Figure 2.7Number <strong>of</strong> projects2016128405 15Distribution <strong>of</strong> Capacity Factors <strong>of</strong>Hydropower CDM Projects253545556575Capacity factor group (mid point %)WBGNon-WBGSource: IEG calculations based on UNEP Risoe 2009.Note: CDM = Clean <strong>Development</strong> Mechanism; WBG = <strong>World</strong> <strong>Bank</strong>Group.Landfill gas projects have produced muchless gas than expected, but good monitoringand rapid feedback have prompted morerealistic appraisal.Provide carbon financeFrom an economic viewpoint, carbon payments rewardrenewable energy sources for reduced emissions. In theidealized world <strong>of</strong> the CDM, such a payment is supposedto nudge an investment project over the threshold <strong>of</strong>financial viability. In reality, a carbon payment, like a8595feed-in tariff, will be one <strong>of</strong> many factors that elicits aresponse from investors.CDM projects must explain the barriers faced by the projectand how carbon finance will help overcome them. A review<strong>of</strong> <strong>Bank</strong>-financed hydropower plants found that many projects(in China, Guatemala, Honduras, India, Nigeria, andUkraine) claim barriers related to insecure or short-termpower purchase agreements. If these are in fact the barriers,then the use <strong>of</strong> carbon finance is a project-specific bandagefor a sectorwide problem. A higher leverage interventionwould be to work at the policy level to correct the problem,potentially catalyzing the entry <strong>of</strong> many plants.<strong>Carbon</strong> finance has had modest impactson investor returns for CO 2-reducingrenewable energy projects.Figure 2.8 shows the impact <strong>of</strong> carbon finance in a sample<strong>of</strong> WBG projects, based on financial data presented forappraisal. <strong>The</strong> figure shows the return on equity (ROE) computedwith and without the contracted carbon payments.<strong>The</strong> degree to which carbon may have affected investors’ incentivesclearly differs among the cases. A strong nudge towardinvestment is plausible in the case <strong>of</strong> one project witha base ROE <strong>of</strong> about 13 percent, which received a boost <strong>of</strong>2.5 percentage points from carbon. It is less plausible forprojects that started with a return <strong>of</strong> 20 percent or aboveand received only 0.5 percent additional from carbon.<strong>The</strong> relatively modest impacts on ROE reflect the basic economics<strong>of</strong> carbon. Renewable energy projects that substitutefor fossil fuels reduce CO 2emissions by 0.8 kilograms/kWh,Box 2.2Monitoring and Evaluation Provides Rapid Feedback on the Performance <strong>of</strong> Landfill Gas Projects“Sanitary” landfills, as the name suggests, are a big improvement over open dumps and are an essential part <strong>of</strong>modern urban development. But when waste rots anaerobically in these landfills, it produces methane, a GHG25 times more potent than the CO 2produced in open dumps.With the advent <strong>of</strong> the CDM, landfill gas projects can claim credit for destroying methane at 25 times the rate, perton, <strong>of</strong> CO 2reduction. This could make them bankable, even in the absence <strong>of</strong> electricity sales.Consequently, 136 landfill gas projects were registered under the CDM between 2001 and 2009, and the <strong>World</strong><strong>Bank</strong>’s CFU has purchase agreements with 21. Like all carbon projects, landfill gas projects must report and verifytheir production annually. This mandatory monitoring soon revealed that many <strong>of</strong> these projects were grosslyunderperforming relative to design expectations, producing on average only about half the planned credits.In 2007, the <strong>World</strong> <strong>Bank</strong>’s carbon fund sponsored an analysis <strong>of</strong> the reasons for underperformance. This and otherstudies showed that project appraisers had estimated the landfill’s methane yield based on models <strong>of</strong> US landfills.But developing country garbage is different from US garbage—it is richer in food waste and moisture content,generates less methane per ton, and decays faster. Investigation showed specific ways in which poor operationand construction <strong>of</strong> the landfill can also depress yields. Feedback on these factors has improved the appraisal anddesign <strong>of</strong> subsequent landfill projects, for instance, leading to more conservative estimates <strong>of</strong> production.Sources: IEG; SCS Engineers 2007.20 | Climate Change and the <strong>World</strong> <strong>Bank</strong> Group
on average (Iyadomi 2010). (Reductions are smaller in hydropower-dominatedcountries such as Brazil.) Thus, carbon paymentsat $10 per ton (<strong>World</strong> <strong>Bank</strong> 2009) 8 would add roughly0.8 cents/kWh to the investor’s revenue—a relatively small incrementin many competitively priced power markets. <strong>The</strong>secarbon flows may <strong>of</strong>fer greater security and less exchange raterisk than domestic payments from an uncreditworthy electricity<strong>of</strong>f-taker, and thus serve a kind <strong>of</strong> guarantee functionin some cases. However, as the formulas in box 2.1 show, theimpact <strong>of</strong> carbon on ROE and ERR is proportional to the capacityutilization factor. Thus, ironically, carbon payments areless helpful to economically mediocre projects than to goodones. Of course, the impact would be much stronger if CO 2were priced at the $30–$60 levels that many analysts suggestis necessary for effective global climate change mitigation.Figure 2.8Addition to ROE (%)3.02.52.01.51.00.5Impact <strong>of</strong> <strong>Carbon</strong> Payments onReturn on Equity0.00.0 5.0 10.0 15.0 20.0 25.0 30.0Initial ROE (%)Source: IEG.Note: ROE = return on equity.<strong>Carbon</strong> sales have not catalyzed wind andhydropower investments.