Report from Workshop 2. The Role of Public Finance in the Carbon Market

Transcription

1 Report from Workshop 2. The Role of Public Finance in the Carbon Market Nordic Council of Minister Project: Nordic Experience from Carbon Market. Johan Nylander Erica Niemi Rickard Frithiof October 28, 2010

2 Report from Workshop 2. Nordic Experiences from the Carbon Market Project: The Role of Public Finance SUMMARY This report summarises the result of a workshop arranged by the Nordic Council of Ministers in early May The workshop is the second of three that deals with the role of Nordic government initiatives and public finance related to CDM and JI. The overall objective of the second workshop was to take stock of how public finance have supported the carbon market as of today and to explore options for new financing and supporting solutions for the future. The workshop was initiated by a presentation by the consultant, followed by a presentation by a private sector representative (from JP Morgan) who gave an overview of how JP Morgan and similar firms operate on the carbon market. The workshop continued with a panel discussion on the role of public finance, collaboration between institutions, experiences from upfront payments and the significance of an Emission Reduction Purchase Agreement for the financing of a project. The workshop also contained group discussions and a brainstorming session related to the main subject. The general impression from the workshop is that it was timely and beneficiary for the participants, representing different types of organisations, to meet and discuss matters relating to the financing of CDM and JI project. Interviews with country representatives prior to the workshop showed that the experiences from collaboration, and lack of collaboration, varies between the Nordic countries and that there are different ways of approaching the carbon market. There are some main points that came out very clear from the discussions. 1. CDM does not, or only to a limited extent, solve financing barriers to projects. The reason is that carbon finance rarely is provided upfront, and if it is, it comes with significant requirements for security. This means that investment costs are covered by equity and debt as in any project not involving carbon finance. It is possible to argue that this is the way it should be, since buyers e.g. do not pay in advance for the electricity produced from a renewable energy project. One of the predicaments is however that the ERPA does not, due to the risk of registration and issuance delays or failures, have the same value as the Power Purchase Agreement for electricity. 2. Early development funding has not increased significantly with the CDM and it seems as if there is room for a larger role for public finance to play at this stage. Funding that can reduce risk is very much welcome, e.g. by providing guarantees. 3. The value of CDM or JI, i.e. the value of an ERPA varies between actors. In a system where carbon finance income would be more predictable and the part of the income would be larger, the significance of an ERPA would be higher. The value of an ERPA seem to range from marginal to something that is important as part of the whole financing picture. Report 1 (34)

3 4. Public finance could do more to increase demand and to contribute to a higher price levels that would give a stronger signal to make the investments. 5. Risks could be better analyzed and presented in order for different actors to make a sound judgment of their own risk taking. It is e.g. often the case that the CDM registration risk is given a lot of attention whereas the real risks are with the creditworthiness of the project owner and the stability of the host country. 6. Public finance can play an important role in improving the JI/CDM mechanisms, making the markets more effective, and breaking new ground for the CDM in Least developed Countries as well as in developing the market for new up-scaled mechanisms. Report 2 (34)

4 TABLE OF CONTENTS 1 INTRODUCTION THE ROLE OF PUBLIC FINANCE BARRIERS TO CDM AND JI PROJECT IMPLEMENTATION OVERCOMING BARRIERS THROUGH PUBLIC FINANCE MECHANISMS The Role of Public Finance Mechanisms The Role of Multilateral Development Banks Risk Sharing Through Public Finance Mechanisms NORDIC PUBLIC FINANCE INSTITUTIONS Introduction Development Aid Agencies SIDA NORAD FINIDA DANIDA Development Finance Institutions Finnfund IFU (The Industrialisation Fund for Developing Countries) Norfund Swedfund Risk Sharing/Mitigating Institutions Finnvera EKF (Eksport Kredit Fonden) GIEK (Guarantee Institute for Export Credits) EKN (The Swedish Export Credits Guarantee Board), Nordic Financial Institutions Nordic Investment Bank, NIB Nordic Environment Finance Corporation, NEFCO Nordic Development Facility, NDF Publicly Backed Guarantees The Nordic Climate Guarantee Facility: Proposal by NEFCO SUMMARY OF WORKSHOP AND INTERVIEWS Experience on financing CDM projects from the National Procurement Programmes of the Nordic countries Introduction Cooperation Risk Assessment Upfront Payment Loan facilitation Role Today Role Tomorrow Discussions and brainstorming Results from Panel Discussion Results from Group Discussions Results from Brainstorming Event CONCLUSION Nordic Perspectives on Carbon Market Mechanisms Project Report 3 (34)

