these instruments can expand dramatically the universe of investments opportunities that can be targeted within a robust, financially sustainable business model. Principles for a Sustainable Business Model Following an initial capitalization from international donors, the Facility would utilize its funding to provide RE project proponents and commercial lenders with a risk-‐return profile needed to bring their projects to a financial close. In addition, it would make the projects more attractive to host governments vis-‐à-‐vis the more conventional polluting technologies. In exchange for this support the project proponents would relinquish to the Facility their rights to the stream of carbon benefits that would be generated throughout their projects’ useful lives and in addition, agree to repay all financial obligations such as, concessional loans provided to it as part of the support. As indicated, the Facility would primarily utilize two instruments for closing the viability gap: a concessional loan and an output-‐based carbon payment. However, unlike the Clean Development Mechanism (CDM) approach, the Facility would not depend on the carbon markets to set the offtake price it would offer proponents, but rather it would use the combination of these two instruments to close the viability gap and no more. Moreover, it would only use the carbon price of the various ETS markets as a reference for determining the amount of financial exposure it can prudently assume for monetizing the carbon benefits. The market prices can also provide a reference to the Facility for which technologies it would target, the guidelines for host government contributions, its solicitation strategy as well as the appropriate mix of the two instruments it would deploy in any given project financing structure. The Facility would financially engineer its support in order to minimize its financial exposure from monetizing the carbon benefits. As such, it is essential that the funding source is sufficiently flexible in order to tailor the financial support to the requirements of a given project rather than vice-‐versa. 8

To this end, the Facility will utilize the concessional loan as the primary instrument to close the viability gap. If it can achieve this and still maintain a minority position in the financial structure, the carbon benefits would be transferred to the Facility at zero cost, thus minimizing the monetization risk of the GHG benefits. In such cases, the monetization risk is negated and all the financial support is recoverable through regular debt servicing of the concessional loan. On the other hand, carbon payments either made up-‐front or on a performance basis are not recoverable unless the CO2 benefits are monetized. As such, if they are used exclusively to close the viability gap, a significant carbon monetization risk would have to be assumed. Accordingly, the carbon payment would be deployed only as a revenue enhancement to the concessional loan, if there is reasonable chance of redeeming the carbon benefits above their cost. Accordingly, the principle for creating a sustainable business model for this operation in the short term would be to utilize concessional loans to a maximum of 30% in a project’s financing structure and utilize output-‐based carbon payments as an incremental revenue enhancement (if needed) in order to fully close the viability gap. Once the Facility establishes linkages with existing and emerging carbon markets, it may begin to increase the portion of carbon payments within each project financing structure and reduce project risk. This strategy would allow the Facility to recover all or most of its financial contributions with the loan repayments as well as potentially achieve an upside (as rationale for extending concessional terms) in the event the carbon benefits can ultimately be monetized at cost plus. An additional risk mitigation measure can be introduced during the subscription for donor funding, whereby certain groups of donors may be willing to provide a per ton floor price (i.e. the break-‐even GHG cost to the Facility) for redeeming the carbon benefits earned by the Facility. In addition, the Facility will endeavor to subscribe the carbon offtake contracts it earns at various carbon prices which can be callable by carbon buyers in the event the market price starts to rise above their strike price. Under such circumstances, the Facility is guaranteed a replenishment of the funds with a recovery of management expenses. The successful demonstration of the replenishment of the original funding resources at a cost plus basis could be transformational as it would likely create wider interest for replication, even from totally private interests. The Role of Host Governments Host governments would have two important guidelines to follow for participating in the GIFF. These include: (i) the ability to fund roughly half of the viability gap through their current and future programs of financial incentives; and (ii) agree to utilize their 9

PPP regulatory framework for the enforcement of legally binding contracts and for the monitoring and verification of CO2 benefits generated by projects which are supported in their own countries. Host Government Contribution to the Viability Gap The financial viability gap of any given project is intrinsically linked to the country environment in which it proposes to operate. If a host government provides subsidies for fossil fuel-‐based energy, it indirectly increases the financial viability gap of green investments4. Conversely, a carbon tax on polluting energy or fuels commensurately reduces the gap of green projects. A robust package of financial incentives such as, tax holidays and duty concessions, direct financing support and feed-‐in tariffs can substantially reduce or entirely eliminate the gap needed for the green investment to be viable without any additional external support. But if that were the case, the percentage of green energy to the total in the East Asia region would actually be much higher than it currently stands. Much more can be achieved on the policy front. An important feature of the Framework methodology rests on cost sharing by both host governments and the international community for closing the financial viability gap of justifiable projects. The relative share of each party’s potential contribution is measured against the quantified value of the direct economic benefits that each gains by implementing the project against the low cost polluting alternative5. Thus, the cost sharing is grounded on sound economic, financial and political arguments. While a fundamental premise behind the Framework states that the form of support does matter as well as who pays for that support, the ability to share the financial cost for closing the gap alleviates a sizable and burdensome contribution by any one party. For a number of RE technologies, the financial viability gap can be more than 50% of the total levelized cost in net present value terms. For a typical 30MW wind project this can amount to a shortfall of $32.3 million. But despite this, the Facility can adequately bring a project to closing with a 50:50 cost sharing from the host government. The co-‐benefit sharing approach addresses the preponderance of the problem rather than “cherry-‐pick” only those projects that conform to donor funding specifications. It

4 The viability gap methodology which is described in greater detail in the Green Infrastructure Finance: Framework Report assesses the discounted cash flows of a proposed clean investment against the same of the polluting alternative. As such, any increase or decrease in the avoided cost would have a commensurate impact on the resulting financial viability gap. 5 It is important to underscore that what determines the financial viability gap under the approach is the levelized net present value cost of the RE investment against the low cost polluting alternative, not necessarily that an economy has high energy prices already. It is often interpreted that RE projects in high energy cost economies would have lower financial viability gap or may be viable without any support. But this would be so only if the alternative polluting technology is also of high cost such as for off-grid systems that primarily use diesel as their main source of fossil fuel. Under this scenario the viability gap for RE would be considerably lower than if compared to a lower cost fossil fuel. Many economies have high energy costs because of inefficiencies in their system and as such, the incremental cost related to this inefficiency would also be applied to new RE technologies with little commensurate effect on the size of the viability gap originally calculated between the two investments.

