Contents

Some CDM points of departure Some brief examples of CDM projects An example of using natural gas to replace coal and electricity What is the market for CERs? What is required Designated National Authority

CDM points
A CDM project activity is mostly a part of a larger project CDM is available for emissions mitigation projects and certain sequestration projects CDM is market based CDM is project based CDM outputs are Certified Emissions Reductions (CER) = 1 tonne CO2equivalent CERs give annex 1 countries possibility to emit one tonne of CO2 = globally neutral

Points of departure for CDM

CDM is the first multi-lateral trade mechanism insisting on Sustainable Development article 12 of KP assist Parties not included in Annex 1 in achieving Sustainable Development and contributing to the ultimate objective of the Convention. CDM assists Annex 1 countries in meeting their emissions reduction targets in return for income for credits derived from projects that contribute to sustainable development

Experience limited to the front end of the cycle

First project participant

Bellville South Reduced landfill gas to industry replacing LSO/HFO

124000 CO2e tonnes/year

Kuyasa low cost housing upgrades

Insulated ceilings, solar water heaters and CFLs reduce electricity for services

2.8 tonnes CO2/house/year

2.8 tonnes CO2e/house/year Total 6558 tonnes CO2e/year

Mondi Richards Bay biomass project

Biomass replaces coal and methane avoided 122000 tonnes CO2e /year

Example of fuel switch to NG

Fuels Combusted CO2 kgs/unit energy (GJ) 90 51 (57% of coal) Value of emissions reductions for 1 million GJ US$ 386 000 US$2.45m

Coal Natural Gas

SA Electricity 269
Note: CH4 has 21 times the global warming potential of CO2

Case study
Mondi Business Paper (large paper mill in Richards Bay) Natural Gas powered cogeneration 27.5MW (electricity) plus process heat Replacing coal for steam Replacing grid electricity

Rationale for project

Require autonomous electricity supply because of production losses as a result of decreasing quality of supply and cost escalations. Co-benefits of process heat.

Emissions from the use of NG in producing synthetic gas Gas leaks Project boundary Emissions of heat, CO2, CH4 and N2O Steam for plant process heat Y GJ/year Plant consuming heat and power

Natural Gas

GAS piped Gas provide r Emissions from coal transport Coal 27 MW CCGT Electricity to plant X MWh/year

Emissions of Y GJ/year heat, CO2, CH4 and N2O Existing Power Boilers

heat Self generated electricity

Emissions from ash transport

Grid Electricity

Grid electricity

Coal Ash

Process of project identification and design Concept Project Identification Note (PIN) Pre-feasibility Feasibility (technical, financial, legal etc.) Project Design Document (PDD) is required to register a CDM project

www.cdmguide.com

Project design document sections

A: Introduction B: Baseline scenario and additionality test C: Crediting period D: Monitoring Plan E: Calculations F: Environmental impacts G: Stakeholder comments Annexes include contact details, baseline data, public funding and methodologies

Methods employed in design Size (small-scale) <15MW, <15GWh/year, and <15kiliotonnes/year Small-scale: top-down methodologies Regular: Bottom-up methodologies

Small-scale methodologies Type II: Efficiency of demand and supply side Type III: Other - Switching fossil fuels - Emission reductions from low Greenhouse Gas emitting vehicles

Regular size Methodologies AM0008: Industrial fuel switching from coal and petroleum to natural gas without extension of capacity and lifetime of capacity AM0009: Recovery and utilisation of gas from oil wells that would otherwise be flared AM0014: Natural Gas-based package cogeneration

In Gas Turbine project

Regular size project None of the approved methods fit Conclude to design new methodology using 3 others, plus using accepted additionality tool

Additionality Theory
What would have happened in the absence of the project activity? Additionality test: Standard tool may be applied Investment analysis (IRR/NPV/Payback of basecase i.e. without emissions reductions) is this conservatively below the investment threshold? Barrier tests (are there technical, normative, investment, other barriers)

Additionality case study: Investment analysis Total capital costs: 15.2million Euros Operational costs: cost of gas, less cost of coal and electricity Full conservative discounted cash flow analysis with and without CDM IRR (including inflation after tax over 15 years) = 22.3% (if company threshold of 25% is required project would not have happened without CDM

Technology barrier test

Emissions calculations
Baseline emissions:
heat: 128 000 tonnes/year electricity: 251 000 tonnes/year

Project activity emissions:

Cogeneration: 123 000 tonnes/year

Less leakage: positive: physical leaking from pipeline, negative ash removal from coal Total less leakage: 256 000 tonnes/year worth +/Euros 2.5million/year Total project return on investment: 30.6% (at 10 Euro per tonne up to 2012)

Project status
Project methodologies being reviewed (see www.UNFCCC.int) Project design validation against approved methodologies to follow Project is to register as a unilateral project Mass and energy balance with Sasol underway for 2.5 million GJ/year (Sasol total 450million GJ/year plus) Gas price negotiations and contracting underway

Project status: Transaction costs

Cost of validation: Euro 12 000 Cost of design: Euro 26 000 (estimate) plus share of risks Cost of registration: Euro 15 000 Costs of adaptation levy: 2% of CERs Cost of govt. approval: varies (SA=0) Costs of monitoring, verification, issuance, tax: ? Income from CERs: Euro 2.5m/year (nominal) total discounted to 2012: Euro 12.3m Plus operational savings (on electricity, coal and downtime because of outages less cost of gas)

Markets for ERs

Markets:
Compliance (CERs) Verified (VERs) Offset (VERs) Gold Standard (high quality CERs) Incremental cost (GEF not market)

Mechanisms for sale/ purchase of CERs

Multilateral funds (World Bank PCF, CDCF, etc.) Bilateral procurements through tenders: Austria, Netherlands, Belgium, Finland, Japan etc. Private purchases Transfer within multinationals Brokers Project developer/wholesale purchases Spot (still to come) Forward purchases, guarantees, rights of refusal, options etc

Prices
Prices going up (early PCF price $3.5/CER) Bilateral procurements Euro 8/CER Current price range reported 8 to Euros 10/CER EU Emissions Trading Scheme (EUETS) Euro 18 to 20/tonne CO2 for allowances VERs Euro 2 to 10/tonne CO2

Designated National Authority

To be able to participate in CDM country must be a party to Kyoto Protocol and establish a DNA Required to cede emissions reductions to project participant Required to approve the projects against sustainable development requirements Required to be established in law in host country Approval is part of validation of project activities DNA must put project out for public comment DNA can be a promoter of projects DNA should be fast and transparent

Doing CDM in the South

CDM is not easy it requires specialists It results in no net emissions reductions CDM has very little to do with Sustainable Development sadly Attracting FDI appears to be higher priority that SD. CDM can leverage technology leapfrogging There are few points of leverage for the South: choosing projects, choosing partners, timing transactions.