5 Workshop 2: Project Financing APPENDICES: 2. Agenda 3. List of Participants 4. Brainstorming result Report 4 (34)

6 1 INTRODUCTION The Nordic Council of Ministers have initiated a project that systematically takes stock of the experiences of the Nordic countries and that scrutinizes the role of government procurement programs and multilateral funds in a post 2012 period. The work under this project is structured around three workshops, where the first workshop (March 2010) covered the Nordic countries CDM and JI experiences so far. Workshop 1 - Lessons learnt Workshop 2 - Public finance Workshop 3 - Future opportunities Figure 1. The topic for the second workshop was the role of public finance. The purpose of the second workshop (May 2010) was to take stock of how public finance have supported the carbon market as of today and to explore options for new financing and supporting solutions. The workshop addressed issues as for example: - What is the current role of public financing institutions and what can be their role in the future? - How could Nordic financing institutions create incentives for private capital investment? - How can Nordic financing institutions and carbon credit funds contribute to the transition of the Kyoto system to a Post Kyoto system that may contain different conditions for project based mechanisms compared to today and that may see the emergence of new sectoral mechanisms? This report summarizes the results of this specific second workshop. Chapter 2 to 4 contains an introduction to the issues, followed by results from interviews with country representatives and proceedings from the workshop. 2 THE ROLE OF PUBLIC FINANCE A major concern for the international community dealing with climate change is how to create institutions and markets that provide for significantly increased flows of public and private sector financing to emission reduction projects. In particular, one of the key issues is how public finance can boost private sector financing. Report 5 (34)

7 13% 21% 49% Private capital Foreign public investment Carbon finance Local public investment 17% Source: 10 years of experience in Carbon finance, World Bank 2009 Figure 2. Origin of capital financing in World Bank CDM projects Since the early stages of the development of the carbon market, government initiatives in the form of carbon credit purchasing programs and capacity building programs have played an important role for the establishment of a global carbon market. As is shown in Figure 2, private capital has been a significant share of the financing in the World Bank CDM projects. Government financing, while targeting specific objectives, has the advantage of not being subject to profit maximizing (albeit cost efficient use of public funding is a requirement), and thus larger potential of providing funding that can pave the way for new markets. Government purchasing programmes can provide additional benefits to the carbon market by: (i) (ii) (iii) (iv) (v) Taking the costs for methodology development (e.g. via funds like the Prototype Carbon Fund) Initiating pilot activities with regard to new project types, new regions or countries Providing upfront payments in various forms Addressing reduction projects that the private sector cannot or will not reach, e.g. small scale projects, CDM Afforestation and Reforestation projects (no use in EU ETS), Programme of Activities, etc Purchasing post 2012 CERs under regulatory uncertainty However, to address the large need of low carbon projects in the developing countries, the role of public finance considers not only purchasing and providing capacity building, but arranging financing mechanisms that further spur investments in low carbon projects by the private sector, e.g. by providing guarantees. There is substantial experience of public finance mechanisms that can be drawn upon when improving the market for emission reduction projects further. One is that it needs more public funding in the early stage of the technology development cycle 1. Other important factors for enhanced climate mitigation actions are 2 : - Increased level of available capital to cover incremental costs associated with low carbon investment; 1 UNFCCC (2009) Investment and Financial Flows to Address Climate Change: An Update 2 Amin, Amal-Lee (2009) Carbon Finance: Driving Technological Transformation of the Global Economy in IETA Carbon Market 2008 Report 6 (34)

8 - Strengthened institutional capacity of governments to develop and implement public policies to reduce carbon related risks for private investors; - Creation of technical capacity for enabling transfer of technology and related know-how; The need for public finance support to overcome market barriers at early (and later) project development stages and the particular public finance mechanisms that can address this problem is of particular concern and was also one of the main issues raised during the workshop. 3 BARRIERS TO CDM AND JI PROJECT IMPLEMENTATION The Clean Development Mechanism (and Joint Implementation 3 ) is currently facing many barriers. Both mechanisms suffer from post 2012 uncertainty and many projects stall or become delayed due to lack of project finance. Furthermore, delays in the CDM registration process as well as political and regulatory risks create a very difficult investment climate. When the mechanisms were launched, the view of many was that a government or company would make an investment in another country and that the investment would result in carbon credits to be used for compliance. However, the model has rather become that the project financing has been arranged unilaterally and that the CDM or JI investment is limited to payment on delivery, thus not entering among the finance provided at the early stages of the project. A few companies combine CDM with equity investment, but the general model is that carbon finance partly covers annual operating costs (including loan down payments) and provides for an improved cash flow. Under this model, CDM or JI does not solve issues related to arranging project finance and a developing country (or EIT-country) project owner has to resolve financial close with little or no help from the designated CER buyer. For many compliance buyers and government purchase programs, investing in the underlying project is not part of the entity s core business. Upfront payments of CERs or ERUs may partly address the lack of equity problem. However, given the risk related to the registration process and the performance of the project, many buyers are unwilling to make upfront payments, and those who do, require a significant discount on the CER price. In addition, most buyers require a bank guarantee when offering upfront payments, which also comes with a cost that will be taken by either the buyer or seller according to contract, and that cost will imply additional discount on the price. 3 This section focuses on CDM but is in some cases also applicable to JI Report 7 (34)