converts large gaps that are systemic among five RE technologies into manageable support. From a host government’s perspective, the justifiable economic value of the local externality benefits of green investments can be substantial and often greater than the value of external global benefits. Work to better understand whether host governments already have the capacity to contribute has already begun with the completion of seven assessments for key countries in East Asia, namely: China, Philippines, Vietnam, Malaysia, Indonesia, Singapore and South Korea. Many countries have already put FiTs in place which in some cases fall short of what is actually needed to bring projects to financial closure. Annex No. 2 summarizes the various financial incentives offered by the seven countries and illustrates the variety of available financial instruments and policies that could already be counted as part of their contribution under the approach. PPP-‐Anchored MRV Framework Successful implementation of the Facility requires a credible and efficient regulatory approach of enforceable contracts that will ensure that projects actually achieve their service obligations and environmental benefits. The Facility would operate within a host country’s existing PPP framework of legal and enforceable contracts, procurement rules, and sanctions for non-‐performance. The main element of such a regulatory approach should be a reliable and efficient system for measuring, reporting and verifying (MRV) environmental benefits since the Facility would issue carbon credits for sale or redemption. The attainment of the environmental benefits would become part of the proponents’ legally binding obligations which would be backed up by some form of security such as, performance bonds, third party guarantees and other forms of security -‐ as with other PPPs. Third party contributors must be assured that remedies can be obtained if a project does not achieve the expected reductions in GHGs. The performance security can be invoked in the event of such an occurrence. Participating governments would agree to regulate the projects which are supported under the program, including the monitoring and verification of GHG benefits realized by the projects supported. The in-‐country regulatory authority would be entrusted to implement the approach, would oversee certified auditors to carry out ex-‐post reviews and would have oversight and responsibility to ensure transparency and compliance. If necessary, conflicts can be referred to international arbitration to provide greater assurances and reduce third-‐party risk further. Many countries are now in the process of preparing domestic MRV systems. Some governments are looking to establish domestic emissions trading, offset systems or a carbon tax. Other governments want to improve their ability to manage and report on 11

VI.

domestic GHG mitigation. The World Bank administered Partnership for Market Readiness (PMR) supports these efforts. Among World Bank clients in East Asia, China is advanced with the creation of seven regional carbon markets and the prospect of a domestic cap-‐and-‐trade system, which the PMR helps prepare. Indonesia has proposed to undertake work on MRV in the electricity generation and industrial sectors, is collaborating with Japan on a bilateral Joint Credit Mechanism and operates a voluntary emissions trading scheme (the Nusantara Carbon Scheme). Thailand has established a system of voluntary emission reductions (T-‐VERs), and Vietnam plans to work with PMR to establish an MRV system and a GHG registry. While the GIFF may prefer to work within domestic systems, equally relevant are market-‐based instruments and related MRV systems in more advanced East Asian countries, such as South Korea, Japan, New Zealand, and Australia, which have concrete plans or are already operating trading schemes. Generally, the Facility will be open to using MRV systems and crediting schemes – including a new internationally negotiated system – that will enhance the value of the Facility’s carbon assets and serve buyers globally. Solicitation Strategy – Market Maker for Price Discovery The Facility will operate to minimize its dollar cost of support needed to close a project’s financial viability gap, but would not necessarily be limited to projects that only reflect a relatively small financial viability gap in relation to the overall investment requirements. The Facility has a number of options for its solicitation strategy: Firstly, its investment priorities could be derived through a solicited competitive bidding which can be either “open” to all technologies in the East Asia region or restricted to a specific technology. Since the GHG support provided by the Facility for a given technology would be heavily influenced by the host country’s contribution for its portion of the viability gap, this solicitation would initially favor those countries that have done the most to improve their green investment climate by reducing risk, streamlining permitting and other processes and by putting together a package of financial incentives that maximizes their potential contribution. Over time, the approach would continue to favor projects in countries that continue to make additional improvements to their green investment climate and to reduce distortions that in the past have favored fossil fuels. Secondly, it could also work with individual countries, especially the poorer economies, if they intend to strengthen incentives and actively participate in the program. Technical support is envisioned for these participating governments which will identify additional 12

VII.

financial incentives that could be included as part of a government’s contribution. Advice can also be provided to help governments develop a policy action plan for the near and medium term in order to make additional improvements to a country’s green investment climate, overall. Thirdly, governments that may have set up or are contemplating an ETS may seek the Facility’s support for how the framework can be utilized in order to accelerate green investments within their own country (e.g. by auctioning allowances for mobilizing the initial capital for investment financing). While the solicited bidding approach provides assurances for efficiency of the price discovery process, it also produces fair market values for each of the RE technologies and ultimately can provide a fairly well documented cost curve. Carbon Market Linkages As noted in the Report on Leading Initiatives6, the successful introduction of carbon prices has only been followed by an unpredictable and volatile carbon market. This has caused a tremendous setback for what otherwise would be very positive contributions of emission trading schemes and the pricing of carbon. An international emission trading scheme has also been very difficult to operationalize due to political difficulties in concluding climate change negotiations. Many country-‐based and regional markets are emerging, which could be ultimately linked through some conversion mechanism to the Facility’s operation. Within the East Asia and Pacific (EAP) region, ETS schemes are in various stages of development and implementation in New Zealand (ETS), South Korea (ETS), Thailand, China (sub-‐national pilot ETS, moving towards national scheme), Japan (bi-‐lateral offset mechanism and sub-‐national ETS), Indonesia (voluntary market potentially moving to ETS) and Australia. Annex No. 3 provides a snapshot of the various markets emerging in EAP. The price of carbon has fluctuated dramatically over the years. The carbon market price for allowances of the European Union (EU) ETS trading scheme are currently hovering around US$9 per ton of CO2, or roughly 64% less than the higher end of the referenced AGF target7 price of $25 per ton. Moreover, in earlier years, trading prices suffered substantial volatility falling to just €1 in 2007, regaining to €30 in July 2008, and then falling again to €14 in 2009. This type of volatility has continued post Kyoto as the CO2 price in the CDM reached just $3 per ton last year. The volatility can be significant even on a monthly basis which creates much uncertainty for individual project 6 Baietti, A., Shlyakhtenko, A., La Rocca, R., Patel, U., “Green Infrastructure Finance: Leading Initiatives and Research”, World Bank, 2012. 7 Report form the United Nations High-level Advisory Group on Climate Change Financing.

VIII.

proponents in need of viability gap financing at any given time. Voluntary markets have been equally volatile with the more recent price of $5.90 in 2012. RE project proponents and commercial lenders require reasonable price expectations in the long run which the current market has not been able to provide. While the Facility will be linked to carbon markets for its own financial interests, its operation focuses more on the per ton support cost that a project requires through a competitive price discovery process. This cost can vary significantly depending on the mix of instruments applied in order to close a project’s viability gap. However, the carbon payment is guaranteed for the duration of the project’s operational life, thus providing the price stability that proponents require. As such, the Facility assumes carbon price risks through this operation but creates an important buffer for project proponents desiring to close on their transaction and move forwards towards implementation. Proponents will thus have a substantial incentive to participate in the program by utilizing the support offered by the Facility. The Facility then has an element of time in following its strategy for placing the carbon offsets in the various markets at cost plus. With regard to the more formal markets, the law firm of Baker McKenzie, Australia has carried out preliminary work for creating a practical emerging carbon markets interface in East Asia. The Facility can become a good first opportunity for creating certifiable benefits, which can be accepted and traded in the various emerging carbon markets and exchanges. While this can result in a longer term endeavor, immediate attention can be placed on more informal and voluntary markets. That said, a minimum of 5 years will likely lapse from the start-‐up of the Facility before an attempt is made by the Facility for a potential placement of the carbon credits it has earned. Approach to Managing Risks The Facility will inevitably assume certain program and project related risks in this undertaking. Demand Risk At the program level, the demand for the Facility’s support will constitute its primary risk. This risk could be due to a number of factors including: (i) lack of projects in need of financial support; and/or (ii) insufficient financial contributions from host governments. With regards to these two aspects of demand risk, a fair amount of work has been initiated both in terms of estimating the amount of RE potential in the EAP region as well as determining which of that potential would be justifiable from a climate change perspective. The overall and environmentally justifiable RE potential was 14

estimated based on secondary research using data from Bloomberg New Energy Finance and other online databases. The research was carried out to develop an overall pool of investments in five RE technologies, but without necessarily considering technology or other limitations (e.g. grid capacity, land availability) which could prevent some of this potential from being realized. On this basis, 313GW of justifiable potential was estimated among six countries in EAP as shown in the chart below. With China, the potential could easily double. Potential for Renewable Energy Investments in Selected East Asian Economies

