Professional Documents
Culture Documents
Robert Kelly
Regional Coordinator, CDM Capacity Development,
Southern & Eastern Africa
robert.kelly@undp.org
A practical example
2 2
The bewildering range of potential CDM projects
Forestry
Hydro power
Wind power
Heavy Industry
Bio-fuels
Transport
Animal waste
Sewage / Landfill
wastewater
Bagasse
3 3
Not all carbon projects are born equal…
Average Annual CER Production by CDM Project-Type
4.5m
970,000
520,000
318,000
206,000
170,000
83,000 79,000 74,000 54,000
26,000 18,000
ro
d
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or
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5 5
Carbon revenues also vary on a project-by-project basis
7,934
7,934
Standard
Standarddeviation
deviation
(kCERs
(kCERs by2012)
by 2012) 4,128
4,128
1,811
1,811 Markers
3,039
3,039 indicate
maximum,
mean and
minimum
1,711
1,711 project
928
928 size within
each
543
543
technology
1,228
1,228 661
661 1,101
1,101
379
379 330 827
827
330
762
762 1,179
1,179
234 00
234 00 91
91 13
13 00
Fu ne
Ce itch
n
W y
et s
or
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sw e
ho P t
se y
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ro
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rib e
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6 6
For some projects, the ‘carbon layer’ is the only layer
7 7
But many carbon projects combine revenue streams
Most carbon projects rely upon a number of revenue flows. The
‘carbon layer’ typically represents just one financial layer
8 8
But many carbon projects combine revenue streams
Most carbon projects rely upon a number of revenue flows. The
‘carbon layer’ typically represents just one financial layer
9 9
But many carbon projects combine revenue streams
Most carbon projects rely upon a number of revenue flows. The
‘carbon layer’ typically represents just one financial layer
1010
So, to summarise…
– Different project-types (and different projects) generate
different volumes of carbon credits
1111
Agenda
A practical example
1212
Three uses for financial analysis…
1313
A CDM project costs money. Is it worth the effort?
Pre-Registration Post-Registration
CDM Costs CDM Costs
Assumes
Assumes aa 10-year
10-year
project.
project.
34,000
111,500
Ongoing Recurrent
Recurrent costs
costs
Verification discounted
discounted at at 3%
3%
By annual
annual rate
rate to
to express
express
10,000
77,500 DOE in present-value
in present-value
16,500 terms.
67,500 terms.
Initial
38,000
51,000 Monitoring Registration
Registration costs,
costs,
Validation Ongoing Administration
Administration Fee
Fee
Annual and Adaptation Fund
and Adaptation Fund
Monitoring Levy
Levy not
not included.
included.
13,000
PDD
PIN
1414
Three uses for financial analysis…
2 Demonstrating additionality
1515
Demonstrating additionality – investment comparison analysis
Carbon
Carbon revenue
revenue
makes
makes the
Revenue / NPV / IRR
the
project
project
worthwhile
worthwhile
Break-even point
Project
Project without
without
carbon
carbon revenue
revenue
is
is unprofitable
unprofitable
1616
Demonstrating additionality – benchmark analysis
Choose an appropriate financial indicator and compare it with a relevant
benchmark value: e.g. required return on capital or internal company
benchmark
Carbon
Carbon revenue
revenue
makes
makes the
the
project
project attractive
attractive
Revenue / NPV / IRR
relative
relative to
to
investment
investment
Investment
threshold
alternatives
alternatives
Project
Project without
without
carbon
carbon revenue
revenue
is
is profitable
profitable ––
but
but not
not
sufficiently
sufficiently
profitable
profitable
Project without Project with
compared
compared with with
carbon element carbon element
alternatives
alternatives
1717
Three uses for financial analysis…
2 Demonstrating additionality
1818
Revenue flows determine more than just profits…
1919
Agenda
A practical example
2020
Investment appraisal techniques
• Payback period
2121
Payback period
The payback period is the length of time taken for the
inflows of cash (i.e. revenue) to equal the original cost of
investment
2222
Payback period - example
2323
Net present value (NPV)
The weakness of the payback period is that it does not
consider the time value of money
250
200
150
100
50
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
2525
Discounting future revenue flows
$ 120
100
80
60
Year
Year15:
15:
Annual
Annualrevenue
revenue
40 of
of$100
$100isisworth
worth
$24
$24
in
in presentvalue
present value
20
terms
terms
(4.2
(4.2times
timesless
less
0 than
than$100
$100
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 today)
today)
2626
Net present value (NPV) - example
2727
Internal rate of return (IRR)
2828
Internal rate of return (IRR)
Once the IRR is found, it is compared with the company’s
pre-set threshold investment rate (the ‘hurdle rate’)
2929
The IRR uplift typically provided by carbon revenues
Technology IRR
Hydro 0.8-2.6
Wind 1.0-1.3
Bagasse 0.4-3.6
Biomass 2-7
Municipal Solid Waste >5
Forestry 2-7
3030
Benefit-cost ratio (BCR)
3131
Benefit-cost ratio (BCR)
3232
Project comparison
Project A Project B
Initial Investment 400 400
Nominal Revenue 477 560
Payback in: 2nd year 4th year
NPV ($1,000) 13.4 27.9
IRR 12.6% 12.9%
BCR 1.03 1.07
3333
Financial Indicator Strengths Weaknesses
Payback period • Easy to calculate and to understand • Cash flows beyond the payback
• Acts as a proxy for risk and is period are ignored
suitable for a company whose • It does not reflect inflation and
objective is survival or which is opportunity costs of money as it
operating in high risk environment ignores the timing of the flows
• The determination of the required
payback period is highly subjective
Net Present value • NPV method overcomes the problem • The choice of discount rate is
of changing value of money over time. problematic
• It looks at projects over their whole • It makes the assumptions that there
lifetime, unlike payback is a single market rate of interest for
both borrowing and lending
• Does not take into account the effect
of taxation or other policy measures
Internal rate of Return • IRR takes into account the value of • As it measures % returns, it fails to
time and is easily understood by measure wealth changes in terms of
managers absolute amounts
• IRR is problematic if the cash flows
are unconventional.