9 Costs and Financial Flows of a CDM Project: The CDM-specific project costs are usually smaller than the non-cdm specific project costs; The largest cost is incurred at construction (including purchase of plant and equipment, etc); Annual operation costs are usually low in relation to construction costs, although they may exceed construction costs over the lifetime of the project; Costs during the planning stage are usually financed by equity; Costs during construction may be financed in a variety of ways for example by various combinations of equity and debt; CDM projects may have conventional revenue streams (such as electricity sales, or sales of other outputs) in addition to CER revenues; Costs during operation are covered by the conventional revenue (if any) and CER revenue of the project; Remaining conventional and CER revenues are used first to repay debt (if any) and lastly to provide a return on equity. Figure 3. Costs and Financial Flows of a CDM-Project In the Least Developed Countries there are even more barriers. One UNEP study 4 reports that there in many parts of the African region still is a lack of local capacity to develop CDM projects. In addition, the lack of capacity to establish Designated National Authorities (DNAs), and lack of capacity to manage these DNAs lead to additional delays and uncertainty. Finally, this region also suffers from lack of regionally based DOEs. Given this situation, a buyer would most likely need to be involved at an early stage to facilitate and take the costs for CDM project development. The buyer is also likely to need to push for host country approval. Thus, the primary CER-buyer needs to be involved at an early stage and is forced to take costs at a quite high risk to get things moving. Number of registered CDM projects CDM project investments (million USD) 0,4% 0,8% 0,1% 0,6% Latin America * Asia & Pacific * Europe & Central Asia Africa * Middle-East SIDS LDCs Source: UNEP Risoe, July 2010 Latin America * Asia & Pacific * Europe & Central Asia Africa * Middle-East SIDS LDCs Source: UNEP Risoe, July 2010 * Excluding SIDS and LDCs Figure 4. CDM projects have not reached the desirable target countries represented by Small Island Development States (SIDS) and Least Developed Countries (LDCs). One of the main barriers for low carbon projects in developing countries is to fill the gap between the amount of construction costs that can be covered by debts and the totally needed construction cost. A 4 UNEP (2009) And yet it moves. Success stories and drivers of CDM project development in sub-saharan Africa Report 8 (34)

10 typical project finance structure in an industrialized country would consist of 10 30% equity, 60 90% senior debt, and 0 15% junior debt. In developing and emerging markets, due to higher risks (perceived or actual) a project finance structure will usually consist of more equity and less debt. This implies that small and medium sized CDM projects typically face an equity-financing barrier. For many small companies, providing collateral and raising this much of equity is challenging and numerous high-quality projects will therefore never be realized 5. In developing countries, project owners seldom have sufficient physical assets for full collateral and debt providers do not necessarily recognize an ERPA as collateral. Generally, the structure of financial markets and limited availability of suitable forms of finance is a common barrier within developing countries 6 : Limited availability of capital for public investment means that developing country governments will be reluctant to use resources for anything else than the most pressing social and economic needs. In the cases where capital is available, public or private investors may refrain from investing due to poor credit-worthiness of potential project developers, poor institutional framework, political risk, and the lack of guarantee facilities. Lack of access to appropriate forms of credit can be a particular constraint for smaller scale renewable energy developers. Overcoming these financial barriers requires either an improvement of the host country investment climate or greater availability of, and access to, low cost investment capital and access to risk sharing mechanisms that can be applied at an early project development stage. Early access to financial resources, in order to plan and facilitate project development, as well as to provide opportunities to achieve financial close, seem to be a key factor for the development of green projects in the developing countries. 4 OVERCOMING BARRIERS THROUGH PUBLIC FINANCE MECHANISMS 4.1 The Role of Public Finance Mechanisms Governments can apply a number of policies and measures in order to promote low carbon projects. As above, one necessary condition is that there are instruments that establish the overall economic framework conditions for investments in low carbon projects. Improvement of the host country investment climate is however not addressed in this report, as this is a separate and complex issue not specific to the carbon market. Another necessary condition is that there is a set of instruments that can remove barriers. Among these instruments are investment grants, interest rate subsidies, dedicated credit lines, investments in private equity or venture capital funds, and publicly backed guarantees 7. Investment subsidies, grants or interest rate subsidies increase the financial rate of return of an investment which increases the incentive for an investor and can also increase the investor s access to debt finance. 5 NEFCO (2010) The Nordic Climate Guarantee Facility 6 International Emissions Trading Association (2009) Carbon Market SEF Alliance (2010) Publicly Backed Guarantees as Policy Instruments to Promote Clean Energy Report 9 (34)