The analysis does have its limitations as it is not based on an in-‐depth review of projects that do not go forward because of a viability gap. Such information is not readily available. But the analysis illustrates that the Facility would target only a very small fraction of this potential for an initial pilot operation. This would provide a relatively conservative basis for ensuring that a good number of projects exist that can be included for financial support. Despite its limitations, the assessment was complemented with actual experiences of RE projects in the Philippines which were not been able to move forward. This review was carried out with IFC’s assistance and was undertaken of actual RE projects in solar PV, biomass and mini-‐hydro. Prior work also found that: (i) many RE technologies can be viable or close to viable on off-‐grid systems when compared to diesel as the alternative fossil fuel; and that (ii) FiTs can be either too high or fall short of making the project financially viable. The fact that many governments have introduced FiTs to support renewable energy projects in addition to numerous other financial incentives, provides comfort that a sufficient number of projects have been conceptualized but have not gone forward because of a persistent financial gap. Moreover, the FiTs already in place would become part of the governments’ contribution as indicated above.

Project Risk The Facility will assume project risk by virtue of utilizing subordinated concessional loans as part of its financing support. Its participation in the financing structure will, however reduce the overall risk of the senior debt. In most cases the senior debt to the fixed asset ratio would actually improve with the Facility’s participation as opposed to an entirely private structure. To limit its own exposure to production risk, the proponent would be expected to provide a performance-‐based security. The performance bond would reduce the Facility’s financial exposure related to its contributions to the financing structure as well as guarantee third parties, in the event a project fails to deliver the expected quantity of GHG emissions credits due to operational shortfalls (such as a lower-‐than-‐expected capacity factor). The value of the performance bond would be adjusted periodically to reflect the remaining financial obligations of the proponent during the projects’ operational period. Taking on project risk also means that the Facility would also assume an element of regulatory risk as is the case with all PPPs. Financial Exposure and Due Diligence The Facility will assume a minority position, subordinate to the senior private lender, of no more than 30% in a project’s financing structure. Additional support may be offered but outside the financing structure as either revenue or risk enhancements. The Facility’s position in the financing structure will be subordinate to the senior lenders which will have first rights to recover their loan capital. While the Facility will exercise a certain amount of due diligence on each project through its competitive bidding process, the senior lenders would provide a good basis for the Facility’s assessment. Pre-‐qualification requirements would include criteria for technical expertise, financial capacity and operational competence. Project proponents would need to have their senior lenders in place prior to any consideration. The Facility may at its option decide to also pre-‐qualify financial institutions by requiring these to fully understand the nature of RE technologies as well the operational aspects of the process and to ensure that projects are only brought forward after all requirements have been satisfied for funding consideration. Projects would need to be fairly well developed and proponents will be required to have received the necessary approvals from the relevant host government agencies.

IX.

Carbon Monetization Risk The Facility will assume the monetization risk for the carbon certificates it earns during its operations. As indicated, as a new entity in this market, the Facility may need some time in order to establish the necessary linkages with emerging and existing carbon markets in East Asia and elsewhere. Many are still not fully operational as illustrated in Annex 3. That said, there are potentially other avenues available for redeeming emission certificates which the Facility obtains through its operation, including voluntary markets and specific arrangements with donors and other carbon buying institutions. As indicated, the Facility will explore the possibility of developing such arrangements during the initial capitalization, whereby donors may agree to a floor price for which the certificates would be redeemed. Moreover, during the initial phase of the Facility’s operations, the financial arrangements vis-‐à-‐vis individual projects would be structured to minimize the carbon monetization risk, by favoring recoverable concessional loans for filling the viability gap. Once the Facility is able to demonstrate the viability of its certificate redemption operations, it could assume a higher degree of carbon monetization risk within each transaction structure. This strategy would create the opportunity for a substantial upside in return of before offering low cost concessional financing. Assessment of Economic and Financial Justification General Description A fully integrated financial projection model was developed to support the financial analysis of five renewable technology investments which could be considered for financial support by the Facility. These include Solar PV, Mini Hydro, Wind, Biomass and Geothermal. The financial model was also utilized to assess the financial implications of the proposed concept as well as assess the potential for sustainability.

The financial aspects: (i) developed long term financial projections in order to determine the financial viability gap of a given target investment against the polluting alternative; (ii) determined an appropriate level of financial intervention which would be able to close the viability gap given various scenarios for host government contributions; (iii) determined the appropriate capital structure and financing plan for ensuring a high leveraging of private finance; and (iv) determined under which scenario the Facility could effectively provide financial support and in what form. The model also developed projections of the environmental benefits which each green investment would be able to generate against the polluting alternative. This would: (i) determine whether the investment is justifiable from a climate change perspective; (ii) break down the economic value of both the local and global externality benefits which 17

would be used as a reference for the justifiable financial contributions that the Facility and host government can make; and (iii) assess the Facility’s cost of GHG benefits in order to validate the capacity of the Facility to redeem earned carbon benefits at a cost plus basis. Reference Investments Five renewable technologies were conceptualized and estimated based on current available technical and financial information. The table below summarizes the technical and financial parameters used for these reference investments. Profile of Reference RE Investments Technology

Capacity (MW)

Wind Mini Hydro Geothermal Biomass Solar

30 10 40 15 5

Utilization (Percent)

29% 40% 70% 75% 20%

Life

CAPEX

(MWh)

(Years)

US$mm per MW

76,212 35,040 245,280 98,550 8,760

20 30 30 20 30

1.90 2.00 3.42 1.30 2.20

OPEX Total

(US$mm)

US$ per MWh

Total (US$mm)

57.00 20.00 131.40 19.50 11.00

12.7 10.0 15.8 40.0 11.3

0.97 0.35 3.87 3.94 0.10

Viability Gap NPV (US$mm)

($32.30) ($5.65) ($47.76) ($13.08) ($6.81)

(percent)

-‐57% -‐28% -‐36% -‐67% -‐62%

Determination of the Financial Viability Gap The financial viability gap was determined for each of the above technologies by calculating the Net Present Value of the financial cash flows against the avoided cost of the polluting technology for the same amount of productive output. This means a direct comparison of both CAPEX and OPEX costs of the renewable energy project to the alternative without any additional revenue support from what would otherwise be earned from the base tariff by the avoided technology. The Financial Viability Gap was calculated based on the following financial assumptions: Avoided Cost Tariff: For purposes of this analysis, coal was used as the polluting alternative with the base tariff of $4.7 cents which is considered a competitive rate. At this point the analysis did not factor any distortions such as direct subsidies which may lower the cost of production. It also did not factor in any enhancements arising from financial incentive program being offered in any given country in the region. Such factors would be included in proponents’ proposals when investments proposals are evaluated for support as they would include all such factors which combined would constitute the contribution by the host government.

