Monday, July 27, 2009
Green Tariffs are an important factor in alternative energy investment decision making. Nations seeking to incentivize alternative energy investment, such as European Union countries and Ukraine also, establish higher electricity sales prices (and therefore revenues) for alternative energy power producers compared to traditional fossil fuel based power producers.
From a project investor's point of view, an alternative energy business plan must be financially attractive and typically must "stand on its own two feet" aside from any carbon credit component. Carbon credits are expected and documented, but an investor does not typically invest into an energy power project to collect carbon credits alone.
Green Tariffs increase the sales revenues from alternative energy power projects; likewise, they reduce the payback period and investment risk for such projects in emerging market economies. Alternative energy projects that otherwise would be regarded as difficult or risky for technology, cost or country risk reasons can experience refreshed interest and activity levels due to corresponding Green Tariff revenues. It is clear, for instance, that Ukraine's new Green Tariff has sustained foreign investors' interest in its clean and renewable energy markets during the present financial downturn.
Countries develop Green Tariffs on an independent basis. In Ukraine, the Green Tariff is set by the National Electricity Regulatory Commission (NERC). It covers alternative energy production facilities such as wind power plants, hydropower, biomass, biogas, and other methane utilization projects (except blast-furnace and coking gases). There is no present capacity cap on Ukraine's Green Tariff except for hydropower plants, where an eligible facility cannot exceed 10 MW in capacity.
Carbon credits and Green Tariffs together create an excellent incentive stew for new alternative energy project finance. In countries like Ukraine, where the Green Tariff roughly doubles historic project revenues and a streamlined Track 1 JI approval process eliminates international bureaucracy, investment conditions have never been better.
Please feel free to contact the Foundation for the Development of Environmental and Energy Markets to discuss specific questions or opportunities with regard to European Green Tariff structures and alternative energy markets. For Ukraine's Green Tariff rate schedule, please see my prior post entitled "Ukraine's New 2009 Green Tariff Rates" and refer to the end table.
Thursday, July 23, 2009
Ukraine’s government has been quite proactive during the first half of 2009 with regard to the renewable energy and carbon sectors. In April, the President approved a "revised" Green Tariff rate calculation methodology... resulting in even higher prices than before for alternative energy producers. Also the government has been working to complete Ukraine’s Green Investment Scheme through the National Agency for Environmental Investments, and has sold 30 million AAUs to Japan. In the coming weeks, Ukraine will most probably complete transactions for over double this amount to additional buyers.
The higher green tariff rate schedule, along with the government’s activity to complete Ukraine’s Green Investment Scheme and to undertake ambitious AAU trades, means that right now we see the most fertile environment for Ukraine’s alternative energy sector growth since the country’s 1991 independence.
New green tariff prices are paid directly by Ukraine's Wholesale Energy Market as the counterparty buyer, which is good. It means that under the present Green Tariff mechanism there is no necessary "purchase price negotiation" (at this moment) between local alternative energy providers and the local oblenergos – distribution companies – that power providers must link into.
I will keep my eye on things as they develop or change. Also I will monitor how individual alternative energy companies fare, in terms of application and payment under this system.
But as you can see from the current price calculations below, alternative energy sales prices make it very attractive to invest. It is important to note that these rates are only available to new projects that are built from 2009 onwards. Click on the chart below and it should increase the viewing size.
You’re a project owner or developer with a fresh project generating valuable carbon credits under the Kyoto Protocol. Perhaps this is your first project, or maybe you’ve already established your track record in the market.
No matter what your prior experience level, you know that 2012 is fast approaching and you want to obtain the best possible terms for selling your carbon credits. This means locking in a great price before market prices dip farther south. But for some reason whenever you try having serious talks about your project with prospective buyers they give only noncommittal signals of interest.
What is happening? Why are your sales talks hitting road blocks this year, when last year was smooth sailing and you could take your pick of any number of interested buyers from just a few phone calls? You’ve heard the market is getting tough as the 2012 Kyoto deadline approaches, but you’ve got a great project whose carbon credits should be easy to sell. You’re confused.
The recent lack of success may be due in part to your failure to show today’s nervous buyers that you have pre-identified and addressed their main risk areas. This is becoming increasingly important in 2009, as the market seems to be swinging from a seller’s to a buyer’s market. The pre-identification exercise not only allays investors’ fears, it also paints you in a highly positive light as an enlightened and responsible seller.
In order to achieve the best price and avoid painfully drawn out contract negotiations, you should be prepared to answer key questions from the very first serious discussion with a buyer. From the first phone call with a major bank, company or carbon fund, you should know how to respond to the 10 items below… even if you can only give a partial answer.
1. What is the project’s full reference name, host country, and approved baseline methodology number?
2. What documentation stage is the project at (PIN, PDD, validation report etc.)?
3. What approval stage is the project at (FSR, LOE, LOA, Track 1 or UNFCCC registered)?
4. What is the full project owner and project developer name, and what track record do they have for previous carbon projects?
5. What is the financing source for the project’s construction and equipment costs? Is financing complete or secure?
6. When should the project begin validation? Has a time slot been pre-arranged with a particular DOE?
7. When is the expected project commissioning date?
8. When is the expected project registration date?
9. What are the expected annual ERU/CER volumes? What portions of these volumes are available for sale? If not 100%, then who has rights to the remainder and what priority status is the piece available for sale?
10. What are the “get it done” purchase price terms … where if a buyer agrees, you can both cut the small talk and proceed directly into exclusive ERPA contract negotiations?
The best Kyoto Protocol projects are great for the environment but good for your bank account also. If you can answer the 10 questions above, you have an excellent shot to complete a carbon credit sales transaction on your terms and on your timeline.
Good luck, here’s hoping to your success in 2009 and to the success of all carbon credit projects worldwide!