11 Funds are established with the purpose of injecting public finance into the commercial system, in particular in markets where there is a lack of liquidity and where the private finance prioritizes other investments. Publicly Backed Guarantees and insurance schemes mitigate risk and thereby steer the flow of private funds towards prioritized areas. As we will see below, Nordic organizations are involved in activities as those described above. In the context of realizing projects in developing countries, Multilateral Development Banks play an important role. 4.2 The Role of Multilateral Development Banks Multilateral Development Banks can act as providers of public finance in the form of loans, grants and guarantees for energy infrastructure investment within developing countries. MDBs can provide loan guarantees so that local financial institutions are able to offer debt and equity to commercial investors 8. They can also offer risk-sharing mechanisms, e.g. in order to cover revenue losses in the event of technology failure. Such mechanisms can be an important means of building private sector experience with newer technologies. Furthermore, the MDBs can provide equity investments used to establish revolving funds to mobilize public and private sector funds for making available appropriate capital and financial services. The World Bank has had the view that public finance, including ODA, can fill financing gaps together with carbon finance, where carbon finance would ideally be used and exhausted first before the public funds/oda is used. This principle is for instance codified in the Clean Technology Fund, also administered by the World Bank as part of the group of funds called the Climate Investment Funds. The Clean Technology Fund contribution to a project is meant to basically cover some of the incremental cost of cleaner technology. The Clean Tech Fund funds should come in after other private and public sources of finance, and if carbon finance is expected, its contribution should be adjusted down accordingly. Countries applying for the Clean Tech Fund financing have been encouraged to consider carbon finance as part of the financing package where applicable. 4.3 Risk Sharing Through Public Finance Mechanisms Several multilateral organizations and funds, such as the Asian Development Bank, and UNEP, stress that risk sharing is of outmost importance. A main element in the proposals of these organizations is that government high risk capital in funds could take the losses from early failed projects. UNEP argues that financial commitments by the public sector that alter the risk-reward balance of private sector investments can boost private sector financing and brings forward the idea of establishing Public Financing Mechanisms (PFM) that can address particular barriers for investments. UNEP s proposal focuses on risk reduction for investors, public or private, which invest in low carbon projects or purchase carbon credits through funds. UNEP argues that institutional investors could provide much of the capital, if an appropriate riskreward balance is offered. Institutional investors, such as pension funds, insurance companies and sovereign wealth funds, are in a position to provide some of the required capital. It is estimated that pension funds alone control assets worth more than $12 trillion and that sovereign wealth funds have a further $3.75 trillion under management. However, to stimulate their engagement the expected 8 Amin, Amal-Lee (2009) Carbon Finance: Driving Technological Transformation of the Global Economy in IETA Carbon Market 2008 Report 10 (34)

12 returns on climate-change mitigation investment need to be commensurate with the perceived level of risk. Several risks need to be managed, including country risk, policy risk and currency risks. Another idea brought forward in the UNEP report is that the public sector could invest directly in low-carbon funds via subordinated or first-loss equity. In this instance, any money made by the fund is directed to private investors first, with the public sector receiving a return on its investment when private sector returns meet a pre-defined threshold. This reduces risk for private investors. Public financing that covers country and currency risk and cushion other generic risks reduce the absolute return required by institutional investors and increase the supply of private finance for emission reductions. Some publicly funded bodies undertake early-stage project execution for infrastructure projects, such as securing consents and off-take arrangements. In the Nordic context, in which the purchasing programs prioritize renewable energy, public finance could play a role in such projects as well. Before looking at a concrete proposal, we will go through what the Nordic public Finance institutions provide as of today. 5 NORDIC PUBLIC FINANCE INSTITUTIONS 5.1 Introduction Looking at the Nordic arena, there are organizations established since many years in the Nordic countries that carry out the tasks described in section 4.1 above. Development agencies contribute to improving the overall political and economical framework in developing countries in order to create conditions for economic growth and to alleviate poverty. The organizations are in this case DANIDA, SIDA, NORAD and FINIDA. There are also organizations aiming at injecting public finance into projects that are implemented in developing countries where the conditions for investment are difficult. These organizations are denoted Development Finance Institutes, and in the Nordic countries these are Finnfund, IFU, Norfund, Swedfund. Finally, the Nordic countries have also established guarantee institutions that provide risk sharing. These organizations are EKF, EKN, GIEK and Finnvera. 5.2 Development Aid Agencies SIDA Sida works according to directives of the Swedish Parliament and Government to reduce poverty in the world. The overall goal of Swedish development cooperation is to contribute to making it possible for poor people to improve their living conditions. Sida's organization has three main pillars: Policy, which is responsible for global dialogues and reaching consensus, knowledge development and advice, quality assurance and competence; Operations which is responsible for the Report 11 (34)