Financing Structure: The approach starts off with a purely private financing structure comprised of 35% Equity and 65% Senior Debt. Weighted Average Cost of Capital: Based on regional benchmarks, the Weighted Average Cost of Capital (WACC) is estimated at 11.25% comprised of 19% for private equity and 7% for the commercial debt. Commercial lending terms extended to proponents would consist of a 15-‐year maturity, 3-‐year grace period under a mortgage style amortization. Price and Cost Escalation Rates. Tariff and costs were escalated at 3% per annum. The derived amounts for the financial viability gap are shown in the above table. In absolute terms the amounts are not necessarily revealing except to illustrate the sheer size of these gaps. For a 40MW geothermal plant the gap is approximately $11.94 million for every 10MW, while a 30 MW wind plant requires an additional enhancement of $32 million in order to make it financially viable. Equally informative are the differences between technologies as illustrated by the value of the gap as percent of the total CAPEX. In this case, Biomass shows the highest at 67% while Mini Hydro shows the lowest at 28%. For the geothermal project, the CAPEX cost included exploration requirement of approximately $11 million which raised significantly the viability gap since these are carried out in the early years of project development and are discounted the least. Determination of Justification The Framework states that RE investments can be justified from a climate change perspective if the value of externality benefits both local and global are greater than the value of the negative financial viability gap. The table below indicates that all the reference projects can be justified on these grounds. In terms of determining the economic values of the benefits, the following assumptions were applied: Determination of Whether Investments are Justifiable From a Cliamte Change Perspective Technology

Capacity (MW)

Wind Mini Hydro Geothermal Biomass Solar

30 10 40 15 5

Viability GAP NPV (US$mm)

($32.30) ($5.65) ($47.76) ($13.08) ($6.81)

NPV Value of Externality Benefits

(percent)

-‐57% -‐28% -‐36% -‐67% -‐62%

GHG B enefits

Pollution B enefits

Total

(US$mm)

26.8 29.5 27.2 47.8 190.1 334.9 34.6 38.2 8.8 13.2

56.29 75.00 525.03 72.79 21.93

Shadow Price of GHG Benefits: A shadow price of $25 per ton was utilized for the purpose of valuing the global externality benefits. This corresponds to a per kilowatt Shadow Price of GHG Benefits: A shadow price of $25 ton given was utilized for the hour value of $0.0258. While many different values have per been to the price of purpose of valuing the global externality benefits. This corresponds to a per kilowatt carbon in recent years, the $25 per ton price is considered conservative and in line with hour value pof $0.0258. different values have given to the price of the values roposed by tWhile he UN many High Level Advisory Group on been Climate Change Financing. carbon i n r ecent y ears, the $ 25 p er t on p rice i s c onsidered c onservative a nd i n l ine with Given the wide disparity in these values and actual prices in voluntary and formal the values proposed by the UN$25 High Level dvisory Group on Climate Change emission trading systems, the per ton vAalue is used only for the purpose of Fjinancing. ustifying Given the wide disparity in these values and actual prices in voluntary and formal the investments from an economic perspective. The price of carbon in ETS markets emission systems, the $25 er ton value used o nly for the financial purpose decisions of justifying would be trading used by the Facility as preference for is other important as the investments from an economic perspective. The price of carbon in ETS markets discussed. would be used by the Facility as reference for other important financial decisions as discussed. of Local Externality Benefits: Externality benefits relate to the avoidance Shadow Price

of local pollution of SO2, NOx and Particulate Matter. The shadow price for the avoided Shadow Price f Local Externality Benefits:hour Externality relate o the avoidance pollutants was oassumed at a per kilowatt price of benefits $0.0455. This twill change with of l ocal p ollution o f S O , NO and P articulate M atter. The s hadow p rice f or t he a voided 2 x actual circumstances based on the location of the investments. pollutants was assumed at a per kilowatt hour price of $.0455. This will change with actual circumstances based on the location of the investments. Capacity Factors Typical Capacity Factors Ranges of RE Capacity Factors Observed Capacity Factors The viability of of RE RE technologies technologies isis Technology The financial financial viability Typical Capacity Factors Ranges of RE Projects i n E ast A sia also llargely driven byy the also argely d riven b the effective effective utilization utilization Observed Capacity Factors The financial capacity. viability of technologies is Wind 20%-‐30% of productive The table to theto right of productive capacity. RE The table the Technology Projects in East Asia also largely driven by factors the effective utilization 23%-‐50% shows the capacity that have been right shows the capacity factors that have Mini Hydro Wind 20%-‐30% of productive The to grid the Geothermal 50%-‐75% observed in Eastcapacity. Asia forAsia on-grid and offbeen observed in East for table on-‐grid and Mini H ydro 23%-‐50% right shows the capacity factors have Biomass 67%-‐77% projects. Since off-grid compete off-‐ grid projects. Since projects off-‐grid that projects Geothermal 50%-‐75% been observed in East Asia for on-‐grid and 14%-‐20% against diesel fired plants as the least compete against diesel fired plants as cost the Solar Biomass 67%-‐77% off-‐ grid off-‐grid projects alternative polluting Since which is w a hich least cost projects. alternative ptechnology olluting technology is a higher cost fuel than coal, most RE Solar 14%-‐20% compete diesel fired as the higher costagainst fuel than most RE technolotechnologies would ecoal, xhibit a mplants uch lower viability gap in off-‐grid systems. As such, off-‐ least c ost a lternative p olluting t echnology which is a higher cost fAs uel such, than off-grid coal, most RE gies would exhibit a much lower viability gap in off-grid systems. investgrid investments, such as isolated mini-‐grids, could represent a sizable demand for the technologies would exhibit a much could lower represent viability gaap in off-‐grid systems. such, off-‐ ments, such as isolated mini-grids, sizable demand for the As facility. facility. grid investments, such as isolated mini-‐grids, could represent a sizable demand for the facility. Financial Assessment of Transaction Structures Financial Assessment of Transaction Structures The financial assessment of alternative transaction structures for each technology reviewed the feasibility of financial support by the Facility under two scenarios: (i) The financial assessment alternative transaction structures for each with technology viable structures with no of monetization risk; and (ii) viable structures some reviewed the feasibility of financial support by the Facility under two scenarios: (i) monetization risk. Both these were determined based on the minimum level viable structures with risk; and for (ii) this viable structures with contribution needed by tno he hmonetization ost government, which assessment would be isome n the monetization risk. Both these were determined based on the minimum level form of a FiT subsidy over and above the avoided cost tariff of $.047 for on-‐grid systems. contribution needed by the host government, which for this assessment would be in the form of Transaction a FiT subsidy Structures over and above voided cMonetization ost tariff of $.047 for The on-‐grid systems. Viable With the No aCarbon Risk: table below

shows the viable structures that would not carry a carbon monetization risk for the five Viable Transaction Structures No systems. Carbon Monetization Risk: The table below reference RE investments for With on-‐grid The assessment determined the shows the viable structures that would not carry a carbon monetization risk for the five reference RE investments for on-‐grid systems. The assessment determined the 20 20

minimum host government contribution needed along with the guideline for a 30% maximum contribution in the form of a concessional loan of 20 years maturity, 5 years grace period and 5% interest. As such, any amount of contribution by governments beyond these amounts would also be viable. The 30% max contribution by the Facility results in a leverage factor of around 2.32 times. While the inclusion of the concessional loan in all the structures increases the debt/equity ratio overall from 1.82 times to around 2.53 times, the support also lowers considerably the ratio of senior debt to total fixed assets from .65 times to approximately 0.50 times. The inclusion of the subordinate concessional loan also reduces the inherent risk of the commercial lender while at the same time maintaining a fairly healthy debt service coverage ratio for the senior lender ranging between 1.4 times to 1.5 times. Overall, the lowest annual DSCR ranges between 1.10 times and 1.3 times, indicating a reasonable risk level for the subordinated debt as well. Viable Transaction Structures With No Carbon Monetization Risk Technology