• Does not take into account the effect
of taxation and other policy measures
Benefit Cost Ratio • Enables a ranking of projects when • Same as for NPV
capital is rationed
3434
Agenda
A practical example
3535
Animal waste management
3636
Theory
Animal waste management Theory
Methane
Methaneisisproduced
producedasaspart
part
of the normal digestive
of the normal digestive
process
processin inanimals
animals(‘enteric
(‘enteric
fermentation’).
fermentation’).The
TheCHCH4 4isis
exhaled
exhaledor oreructated
eructatedbybythe
the
animal.
animal.
Revenue
RevenueOpportunity
Opportunity
Credits
Creditsfor
forreduced
reducedCH CH4 4
emissions;
emissions;utilise
utilisecaptured
captured
CH
CH4 4for
forenergy
energygeneration
generation(and
(and
further
furthercarbon
carboncrediting)
crediting)
Method
Method
Covered Lagoon 22potential
potentialapproaches:
approaches:
•• Modify
Modifyanimal
animalfeed
feedintake
intake
Capture CH emissions
•• Capture CH4 emissions
Complete Mix Digester 4
3737
Methane flaring from a swine farm in Brazil: costs and revenues
US$ Year Year Year Year Year Year Year Year Year Year
0 1 2 3 4 5 6 7 8 9
Equipment (61,363)
costs (cover,
PVC, meter,
flare, etc.)
Installation (92,000)
costs
(ground
excavation,
etc.)
Maintenance (4,600) (4,600) (4,600) (4,600) (4,600) (4,600) (4,600) (4,600) (4,600) (4,600)
costs
Other costs (9,200)
(operation,
engineering)
Revenues 0 0 0 0 0 0 0 0 0 0
from the sale
of electricity
Number of 25,000 69,500 69,500 69,500 69,500 69,500 69,500 69,500 64,000 60,000
CERs
generated
3838
Calculating the Net Present Value (NPV)
$US Total costs Total revenue Cashflow Discounted cashflow
Year 0 -167,163 250,000 82,837 82,837
Year 1 -4,600 695,000 690,400 627,580
Year 2 -4,600 695,000 690,400 570,533
Year 3 -4,600 695,000 690,400 518,672
Year 4 -4,600 695,000 690,400 471,525
Year 5 -4,600 695,000 690,400 428,663
Year 6 -4,600 695,000 690,400 389,698
Year 7 -4,600 695,000 690,400 354,274
Year 8 -4,600 640,000 635,400 296,413
Year 9 -4,600 600,000 595,400 252,506
NPV 3,992,700
(Assuming a 10-year project crediting period, 10% discount rate and $10 per CER)
3939
Adding an electricity generation component
$US Total costs Total revenue Cashflow Discounted cashflow
Year 0 -237,163 280,000 42,837 42,837
Year 1 -9,600 765,000 755,400 686,666
Year 2 -9,600 765,000 755,400 624,248
Year 3 -9,600 765,000 755,400 567,504
Year 4 -9,600 765,000 755,400 515,918
Year 5 -9,600 765,000 755,400 469,021
Year 6 -9,600 765,000 755,400 426,387
Year 7 -9,600 765,000 755,400 387,628
Year 8 -9,600 700,000 690,400 322,071
Year 9 -9,600 660,000 650,400 275,831
NPV 4,318,110
(The annual revenue from this electricity generation component of the project is
$US30,000 in Year 0, $70,000 in Years 1-7, and $60,000 in each of Years 8 and 9.
The cost of installing the required electrical equipment is $70,000 in Year 0 and
$5,000 in each subsequent year)
The NPV of the project has increased: it makes financial sense to add an
electricity generation component to the project
4040
Electricity generation without carbon revenues from the CDM
$US Total costs Total revenue Cashflow Discounted cashflow
Year 0 -237,163 30,000 - 207,163 - 207,163
Year 1 -9,600 70,000 60,400 54,904
Year 2 -9,600 70,000 60,400 49,913
Year 3 -9,600 70,000 60,400 45,376
Year 4 -9,600 70,000 60,400 41,252
Year 5 -9,600 70,000 60,400 37,502
Year 6 -9,600 70,000 60,400 34,093
Year 7 -9,600 70,000 60,400 30,994
Year 8 -9,600 60,000 50,400 23,512
Year 9 -9,600 60,000 50,400 21,374
NPV 131,757
But the argument for CDM additionality has become a lot more difficult. The project
developer would have to demonstrate either that there are more attractive projects to
invest in (i.e. that the NPV, though positive, isn’t sufficiently large) or that there are non-
financial barriers to investment that the CDM helps to overcome
4141
End
Robert Kelly
Regional Coordinator, CDM Capacity Development,
Southern & Eastern Africa
robert.kelly@undp.org
4242