13 implementation of the development co-operation; Management, which is responsible for control and planning functions as well as service to the rest of the authority. Regarding energy and energy efficiency, Sida works with support for partner countries that brings the opportunity to test new technology within sustainable urban development and renewable energy. Sida has to a limited extent worked with CDM, however, Sida has financed a capacity building program for CDM in Sub-saharan African implemented by the Swedish Energy Agency NORAD The Norwegian Ministry of Foreign Affairs has through the Norwegian Agency for Development Cooperation (Norad) established a support mechanism to enable eligible entities (Project Developers) to prepare the necessary documentation for submission of CDM projects to the Designated National Authority (DNA) and the CDM Executive Board. Developing new CDM methodologies or adapting existing methodologies can also be supported. Project Developers from Norway and Least Developed Countries (LDCs) may submit CDM project proposals. Increased investment in low-carbon technology, improved energy efficiency and increased use of renewable energy at prices that are affordable to poor people is crucial in achieving the MDGs FINIDA Finland places particular emphasis on the importance of issues relating to climate and the environment. Finland's eight long-term partner countries are Ethiopia, Kenya, Mozambique, Nepal, Nicaragua, Tanzania, Vietnam and Zambia. Finland supports programs and projects that focus on saving energy, increasing energy efficiency and producing renewable energy DANIDA Denmark provides special bilateral environmental assistance to countries in Southern Africa and Southeast Asia. The objective is to co-operate with countries in order to further sustainable development and to support efforts to mitigate the effects of environmental pollution and the pressure on natural resources. Cooperation on special environmental assistance aims to further sustainable development and to prevent and mitigate environmental pollution as well as to avoid depletion of natural resources. Key areas for cooperation are: Urban environment and industrial pollution, Sustainable production and use of energy Sustainable use of natural resources (including water). Programmes within the special environmental assistance focus on the development of administrative and organisational capacity of authorities on local, national and regional levels, civil society and NGOs and on the practical demonstration of methods for preventing and controlling pollution. Examples of recent programmes under the special environmental assistance include: i) capacity building in the energy sector in Malaysia on the use of renewable energy, Report 12 (34)

14 ii) community based management of forest resources in Tanzania, iii) integrated water resource management in South Africa and iv) NGO/CBO-based mitigation of urban environmental pollution in low-income areas in major cities in Thailand. The special environmental assistance earlier included cooperation with Botswana, Mozambique, Namibia, South Africa, Tanzania, Zambia in the Southern Africa region and with Cambodia, Malaysia, Thailand and Vietnam in the South East Asia region, but are now phased out in most of these countries. Furthermore, in Malaysia, South Africa and Thailand activities have been included which support the development and implementation of the Clean Development mechanism of the Kyoto Protocol. The B2B Programme supports the establishment of partnerships between Danish companies and companies in Danida s programme countries as well as Egypt and South Africa. In addition B2B Environment is available in Indonesia. The program can assist companies in finding a Danish partner, which can help them gain access to Danish technology and know-how. The Danish companies can obtain access to new markets, products and production opportunities. The program aims at developing the private sector in a range of programme countries by supporting the establishment of long-term and mutually committing partnerships between Danish companies and companies in developing countries. By using business linkages as an instrument for economic growth, the B2B Programme seeks to improve living conditions for the people in the selected countries. 5.3 Development Finance Institutions Finnfund Finnfund is a Finnish development finance company that provides long-term risk capital for private projects in developing countries. Apart from co-investing with Finnish companies, Finnfund can finance ventures that use Finnish technology, cooperate with Finnish partners on a long-term basis or generate major environmental or social benefits. The terms of Finnfund s financing are market-related, not extending soft loans but sharing risks by providing long-term financing for promising projects in challenging markets, where the availability of such financing from commercial sources is often highly restricted. Finnfund s funding can be in the form of equity capital, mezzanine financing or long-term investment loans. Whatever the form, the intention of Finnfund is to be a financial investor with a minority funding share in a project managed by the industrial sponsor, typically a Finnish parent company IFU (The Industrialisation Fund for Developing Countries) IFU invests knowledge and venture capital in private-sector projects in developing countries whose aim is to quickly become self-sustaining. More specifically, IFU co-invest with Danish businesses in projects based in developing countries. The projects should have a lasting positive effect on development, including helping create local jobs and local income. In the vast majority of cases, IFU s investments generate the extra bonus of having positive effects for Danish business partners. Danish enterprises that take the step of expanding into poor and lessdeveloped countries require capital and knowledge to safeguard their investment. The IFU provides Report 13 (34)