Viability Gap Minimum Govt Contribution Capacity

Concessional Loan

Ratios of Senior Debt Leverage

NPV

FiT Subsidy

Amount

Percent of

US$ Millions

Contribution

(US Cents/kWh)

US$ Millions

Total F inancing

($32.30)

58%

3.21

$17.51

30%

2.32X

2.53

0.50

1.48

D/E

D/FA

DSCR

Wind

30MW

Mini Hydro

10MW

($5.65)

45%

0.90

$6.14

30%

2.32X

2.53

0.50

1.40

Geothermal

40MW

($49.00)

51%

1.74

$42.40

30%

2.32X

2.49

0.50

1.46

Biomass

15MW

($13.08)

63%

1.10

$5.97

30%

2.33X

2.52

0.50

1.50

Solar

5MW

($7.68)

71%

6.54

$3.38

30%

2.32X

2.33

0.50

1.45

Debt to Equity Ratio Senior Debt to Capex Ratio a t Financing 3 Lowest Annual Debt Service Coverage to Senior Debt 2

With regards to the different technologies, the mini hydro investment offers the best opportunity for support as it requires only a 47% level of support from the host government. Wind is next with 59% support, then geothermal and biomass. Solar is a difficult case in that the structure requires a 71% contribution from the host government. On a case by case basis there will be situations where FiTs for solar systems in the countries observed are already sufficiently high to enable some support from the Facility. In any case, solar investments in off-‐grid systems can be included for support and represent a significant level of demand. Viable Transaction Structures With Some Carbon Monetization Risk: The participation by host governments can be reduced, in the event there is merit in assuming some element of carbon monetization risk. The table below shows viable structures with some element of carbon monetization risk.

Viable Transaction Structures With Some Carbon Monetization Risk Technology

Viability Gap Minimum Govt Contribution Capacity

Concessional Loan

Carbon Payment

Ratios of Senior Debt Leverage

NPV

FiT Subsidy

Amount

Percent of

US$ Millions

Contribution

(US Cents/kWh)

US$ Millions

total financing

US$ Price/ton of CO 2

D/E 1

D/FA 2

DSCR 3

Wind

30MW

($32.30)

50%

2.69

$17.51

30%

$5.00

2.32X

2.53

0.50

1.89

Mini Hydro

10MW

($5.65)

35%

0.70

$6.14

30%

$2.00

2.32X

2.53

0.50

1.72

Geothermal

40MW

($49.00)

40%

1.43

$42.40

30%

$3.00

2.32X

2.49

0.50

1.80

Biomass

15MW

($13.08)

50%

0.87

$5.97

30%

$2.25

2.33X

2.52

0.50

1.90

Solar

5MW

($7.68)

66%

5.90

$3.38

30%

$6.11

2.32X

2.53

0.50

1.84

Debt to Equity Ratio Senior Debt to Capex Ratio a t Financing Lowest Annual Debt Service Coverage to Senior Debt

As shown, for the wind project, the government’s participation could be reduced by 9 percentage points to 50% with an alternative structure that would include a carbon payment of $5/ton of CO2. Equally the government’s contribution on the biomass project can be reduced from 65% to 51% with a carbon payment of $2.25 per ton added to the structure. Governments contribution on solar could be reduced to 63%, but with a carbon payment of $6.11 per ton of CO2. Transmission Links: Since many RE technologies are location-‐specific, some of the more feasible locations may be in remote areas that would require additional transmission costs to connect. FiTs may include some consideration for such costs, whereas these are excluded in the cost of the reference projects above. Instead, these costs can be considered as part of the host government’s contribution to the extent that the remaining value of local externality benefits justifies the additional transmission connection. The costs of the 132kV and 220kV transmission lines are estimated at $327K/km and $426K/km, respectively. Selection Strategy: In the short term, the Facility would target opportunities that would allow it to avoid the carbon monetization risk entirely. This would be achieved by soliciting investment proposals that have the lowest viability gap for support by the Facility. Again, this would mean projects that would be implemented in a low cost environment taking all factors into considerations such as, the package of financial incentives provided by the host government, access to transmission linkage, other costs of doing business as well as subsidies provided for fossil fuels. Implementation Strategy The Facility will be implemented in two phases: a pilot phase carried out in East Asia and a global operations phase. The two-‐phased implementation will allow the Facility management to gain operational experience and demonstrate proof-‐of-‐concept with the new financing approach in the initial phase. These insights will enhance the effectiveness of the Facility during its larger-‐scale global operations. 3

The Pilot Phase The success of the pilot phase will be measured primarily by the volume of GHG emissions reduced, the effective portfolio-‐wide cost of GHG emissions savings (US$ per ton of CO2), and the amount of private sector capital leveraged through the Facility’s support. The indicative pipeline for the pilot phase is shown in the table below along with a summary of the financing arrangements. This includes 10 investment projects amounting to 205MW of power and a total investment of $509 million. The financial viability gap for these investments is estimated at $210 million or almost half of the investment. The list includes projects which the Facility can support with a concessional loan only, and with a combination of a concessional loan and a carbon payment. Indicative Pipeline for Pilot Implementation Technology

Viability Gap Capacity MW

US$ Millions

Govt Contribution

Facility Contribution

NPV

FiT Subsidy

Loan

Carbon Payment

Contribution

(US$ m illions)

US$ Millions

US$ Price/ton of CO 2

Wind Wind Mini Hydro Mini Hydro Mini Hydro Geothermal Geothermal Biomass Biomass Solar

30 30 10 10 10 40 40 15 15 5

($32.30) ($32.30) ($5.65) ($5.65) ($5.65) ($47.76) ($47.76) ($13.08) ($13.08) ($6.81)

59% 50% 47% 37% 47% 62% 47% 65% 51% 71%

$19.17 16.06 2.69 2.09 2.69 29.44 22.45 8.50 6.72 5.45

$17.51 $17.51 $6.14 $6.14 $6.14 $42.40 $42.40 $5.97 $5.97 $3.38

Totals

205

($210.03)

55%

$115.25

$153.56

$5.00 $2.00

$3.00 $2.25

GHG Benefits

Cost of GHG

MM CO 2 Tons

US$ Millions

1.58 -‐ 1.58 $7.88 1.87 -‐ 1.87 3.74 1.87 -‐ 7.61 -‐ 7.61 22.83 2.80 -‐ 2.80 6.30 0.30 -‐

