CARBON PARTNERSHIP FACILITY APRIL 2014 SELLER PARTICIPANT TRAINING

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CARBON PARTNERSHIP FACILITY APRIL 2014 SELLER PARTICIPANT TRAINING KEY COMMERCIAL ASPECTS OF SUB-ERPAS CARBON

CARBON PARTNERSHIP FACILITY APRIL 2014 SELLER PARTICIPANT TRAINING KEY COMMERCIAL ASPECTS OF SUB-ERPAS CARBON PARTNERSHIP FACILITY 1

Outline A. Contracting structure B. Experience in delivery C. Managing under-delivery D. Risk categories

Outline A. Contracting structure B. Experience in delivery C. Managing under-delivery D. Risk categories E. Possible solutions CARBON PARTNERSHIP FACILITY

Contracting structure Other Buyers CPF CERs ERPAs CERs $ $ C/ME CERs CPA CARBON

Contracting structure Other Buyers CPF CERs ERPAs CERs $ $ C/ME CERs CPA CARBON PARTNERSHIP FACILITY CPA $ CPA Sub-ERPAs CPA 3

Experience in delivery so far • Projects often under-deliver – – Technical difficulties Implementation

Experience in delivery so far • Projects often under-deliver – – Technical difficulties Implementation delays Monitoring capacity Regulatory delays • Under-delivery is detrimental to everyone: – Inefficient allocation of capital for buyers – Unpredictable/smaller revenue stream for sellers • Delivery highly dependent on – Sectors (waste management ≠ hydropower ≠ HFCs) – Capacity of project entities (big, small, private, public) • Downstream amendment of contracts to match volume and value is costly and time consuming CARBON PARTNERSHIP FACILITY 4

Managing under-delivery • The challenge: allow enough flexibility for sellers to deliver, and enough

Managing under-delivery • The challenge: allow enough flexibility for sellers to deliver, and enough certainty for buyers to receive assets. • Potential issues: – Identify and develop enough CPAs to be included under the Po. A in a given period of time • Replacement/additional CPAs? – Manage under-/over-delivery of individual CPAs vis-à-vis the entire Po. A? – Other lessons as we go along • How to address default/liability issues? – Who should bear the risk? • CMEs (public/private) • CPAs (public/private) • Buyers – How should the risk distribution be reflected in the price? – What remedies should be available? CARBON PARTNERSHIP FACILITY 5

Risk categories • Market risk – Price fluctuations – Post-2012 framework – LIABILITY for

Risk categories • Market risk – Price fluctuations – Post-2012 framework – LIABILITY for delivery • Financial risk – Buyers’ and sellers’ viability – CPA implementers’ viability • Technology and implementation risk – Sector – CPA implementers’ technical capacity and experience • Regulatory risk – CDM additionality risk – Methodology changes – Methodology, monitoring and verification risk • Policy risks – Social and environmental quality risk – Host country regulatory risk CARBON PARTNERSHIP FACILITY 6

Potential solutions • Flexible commercial agreements – Framework agreement between the seller and the

Potential solutions • Flexible commercial agreements – Framework agreement between the seller and the CPF (General Conditions/Framework ERPA) – CPA Sub-ERPAs for each new CPA or batch of CPAs – No two projects are the same contractual agreements need to be “tailor -made” • Realistic assessments – Minimum annual delivery target according to CPA probability (certain, probable, risky) – Maximum contract value/volume – Seniority and sweep clauses to accelerate delivery and to facilitate negotiations of contracts with junior buyers for additional CERs – Put and/or call options – “Fungibility” of CERs from different CPAs CARBON PARTNERSHIP FACILITY 7

Option 1 - Regular annual delivery 350 300 t. CO 2 e 250 Max

Option 1 - Regular annual delivery 350 300 t. CO 2 e 250 Max volume or value reached on year 9 200 150 100 50 0 1 2 3 4 5 CERs delivered to CPF CARBON PARTNERSHIP FACILITY 6 7 Year 8 9 10 11 12 13 14 CERs sold to other carbon buyers or auctioned 8

Option 2 - Front loading delivery 350 300 t. CO 2 e 250 Max

Option 2 - Front loading delivery 350 300 t. CO 2 e 250 Max volume or value reached on year 6 200 150 100 50 0 1 2 3 4 5 CERs delivered to CPF CARBON PARTNERSHIP FACILITY 6 7 Year 8 9 10 11 12 13 14 CERs sold to other carbon buyers or auctioned 9

Pros and cons • Option 1: Regular delivery – Possibility to use call or

Pros and cons • Option 1: Regular delivery – Possibility to use call or put options, or to sell or auction extra CERs each year on the spot market • Very low prices for the foreseeable future – Obligation to match Sub-ERPAs conditions to ERPA: • Less flexibility to manage the Po. A as a whole and to “benefit” from performing CPAs • Option 2: Front loading – Allows better delivery management: • CERs from any CPAs are swept until the maximum volume or value is reached – Easier to structure agreements with junior buyers for later delivery (if any) CARBON PARTNERSHIP FACILITY 10

C/MEs experience • • • Brazil Morocco Vietnam Philippines Tanzania CARBON PARTNERSHIP FACILITY

C/MEs experience • • • Brazil Morocco Vietnam Philippines Tanzania CARBON PARTNERSHIP FACILITY