15 capital through loans, guarantees and share purchase; IFU participates as a partner in the joint ventures through committing equity capital and/or loans and through board membership. IFU also acts as a project partner offering to help project companies overcome traditional bureaucratic, cultural and language barriers, using a network of local employees and advisers. For the purpose of promoting economic activity in developing countries, IFU has been created to promote investments in these countries in collaboration with Danish trade and industry Norfund Norfund (Norwegian Investment Fund for Developing Countries) is an investment company intended to develop and establish profitable and sustainable enterprises in poor countries. The objective is to promote business development and contribute to economic growth and poverty alleviation. Norfund operates in some of the world s poorest countries and invests in markets where ordinary commercial enterprises are often reluctant to venture alone because of the high risk. Norfund invests equity, directly in enterprises and indirectly through funds, as well as providing loans to individual companies. Norfund is a hybrid company with limited liability established and operated under special legislation and owned by the Norwegian Government through the Ministry of Foreign Affairs. Norfund acts as a key instrument of Norwegian development policy, and the Storting (Norwegian parliament) allocates annual capital grants to Norfund in its development assistance budget. Norfund is a development finance institution (DFI). Bi- and multilateral DFIs in many ways represent a third pillar in international development cooperation, along with bilateral and multilateral aid. All these channels are important in the struggle against poverty, but the DFIs constitute the channel that contributes most directly to economic development by boosting the private sector and thereby reducing dependence on development aid. Today, DFIs are the principle development policy instrument for promoting a profitable business sector and encouraging more private businesses to invest in developing countries. Norfund s investments are divided into four investment areas: Financial Institutions, SME Funds, Renewable Energy and Industrial Partnerships Swedfund Swedfund is Sweden s risk capital company specialised in investments in developing countries, it offers risk capital and competence for investment in Africa, Asia, Latin America and Eastern Europe (non-eu members). The ambition is to contribute to the development of profitable companies and thereby stimulate sustainable economic development in the countries in which we invest. Swedfund invests together with strategic partners, which primarily are Swedish companies wishing to establish in a new market or to expand their operations. The strategic partner must be prepared to share the financial risk with Swedfund and to take the operative responsibility. Swedfund offers risk capital in the form of share capital, loans, guarantees and part-financing of leasing agreements. Table 1. Nordic Risk Capital Companies / Development Finance Institutions Report 14 (34)

16 Finnfund Ownership State of Finland 87.1%, Finnvera 12.8% and Confederation of Finnish Industries EK 0.1%. Prioritized Partners Finnish companies Type of Support Loans, mezzanine, equity Technical Assistance IFU Norfund Swedfund Fund under statutes of Ministry of Development Cooperation Norwegian Government 100% Swedish Government Danish companies Partly Norwegian companies Primarily Swedish companies Loans, shares (equity), guarantees Loans and equity Loans, equity, guarantees Advice Advice 5.4 Risk Sharing/Mitigating Institutions Finnvera Finnvera is a specialised financing company owned by the State of Finland. It provides its clients with loans, guarantees, venture capital investments and export credit guarantees. Finnvera offers financing and expertise to enterprises that aim for internationalisation. Finnvera offers export guarantees to Finnish exporters to cover risks related to the buyer or the borrower (com-mercial risks), or to the buyer's or borrower's country (political risks). Finnvera is an official Export Credit Agency (ECA), and the State of Finland is responsible for all guarantees issued by Finnvera EKF (Eksport Kredit Fonden) The most important task of Eksport Kredit Fonden (EKF) is to ensure competitive financial conditions for Danish business and industry in international markets. EKF is the only organisation in the Danish market to offer insurance against the extraordinary risks that are not covered by the private credit insurance market. In connection with Danish exports to expanding markets that are subject to political and commercial uncertainties EKF plays a key role as an insurer of such transactions. In these markets, it is easier for a company to finance export transactions that are covered by an EKF guarantee. EKF thus covers the risk when Danish companies develop or enter new markets. Report 15 (34)

17 EKF has also specifically developed a number of climate guarantees designed to increase project security and stability in financing. Specifically aiming at boosting Danish participation in the CDM EKF offers the following climate guarantees: Guarantee against non-issuance of carbon credits: Covers the risk of a country refusing to issue and transfer the carbon credits generated by a project under the Kyoto Protocol (CDM and JI projects) through reductions in carbon dioxide emissions. Guarantee for down payment to climate projects under the Kyoto Protocol: Guarantees that the down payment is reimbursed to the buyer of carbon credits if the project does not generate the agreed credits. Guarantee against breach of contract on sale of carbon credits: Companies are covered against possible losses due to breach of contract by a buyer of carbon credits. Guarantee against non-payment in carbon credits: EKF accepts carbon credits as a currency and guarantees against non-payment. Energy and water-saving guarantees: EKF provides cover against non-payments in sale of climate technology and energy-saving products exclusively financed by the energy and water savings created by the energy-saving products. Guarantee for export of new technology: It can be difficult to obtain financing of export of new and commercially untested climate technology due to uncertainty regarding the market value of the project. EKF guarantees payment. Guarantee for financing of Energy Service Companies (ESCOs): Covers an Energy Service Company against customers non-payment and covers banks for the payment of the ESCO of possible loans GIEK (Guarantee Institute for Export Credits) GIEK (Garanti-insttitutet for exportkredit) is the central governmental agency responsible for furnishing guarantees and insurance of export credits. The Institute's primary function is to promote export of Norwegian goods and services and Norwegian investment abroad. GIEK secures competitive terms for the industry and promotes the export of Norwegian goods and services and investment abroad. GIEK can offer coverage for the export of most types of products and services to over 150 countries. The guarantees can cover single or multiple transactions, and commercial as well as political risk EKN (The Swedish Export Credits Guarantee Board), EKN (Exportkreditnämnden), guarantees that Swedish companies and banks get paid when they export. Guarantees lead to improved financing and provide opportunities to offer purchasers competitive credit. An EKN guarantee serves as an insurance policy covering export transactions and investments abroad. EKN exists to help Swedish business - to help you reduce risks and improve chances of getting your bank to finance your transactions. EKN s directive from the government is to help improve the competitiveness of Swedish companies. Long-term credits, high-risk markets, specific transactions, small transactions if there s no cover on the commercial insurance market, EKN s guarantees are there to help. Report 16 (34)