$1.36 29.88

$40.75

Summary of Financing Arrangements of Pilot Implementation

Technology

Total Capacity Investment1 MW

Wind Wind Mini Hydro Mini Hydro Mini Hydro Geothermal Geothermal Biomass Biomass Solar Totals

Viability Gap

30 30 10 10 10 40 40 15 15 5 205

US$ Millions

$58.06 $58.06 $20.37 $20.37 $20.37 $140.85 $140.85 $19.86 $19.86 $11.20 $509.87

($32.30) ($32.30) ($5.65) ($5.65) ($5.65) ($47.76) ($47.76) ($13.08) ($13.08) ($6.81) ($210.03)

Project Finance Structure Private Sector Contribution Facility Equity

Debt

Concessional Loan

US$ Millions

$11.48 $11.48 $4.03 $4.03 $4.03 $28.23 $28.23 $3.95 $3.95 $2.21 $101.63

$29.07 $29.07 $10.20 $10.20 $10.20 $70.22 $70.22 $9.95 $9.95 $5.61 $254.68

$17.51 $17.51 $6.14 $6.14 $6.14 $42.40 $42.40 $5.97 $5.97 $3.38 $153.56

Total US$ Millions

$58.06 $58.06 $20.37 $20.37 $20.37 $140.85 $140.85 $19.86 $19.86 $11.20 $509.87

Revenue Enhancements Govt Contribution Facility Support NPV of Viability G ap

Carbon Payment

US$ Millions

$19.17 16.06 2.69 2.09 2.69 29.44 22.45 8.50 6.72 5.45 $115.25

$7.88 $3.74

$22.83 $6.27 $40.72

Based on this list, two optional pilot programs are presented: Pilot Program No. 1 -‐ Includes 7 projects, two of which would require some carbon payment. 1

Includes Interest during construction

Pilot Program No. 2 – Includes all 10 projects, 4 of which would require the carbon payment. A cash flow projection (See Annex 1) was developed for each option with the table below summarizing the results in terms of: (i) initial capital required, and (ii) carbon redemption prices in order to break even, realize the commercial rate of return of 7% and 15% FIRR. As shown, both program offer similar returns. The key difference is the amount needed for the initial capital. Financial Viability Summary of Pilot Options Pilot Program No. 1

Pilot Program No. 2

Capital Requirements (000) 95,000 Emission Certificates (000) 15,736 Emission Redemption Price /ton Break Even $1.54 7% Return $5.45 15% Return $8.96

163,000 20,437 $1.73 $5.61 $9.12

The projected cash flows for each option are shown below with the following assumptions. Implementation Arrangements: It is envisioned that the Facility will be a trust-‐funded program under the World Bank Group (WBG), for which roles and responsibilities will be set through trust management/advisory agreements. Donors will provide capital and delegate decision making responsibility to the WBG, which in turn will be responsible for managing the Facility, making investment decisions, and reporting its activities to the donors. Since this is primarily a private financing initiative, IFC performance standards would be most appropriate. Management Fees: These are estimated to peak at $1.2 million in Year 6 and then drop considerably given the completion of all financings and carbon redemption operation. In the event of a continuation of a global program, these fees would increase in concert with the requirements of new activity. Carbon Monetization Risks: Under both scenarios the cost of carbon payments to the project proponents would be less than the receipts from the lending operation. However, given the additional cost of managing the Facility, it would be required to realize some revenue from the sale or redemption of the carbon certificates. This amount is defined as the break even carbon price under both options.

TA Expense: An amount of $1 million is assumed to provide for some initial Technical Assistance (TA) in order to work with governments for facilitating their participation in the Program. Redemption of Certificates: It is assumed that the emission certificates for the Pilot Program No. 1 will be redeemed as forward contracts in year 5 of the operation. The redemption for Pilot Program No. 2 would occur a year later. This would allow for all projects to complete construction as well as complete at least two years of operations in order to ensure the reliability of cash flows as originally assessed. Phase 2: Global Operations Following the pilot phase, the Facility would expand its operations to support renewable energy projects in developing economies around the world. The Facility will only seek to raise additional capital and proceed with a global rollout if the pilot phase is successful. There will be three primary measures of the pilot phase which will trigger the next phase of global operations: • Climate Impact: the pilot phase will measure the impact of the green finance framework in terms of the volume of GHG emissions reduced by the renewable energy projects supported by the Facility. •

Financial Impact: the Facility’s financial performance will be assessed at the end of its pilot phase, including the amount of private capital that was leveraged through the Facility’s operations.

•

Sustainability: The Facility’s ability to sell its portfolio of GHG emissions credits from the pilot phase at cost plus. This will demonstrate a financially sustainable approach, and depending on actual returns may reduce or entirely eliminate the need for continuing donor funding. While the approach would be piloted in East Asia, it can in principle be replicated in other regions.

33,890

1,000

Year 2

Year 3

1200

Year 4

1200

3,002

Year 5

6,822

-‐

7,190

9,000

-‐

3,002

-‐

17 423

1,938

-‐

17 438

86,633

-‐

17 438

88 31 31

Ending Cash Balance

212

1,501

301

85,759 32,080 50,254 3,423 438 86,196 (1,810) (368) (3,820) (1,064) 84,695

9 254

30 30

30 15

88 31 31

212

88 31 31

112

88 15 15

212

1,501

301

72 229

-‐

1200

1,938

229

44 15 15

7,242

3,000

50,622

40000 5970 5970 3380 49,350 5,970 -‐

1200

6,822

1200

7,190

50,000

32,000

-‐

32,190

6140 6140 17510 2400

1200 500 1700

-‐

Year 1

0 9,000

500 500 1000

Year 0

Capitalization Receipts 10,000 Interest Revenue Geothermal Wind Hydro 1 Hydro 2 Biomass Biomass 2 Solar Interest Revenue -‐ Repayment of Principal Geothermal Wind Hydro 1 Hydor 2 Biomass 1 Biomass 2 Solar Principal Repayments Redemption of Carbon Certificates Total Receipts 10,000 Cash Surplus/(Shortfall) 9,000

Receipts

Personnel & Overheads TA Expense Facility Management Financings Hydro 1 Hydro 2 Wind Geothermal Biomass 1 & 2 Solar Total Financings Carbon Payments Hydro Biomass 2 Total Carbon Payments Repayment of Capital Total OutFlows