<strong>Carbon</strong> market participants acknowledge that carbon saleshave generally not been catalytic in triggering wind andhydropower investments. But carbon can make a big differencefor projects that capture methane emissions anddestroy them or use them for energy, as noted earlier.Provide better loan terms<strong>Low</strong>er interest rates and longer repayment periods makeprojects more bankable, though they do not affect the ERR.<strong>The</strong> financial model suggests that a change from a 5-year toa 10-year tenor could boost the debt service coverage rati<strong>of</strong>rom 1 to 1.4. This is a very significant difference, whichmight well be sufficient to make a project bankable.Longer repayment periods make projectsmuch more bankable.Although IFC does not compete with commercial lenderson interest rates, it can and does <strong>of</strong>fer longer tenors, <strong>of</strong>tenaround 10 years as opposed to 5 for commercial loans(with much variation). In syndicated loans, IFC terms areusually matched by other lenders. <strong>The</strong> IBRD can <strong>of</strong>fer bothlower interest rates and longer tenors than commerciallenders.IBRD’s Turkey Renewable Energy Project (2004) is an example<strong>of</strong> the catalytic effect <strong>of</strong> longer loan repayment periods.This project loaned about $200 million to a state bankand a private bank. <strong>The</strong> funds were on-lent to 22 renewableenergy investments (mostly hydropower, with wind andgeothermal power plants as well) with total value <strong>of</strong> $774million and a capacity <strong>of</strong> 605 MW; claimed lifetime CO 2reductions are about 1 million tons. 9 One success factor wasthat the Turkish banks <strong>of</strong>fered loans <strong>of</strong> 10 years’ duration ormore, compared to prior norms <strong>of</strong> 4 years. This precedentalso convinced other banks to <strong>of</strong>fer lengthier repaymentperiods for renewable energy projects.Political risk insurance could be importantin catalyzing renewable energy investment.Mitigate risksRenewable energy investments can be risky. <strong>The</strong> investorputs a large sum into an expensive, immovable installationand must trust a utility to keep paying an agreed tarifffor many years. This risk is more acute than for fossil fuelplants, because renewable energy plants cost more per MW.In many countries, the <strong>of</strong>f-taker is in poor financial healthor subject to external pressures.<strong>The</strong> use <strong>of</strong> feed-in tariffs (a producer subsidy) poses anotherrisk. Governments may promise 10 or 15 years <strong>of</strong>these premium payments for renewable power to makethe initial investment worthwhile for investors. But if a financialcrisis were to hit, governments might be temptedto eliminate these subsidies, because the marginal costs <strong>of</strong>continued operation are low. Governments might also betempted to renege on feed-in tariffs if prices <strong>of</strong> coal, oil, orgas declined.<strong>The</strong>se considerations suggest that guarantees and politicalrisk insurance could be important in catalyzing renewableenergy investment. In principle, MIGA can providepolitical risk insurance at lower cost than private agencies,because the WBG’s special relationship with client governmentslowers its risk. Both the <strong>World</strong> <strong>Bank</strong> and MIGA havein fact provided such insurance. Box 2.3 describes a MIGAexample. Mostert, Johnson, and MacLean (2010) explainhow WBG partial credit guarantees facilitated longer loanterms for a Philippine geothermal and a Chinese hydropowerplant, making them both bankable.Renewable Energy | 21
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Phase II: The Challenge of Low-Carb
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CLIMATE CHANGE AND THE WORLD BANK G
- Page 5 and 6: Table of ContentsAbbreviations . .
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ConclusionsThe WBG’s efforts to p
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Table 5.1Carbon Funds at the World
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demonstration initiative. The Commu
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Impacts on technology transferThe 2
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Figure 6.1800Economic and Carbon Re
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Specifically, the WBG could:• Pla
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Table 6.1Summary of Sectoral Findin
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Table 6.1Sector Intervention Direct
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Appendix ARenewable Energy Tables a
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Table A.4Grid-Based Biomass/Biogass
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Table A.5 (continued)Negative examp
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Figure A.4A. Hydro/biomass capacity
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Appendix bWorld Bank Experience wit
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Table C.2Completed Low-Carbon Energ
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TAble C.4Reviewed energy efficiency
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the new capacity. Transmission syst
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Table E.2Climate obligationsCoal Pl
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Table F.2GHG objectiveModeNumber of
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Table H.1Project andlocationBioener
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Appendix ICarbon and Economic Retur
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Appendix JRecent WBG Developments i
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overnight. The Bank can provide ass
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Hartshorn, G., P. Ferraro, and B. S
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IEG PublicationsAnalyzing the Effec