18 5.5 Nordic Financial Institutions Nordic Investment Bank, NIB The Nordic Investment Bank, NIB, is an international financial institution owned by Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway and Sweden. NIB finances projects that strengthen competitiveness and enhance the environment. The Bank offers long-term loans and guarantees on competitive market terms to its clients in the private and public sectors. The Bank has lending operations both in its member countries and in emerging markets in: Africa and the Middle East; Asia; Europe and Eurasia; and Latin America. NIB acquires the funds for its lending by borrowing on the international capital markets. The NIB lending facility Climate Change, Energy Efficiency and Renewable Energy (CLEERE) supports actions for combating and adapting to climate change around the world. In years, the initially allocated EUR 1 billion was fully deployed, and, in spring 2010, the facility was extended by another EUR 1 billion. Under the CLEERE facility, NIB finances projects: - in renewable energy; - in energy efficiency; - using cleaner production technologies that reduce greenhouse gas emissions in industries; - dealing with the adaptation of power networks and infrastructure to climate change, such as extreme weather conditions Nordic Environment Finance Corporation, NEFCO NEFCO is an international financial institution established by the five Nordic countries. NEFCO finances investments and projects primarily in Russia, Ukraine, Estonia, Latvia, Lithuania and Belarus, in order to generate positive environmental effects of interest to the Nordic region. NEFCO is an international financial institution with wide experience of financing environment and energy projects in the potential host countries in the region. NEFCO administers a range of different funds for a variety of purposes and two carbon funds with the purpose of purchasing carbon credits: - NEFCO is the Fund Manager of the Baltic Sea Region Testing Ground Facility (TGF), a regional carbon finance facility established in Following the closure of the second subscription on 31st March 2006, the TGF now has a total fund capital of EUR? 35 million. The TGF invests in projects with a potential for delivering ERUs (according to Article 6 of the Kyoto Protocol) and AAUs (according to Article 17 of the Kyoto Protocol) for the account of the investors. - The NEFCO Carbon Fund (NeCF) is a global carbon fund launched in 2008 with financial resources of EUR 100 million. The NeCF invests in a wide typology of projects by providing carbon finance to renewable energy, energy efficiency, fuel switching and other investments. The principal target markets are the Russian Federation, Ukraine, People's Republic of China, South East Asia and India although other regions will also be considered. Report 17 (34)

19 The NeCF will also procure credits from CDM projects in the post-kyoto period up to the maximum of the first crediting period of the project (7 or 10 years). NEFCO also administers two facilities financed by the Nordic Development Facility the ProClimate Guarantee Facility and the Nordic Climate Facility, see chapter below Nordic Development Facility, NDF The Nordic Development Fund (NDF) provides grant financing for climate change interventions in low-income developing countries. NDF is the joint development finance institution of the Nordic countries Denmark, Finland, Iceland, Norway and Sweden and finances projects in cooperation with other development institutions. NDF grants are provided mainly for technical assistance, i.e. consulting services, and for investments, i.e. goods, works, services, and for other applicable expenses in connection with technical assistance. NDF only finances projects in low-income countries. As NDF is a co-financing institution NDF grants normally constitute a part of the whole project or programme financing. The Nordic Climate Facility (NCF) funding is intended for challenging and innovative climate change approaches. NCF facilitates the exchange of technology, know-how and innovative ideas between the Nordic countries and low-income countries in the sector of climate change. This will increase low-income countries abilities to mitigate and adapt to climate change and contribute to sustainable development and the reduction of poverty. NCF is funded by NDF and implemented jointly with the Nordic Environment Finance Corporation, NEFCO. 5.6 Publicly Backed Guarantees 9 An important instrument for addressing particular needs in sectors and countries are the publicly backed guarantees (PBG). These mechanisms provide beneficiaries with access to finance, reduce their cost of capital, and can expand loan tenor or grace periods to match project cash flows. PBGs are very useful in the context of promoting emerging or higher risk technologies. PBGs are financed by governments but typically recover costs of losses with fees. The export credit guarantee organizations listed above are examples of risk sharing organizations and provide services within the concept of publicly backed guarantees. The export credit guarantees could be classified under technology transfer guarantees. PBGs can be designed in many ways in order to suite particular needs and situations. PBGs are of particular importance to CDM since they can address barriers that are typical for project finance. For instance, there are in many cases high-risk premiums on loans to renewable energy and energy efficiency projects where demonstration level technology is applied. PBGs can also be used when addressing project finance for example, for small-scale grid connected renewable projects. In the latter case, the guarantees can improve the incentive of a financial institution to enter, and it can assist in securing sufficient equity finance. 9 This section is based on SEF Alliance (2010) PBGs as Policy Instruments to Promote Clean Energy Report 18 (34)