Opening Cash Cash Outflows

Year 7

4,646

2,729 1,127 395 395

17 438

88 31 31

212

801

301

229

-‐

500

85,569

89,852

438 5,084 (1,064) 4,283

-‐

17 438

88 31 31

212

1,501

301

229

-‐

1200

86,633

Year 6

94,736

5,686 4,884

218 5,272

2,743 1,133 397 397 384

17 414

82 29 29

198

801

301

229

-‐

500

89,852

Year 8

Projected C ash Flows of Pilot Program No. 1

Green Infrastructure Finance Facility

100,005

6,070 5,269

2,756 1,138 399 399 386 384 219 5,682

16 388

76 27 27 28

185

801

301

229

-‐

500

94,736

Year 9

105,273

6,070 5,269

2,770 1,144 401 401 388 386 220 5,711

15 360

171 71 25 25 26

801

301

229

-‐

500

100,005

Year 10

Annex 1: Pilot Program Projected Cash Flows

110,542

6,070 5,269

2,784 1,150 403 403 390 388 221 5,739

14 331

157 65 23 23 24

801

301

229

-‐

500

105,273

Year 11

115,810

6,070 5,269

2,798 1,155 405 405 392 390 222 5,768

13 302

143 59 21 21 22

801

301

229

-‐

500

110,542

Year 12

121,079

6,070 5,269

2,812 1,161 407 407 394 392 223 5,797

11 273

129 53 19 19 20

801

301

229

-‐

500

115,810

Year 13

126,348

6,070 5,269

2,826 1,167 409 409 396 394 224 5,826

10 244

115 48 17 17 18

801

301

229

-‐

500

121,079

Year 14

Year 15

131,616

6,070 5,269

2,840 1,173 411 411 398 396 225 5,855

9 215

101 42 15 15 16

801

301

229

-‐

500

126,348

10,000 9,000

9,000

Ending Cash Balance

-‐

Year 2

Year 3

-‐

17 768 -‐

17 768

88 88 31 31 31

212

2,656

1,456

7,190

5,550

3,806

1,917

143,544

143,516 32,080 75,426 46,653 768 144,283 (1,810) (1,640) (1,744) (1,889) 141,627

-‐

17 653

9 350

88 88 31 31 31

212

88 88 31 31 31

112

2,656

1,456

88 44 31 31 15

212

46,000

48,397

112

77,067

1,227

229

467

761

394

-‐

394

1200 1200

15 15

1200 1200

Year 5 1,917

75,076

Year 4 3,806

6140 17510 40000 2400 40000 5970 5970 3380 75,400 45,970 -‐

1200 1200

1200

5,550

1200

7,190

32,000

33,890

1,000

10,000

-‐

32,190

6140 6140 17510 2400

1200 500 1700

-‐

Year 1 0 9,000

500 500 1000

Year 0

Capitalization Receipts Interest Revenue Geothermal 1 Geothermal 2 Wind 1 Wind 2 Hydro 1 Hydro 2 Hydro 3 Biomass 1 Biomass 2 Solar Interest Revenue Repayment of Principal Geothermal 1 Geothermal 2 Wind 1 Wind 2 Hydro 1 Hydor 2 Hydro 3 Biomass 1 Biomass 2 Solar Principal Repayments Redemption of Carbon Certificates Total Receipts Cash Surplus/(Shortfall)

Receipts

Personnel & Overheads TA Expense Facility Management Financings Hydro 1 Hydro 2&3 Wind 1&2 Geothermal Geothermal 2 Biomass Solar Total Financings Carbon Payments Hydro 2 Wind 2 Geothermal 2 Biomass 2 Total Carbon Payments Repayment of Capital Total OutFlows

Opening Cash Cash Outflows

236,050

93,694 94,462 92,505

-‐

17 768

88 88 31 31 31

212

1,956

1,456

229

761

394

-‐

500

143,544

Year 6

239,508

5,414 3,458

4,646

395 395

1,127

2,729

17 768

88 88 31 31 31

212

1,956

1,456

229

761

394

-‐

500

236,050

Year 7

247,818

10,267 8,311

218 9,523

2,743 2,729 1,133 1,127 397 397 395 384

17 745

82 88 29 29 31

212

198

1,956

1,456

229

761

394

-‐

500

239,508

Year 8

Projected C ash Flows of Pilot Program No. 2

Green Infrastructure Finance Facility Year 9

256,514

10,652 8,695

2,756 2,743 1,138 1,133 399 399 397 386 384 219 9,955

16 697

76 82 27 27 29 28

198

185

1,956

1,456

229

761

394

-‐

500

247,818

265,209

10,652 8,695

2,770 2,756 1,144 1,138 401 401 399 388 386 220 10,004

15 647

71 76 25 25 27 26

185

171

1,956

1,456

229

761

394

-‐

500

256,514

Year 10

273,904

10,652 8,695

2,784 2,770 1,150 1,144 403 403 401 390 388 221 10,054

14 597

157 171 65 71 23 23 25 24

1,956

1,456

229

761

394

-‐

500

265,209

Year 11

282,599

10,652 8,695

2,798 2,784 1,155 1,150 405 405 403 392 390 222 10,105

13 547

143 157 59 65 21 21 23 22

1,956

1,456

229

761

394

-‐

500

273,904

Year 12

291,294

10,652 8,695

2,812 2,798 1,161 1,155 407 407 405 394 392 223 10,155

11 496

129 143 53 59 19 19 21 20

1,956

1,456

229

761

394

-‐

500

282,599

Year 13

299,989

10,652 8,695

2,826 2,812 1,167 1,161 409 409 407 396 394 224 10,206

10 446

115 129 48 53 17 17 19 18

1,956

1,456

229

761

394

-‐

500

291,294

Year 14

Year 15

308,684

10,652 8,695

2,840 2,826 1,173 1,167 411 411 409 398 396 225 10,257

9 395

101 115 42 48 15 15 17 16

1,956

1,456

229

761

394

-‐

500

299,989

Annex 2: Tax and Other Financial Incentives for Green Energy Development Table 1 -‐ Tax Incentives to Green Development

Corporate Income Tax Incentives

China

Indonesia

South Korea

The Philippines

Singapore

Vietnam

New energy: 15% vs. 25% CIT Specific CDM projects: temporary CIT exemption CER receipts: exempt from CIT Environmental protection and energy conservation: capital and R&D CIT deductible, and 5-‐year carry-‐over of investment credits Foreign investments related to environmental protection: temporary CIT exemption and long term CIT reduction Energy conservation: 10% of capital investment are CIT exempt

Duty and VAT Incentives -

VAT refund from sales of 50% wind power; and 100% biodiesel power VAT exemption from sales of recycled resources, solid and liquid waste treatment

Resources Tax -

Resources tax on oil and gas Implementation of a carbon tax has been delayed

Foreign investments related to environmental protection: import duty exemption Reduced import duty on RE products

N/A

Purchases of RE components: tax refund RE related power sales and equipment purchase: exempt from duty and VAT

N/A

CNG and Bi-‐fuel (CNG/Petrol) cars: fuel tax/duty exemption was available for until early 2012

Consumption tax and duty on fuel

Power projects in general: major tax incentives for in the first 15 years Foreign investments in environmental industries: 4-‐year CIT exemption Environmental businesses: reduced CIT of 10% vs. 25% Green businesses: CIT reduction or exemption

Waste treatments, clean energy and RE: exempt from import duty

The exploitation of natural resources is taxed under the Law on Resources Tax (2009)

RE: 7-‐year CIT tax holiday followed by a reduced rate at 10% vs. 30% RE investment: CIT exemptions up to 21 years; and net operating loss carry-‐over for 7 years Companies engaged in carbon trading: reduced CIT of 5% or 10% R&D on clean tech: tax refund Energy Efficiency and RE: general CIT incentives

N/A

Table 2 -‐ Direct Subsidies for Renewable Energy and for Energy Efficiency

China

Renewable Energy -

Singapore

The Building-‐Integrated PV Subsidy Program (2009): RMB 20 cents (3.1 US cents) per watt capital subsidy The Golden Sun Program (2009): subsidies and technical support to utility scale solar farms N/A

Energy Efficiency

Vietnam

N/A

General

N/A

The Design for Efficiency Scheme (2008): co-‐found up to 80% capex up to a limit of s$600,000 The Grant for Energy Efficient Technologies Program (2008): co-‐found up to 50% capex with a cap of s$ 2million per project Green vehicle rebate (2001) offering rebates from 10-‐40% of the vehicles’ open market value N/A

N/A

Green businesses receive a number of fiscal, land and investment subsidies (Decree 04/2009/ND-‐CP)

Table 3 -‐ Legislation and Incentive Regime

Policy/Legal Documents

Applications

Level and Term (approximate US cents/kWh)

China

- The Renewable Energy Law (2006) and Revision (2009)

Biomass (2007) Biomass update (2010) Wind (2009) On-‐grid solar (2011)

3.1+ coal (5.4 cents) 11.8 8.0–9.6 15.7–17.3

South Korea

- The Electricity Business Law

Off-‐grid solar (2006/ 08/10) On-‐grid solar (2008/10) Wind (2006) Small hydro (2006) Tidal ocean (2006) Land fill (2006)

63/60/50 for 15 yrs. 37/33for 20 yrs. 9.5 for 15 yrs. 6.5 5.5 5.4

The Philippines

- The Renewable Energy Act (2009)

Solar (2012) Wind (2012) Small hydro (2012) Biomass (2012)

22.9 for 12–15 yrs. 8.5 for 12–15 yrs. 14.0 for 12–15 yrs. 15.7 for 12–15 yrs.

Vietnam

- Prime Minister’s Decision 37/2011on Support Mechanisms for Wind Power Projects - Avoided Cost Tariff (ACT) Regulation

- Wind (2010) - Small RE power plants

- 7.8 (of which EVN pays 6.5) - Seasonally adjusted

Table 4 -‐ RE Enabling Institutions

Country

Agency Name

Enabling mechanism

China South Korea

- National Energy Conservation Center - Korea Energy Management Corporation

Indonesia

- Department of Alternative Energy Development and Efficiency - An Inter-‐Ministerial Committee on Climate Change (IMCCC) was set up in late 2007 to oversee inter-‐agency coordination on climate change - The Energy Efficiency Program Office (E2PO) and the Energy Innovation Program Office (EIPO) - Sustainable Development Office - The Vietnam National Cleaner Production Centre

Singapore

Vietnam

Institutional model

N/A - Rational Energy Utilization Act - Energy Conservation and Promotion Act N/A

N/A

- EE public agency - State-‐owned enterprise focused on EE - EE public agency - Whole-‐of-‐government

N/A

Table 5 -‐ Energy Efficiency Related Policy Tools

Fiscal Incentives

Financial Measures

Programs

Procedures

- ESCO financing, equipment leasing; and partial risk guarantee

- The Ten Key Energy Conservation Programs - The Top-‐1000 Energy Consuming Enterprises - The Small Plant Closure Program, Building Energy Efficiency (new and retrofit) - The ESCO project; energy-‐ saving office equipment & home electronics program

- Appliance standards - Energy-‐Efficiency labels; new building energy standards

China

- Tax incentives

South Korea

- Tax incentives

N/A

Indonesia

- Tax incentives - Tax incentives

N/A

The Philippines Singapore

Vietnam

- Tax incentives; Investment Allowance schemes; cash incentives for building EE design, retrofitting; green vehicle rebate - Tax incentives, land and capital subsidies to green businesses

N/A

- National Energy Efficiency and Conservation Program; SEF program - The Clean Energy (Research) Program; Test-‐Bedding (clean tech park, eco-‐town, zero-‐energy building, etc.); EE Singapore (E2PO); EE Improvement Assistance

- Pilot Building Retrofit Energy Efficiency Financing

- IFC Vietnam Energy Efficiency and Cleaner Production Financing Program; Green Credit Trust Fund (guarantee); SEF Program

- The Vietnam Energy Efficiency Program (VNEEP)

- Energy Efficient Standards and Labeling; Minimum &Target Energy Performance Standards; (Building) EE Design Standards - Energy Efficient Labeling Program - National Eco-‐labeling Program – Green Choice Philippines - The Green Mark Scheme; Minimum Energy Performance Standards

- Vietnam Green Label - Energy-‐Efficiency labels

Annex 3: Emerging Carbon Markets in East Asia

Country 8

Scheme

Allowances

Domestic Offsets

International Offsets

Requirements/ MRV

Linking

Australian Emissions Units Allocations starting from 2013/14 NZUs

Offsets (ACCUs) from land based activities

CERs, EUAs (from 2015), In future possibly other units

Forestry activities create NZUs

EU link from 2015 Limit on export of ACCUs None yet but discussions with Australian ETS

Offsets -‐ possibly from domestic CDM projects and domestic voluntary offsets KVERs -‐ only up to 10% of domestic ETS. Likely limit on forestry and land use CCERs National likely to accept CDM methodologies – so double counting likely issue

CERs, ERUs (subject to some exclusions including credits generated from nuclear power) Excluded until 2021, after which CERs (and possible other units) can be used for up to 50% of total offset

After 2015, up to 100% from domestic units and limits on CERs (require methodology and comprehensive rules, especially for permanence) Participants must collect prescribed data and calculate own emissions and are subject to audit. Penalties apply for non-‐compliance. Verified emissions to be reported within 3 months after the end of the compliance year, with surrender of allowances to be completed within 6 months. Penalties apply for non-‐ compliance.

Undecided

Some pilot schemes to accept CERs

Pilot schemes vary. No national regulation but expected to mirror NDRC “Tentative Trading Rules for Voluntary Emissions Reduction”

Various domestic credit types from emissions reductions activities and renewable energy Nusantara Carbon Units (NCU). Each NCU is equivalent to one ton of CO2

TVERs (Thailand Verified Emission Reductions)

Undecided

Covered facilities obliged to report GHG emissions in the previous fiscal year to the governor and disclose data every fiscal year. GHG emissions verified by a third party agency. Considering methodologies from other schemes, including CDM. Validation/Verification will adopt principles in Standar Nasional Indonesia (SNI) ISO 14064-‐3:2009. MRV to be in accordance with ISO 14064-‐1 / 14064-‐3 / 14065

Possible linkage between the seven pilots and possible future policy for international linkages Tokyo – Saitama link and no current international linking

Australia

ETS – Operational

New Zealand

ETS – Operational

South Korea

ETS (scheduled for Jan 2015)

Allowances to be outlined in allocation plan (June 2014) and free allowances provided in Oct 2014

China

ETS (developing 7 pilot sub-‐ national ETS schemes (from 17 June 2013); national ETS expected in 2015) ETS in Tokyo and Saitama and others being contemplated. No national scheme. Voluntary carbon market (developing)

Unclear at national level. Some pilot schemes include free allocations

Voluntary carbon market -‐ Oct 2014

Grand fathering in trial phase with further considerations

Japan

Indonesia

Thailand

Grand fathering with a free allocation

Contemplating CERs

None

Undecided

The system is changing as a result of the new government.

www.worldbank.org

www.dfat.gov.au/aid

The Green Infrastructure Finance Facility (GIFF) Concept Financial and Operational Considerations Relating to the Proposed Concept