20 5.7 The Nordic Climate Guarantee Facility: Proposal by NEFCO 10 NEFCO proposed earlier this year to establish a climate guarantee facility Nordic Climate Guarantee Facility, (NCGF) to support targeted small and medium investments in renewable energy, waste management and energy efficiency projects or programmes of activity that reduce greenhouse gas emissions and are eligible for carbon financing through CDM. NEFCO proposed that the facility should target a specific region, e.g. the Mekong Sub-Region (Cambodia, Lao PDR, Vietnam) and sub-saharan Africa, with a possibility to later expand operations to other Nordic partner countries. The Facility can extend partial loan guarantees, technical and operational guarantees as well as technical assistance to selected projects. As an innovative element the facility can enable different kinds of advance payments on deliveries and supplies, such as CERs in CDM projects. Attaching technical assistance to the selected projects is expected to further enhance the efficiency of the facility Such a Facility could work as follows: A company developing an energy or waste project (the borrower) needs a loan to finance its climate-related investments. The local or regional financial institution is not likely providing the necessary loan to each project company without a partial loan guarantee granted by a creditworthy third party. The Facility could then reduce collateral and equity requirement significantly by providing to (i) the procurement fund or (ii) a local or regional financing institution (FI) a partial loan guarantee to cover the advance payment (loan) component of an ERPA contract to increase the debt financing of the projects. The amount of guarantee would be in relation to the equity available from the project owner, the credit risk accepted by the borrower and the expected cash flow from the carbon finance. The size of each loan guarantee would be subject to negotiation, and would cover the advance payment component of the carbon financing. The guarantee amount from the Facility would be typically in the range of EUR 1-2 million for each intervention but exceptionally, as low as EUR 100,000 or up to EUR 3 million per project. The life of each guarantee is to coincide with the life of the guaranteed loan, typically in the 7-10 year range. In June 2010, the Nordic Development Fund s Board of Directors approved financing of EUR 10 million for the ProClimate Facility (ProCF) 11. The facility will be jointly implemented with NEFCO. 10 This section is based on NEFCO (2010) The Nordic Climate Guarantee Facility. 11 It should be noted that at the time of writing, the modalities and procedures of the Pro-Climate Facility have not been agreed. Hence, this section refers to the proposal by NEFCO rather than to imply any proposed undertakings by the Pro-Climate Facility. Report 19 (34)

21 Loan from FI Upfront payment Total loans Equity Project financing Pay on delivery NCGF concept Figure 5. Reducing Loan and Equity with Advance CER Payments (ERPA Loan) Annual CER delivery will function as payment that reduces the loan (advance payment) amount and release part of the guarantee. Should the project owner default then the FI will be indemnified by the Facility, and the guaranteed funds will be disbursed. In this case, the principal beneficiary of the Facility is the project owner. Report 20 (34)

22 6 SUMMARY OF WORKSHOP AND INTERVIEWS 6.1 Experience on financing CDM projects from the National Procurement Programmes of the Nordic countries Introduction The previous section of the report has been included as an introduction to the issues and to a few alternatives that Nordic countries may want to look at for their future activities. The remaining part of the report is devoted to presenting results from interviews with Nordic country representatives and from the discussions during the workshop. The following section is based on interviews made with representatives from each Nordic governmental JI and CDM Programme: Cooperation The Nordic Governments were asked of their experience from cooperation with national institutions, if it has been successful and if the cooperation has resulted in concrete projects. Denmark The Danish CDM and JI programme cooperates with the national guarantee fund EKF, with the development agency DANIDA and with the public investment fund IFU. Last year, EKF launched their climate service to companies and the Danish JI and CDM Programme invited EKF to work together with them on some projects, and one of them are in the final phase of negotiation. Since the cooperation with EKF will only be with projects in early stage, when the technology provider yet not has been chosen, these projects are very few, since the Danish JI and CDM programme now focuses on projects that will deliver before DANIDA has a loan facility (The Business to Business (B2B) programme) for sustainable projects and they are cooperating with the Danish JI and CDM programme on two projects, one wind power project on 120 MW and one small biomass project. The Danish JI and CDM programme has also cooperated with IFU in one specific project. There is an advantage for a JI and CDM programme to involve IFU, since, if they choose to invest in the project an be a shareholder, they have a good understanding of the project and the project is more probable to be well implemented Finland The Finnish programme worked with Finnfund, but a barrier has been that Finnfund has strong security regulations and it has been difficult to find projects eligible for support. Finland has not worked a lot with the development agency, since the development agency argue that they can only use ODA for capacity building purposes, and on a relatively small scale. The development agency also has limited human resources that work with CDM related issues. The programme has only benefited from support from the Finnish Embassies in China and South Africa, where persons with some knowledge of CDM have been located. Report 21 (34)