Renewable Energy Project Development Under the Clean Development Mechanism: A Guide for Latin America (Environmental Market Insights)

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Elizabeth Lokey

Renewable Energy Project Development Under the Clean

Development Mechanism

A Guide for Latin America

Renewable Energy Project Development under the Clean Development Mechanism A Guide for Latin America

Elizabeth Lokey

London • Sterling, VA

First published by Earthscan in the UK and USA in 2009 Copyright © Elizabeth Marie Lokey, 2009 All rights reserved ISBN: 978-1-84407-737-3 Typeset by MapSet Ltd, Gateshead, UK Cover design by Ruth Bateson For a full list of publications please contact: Earthscan Dunstan House 14a St Cross St London, EC1N 8XA, UK Tel: +44 (0)20 7841 1930 Fax: +44 (0)20 7242 1474 Email: [email protected] Web: www.earthscan.co.uk 22883 Quicksilver Drive, Sterling, VA 20166-2012, USA Earthscan publishes in association with the International Institute for Environment and Development A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Lokey, Elizabeth. Renewable energy project development under the clean development mechanism : a guide for Latin America / Elizabeth Lokey. p. cm. Includes bibliographical references ad index. ISBN 978-1-84407-737-3 (hardback) 1. Renewable energy sources–Government policy–Latin America. I. Title. TJ807.9.L29 L65 2009 333.79'4098–dc22 2008044614 At Earthscan we strive to minimize our environmental impacts and carbon footprint through reducing waste, recycling and offsetting our CO2 emissions, including those created through publication of this book. For more details of our environmental policy, see www.earthscan.co.uk. This book was printed in the UK by Antony Rowe Ltd. The paper used is FSC certified and the inks are vegetable based.

Contents

List of Figures and Tables Acknowledgements Executive Summary List of Acronyms and Abbreviations

v vii ix xi

Section 1 CDM Market and this Guide Chapter 1 Background and Introduction

3

Section 2 Barriers Chapter 2 Technical Barriers

43

Chapter 3 Social Barriers

65

Chapter 4 Financial Barriers

75

Chapter 5 Informational Barriers

87

Chapter 6 Host Country Institutional Barriers

101

Chapter 7 UNFCCC Procedural and Methodological Barriers

109

Chapter 8 Small-Scale Barriers

127

Section 3 Country Market Intelligence for CDM Projects Chapter 9 Country-Specific Profiles Introduction

147

Chapter 10 Argentina

151

Chapter 11 Belize

159

Chapter 12 Bolivia

161

iv

RENEWABLE ENERGY PROJECT DEVELOPMENT

Chapter 13 Brazil

169

Chapter 14 Chile

177

Chapter 15 Colombia

187

Chapter 16 Costa Rica

197

Chapter 17 Dominican Republic

207

Chapter 18 Ecuador

213

Chapter 19 El Salvador

223

Chapter 20 Guatemala

231

Chapter 21 Honduras

241

Chapter 22 Mexico

251

Chapter 23 Nicaragua

265

Chapter 24 Panama

271

Chapter 25 Peru

279

Chapter 26 Uruguay

289

Chapter 27 Other Latin American Countries

297

Chapter 28 Regional Trends

303

Section 4 Future Development Chapter 29 Stimulating Investment and Overcoming CDM Barriers

319

Chapter 30 Summary of CDM Barriers

329

Index

337

List of Figures and Tables

Figures 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.1 2.2 7.1 10.1 12.1 13.1 14.1 15.1 16.1 17.1 18.1 19.1 20.1 21.1 22.1 23.1 24.1 25.1 26.1

CER distribution by project type CDM projects registered by type CDM project cycle Global distribution of CDM projects Global distribution of CERs Distribution of CERs by country in Latin America Distribution of CERs generated by 2012 by type in Latin America CERs derived from various renewable energy projects in Latin America CDM renewable energy project distribution in Latin America Hurricane damaged pipe for hydro electric La Joya site III biodigester in Puebla, Mexico CERs predicted without industrial gas inclusion Projects registered or in validation in Argentina Projects registered or in validation in Bolivia Projects registered or in validation in Brazil Projects registered or in validation in Chile Projects registered or in validation in Colombia Projects registered or in validation in Costa Rica Projects registered or in validation in the Dominican Republic Projects registered or in validation in Ecuador Projects registered or in validation in El Salvador Projects registered or in validation in Guatemala Projects registered or in validation in Honduras Projects registered or in validation in Mexico Projects registered or in validation in Nicaragua Projects registered or in validation in Panama Projects registered or in validation in Peru Projects registered or in validation in Uruguay

9 10 13 16 16 17 18 18 19 45 56 110 154 162 171 180 189 200 209 217 225 233 244 255 267 274 282 291

vi


Tables 1.1 4.1 4.2 5.1 6.1 6.2 13.1 18.1 28.1 28.2 28.3 28.4 30.1 30.2 30.3 30.4 30.5 30.6 30.7 30.8 30.9 30.10 30.11

Renewable energy CDM projects registered or in the process of validation Investment and average generation costs for various energy technologies Incremental impact of the CER price on the internal rate of return of the project (percentage per purchase period) Major renewable energy associations in region Point Carbon’s international CDM host country rating Latin America’s top rated countries for CDM investment rated by the German Office of Foreign Trade Summary of Brazilian renewable energy mandate (PROINFA) Feed-in tariff prices Non-technical electrical losses before and after privatization Privatization schemes in select countries Summary of renewable energy legislation The role and participation of DNA Offices in Latin American countries Technical barriers Social barriers Financial barriers Informational barriers Host country institutional barriers UNFCCC procedural and methodological barriers Small scale barriers Country comparisons: Summary Solutions for project developers Solutions for host country governments / DNA offices Solutions for the UNFCCC

24 76 79 94 101 102 171 216 303 304 305 313 330 331 331 331 331 332 332 333 334 334 335

Acknowledgements

I could not have completed this research without the cooperation, time and hospitality of the hundreds of people in the 12 Latin American countries that I visited. Their willingness to share insights, anecdotes, contacts and documents made the content in this book come alive for me and, hopefully, for the readers too. I would like to thank a few people in particular. Thank you to Frank Barnes, my primary PhD adviser, whose intellectual curiosity and constant willingness to rise to a new challenge inspired me, and whose practical guidance led me on a weekly basis to always contemplate the larger impacts of my research. I appreciate my dissertation committee for giving me the flexibility to complete this multidisciplinary research in the emerging field of carbon markets. Ilan Kelman of the Center for International Climate and Environmental Research in Norway was a tremendous help in reviewing this work. Debora Ley of Oxford University was instrumental in reviewing this book and providing me with contacts throughout Mexico and Central America

viii


that helped me have successful interviews. Manuel Estrada, a private CDM consultant in Mexico City, helped provide guidance on CDM-specific questions. Gerardo Salgado introduced me to the world of CDM in Honduras. A host of other friends including Victoria Frías, Eduardo Meléndez, José Maria Meléndez, Mark Feldman, Richard and Vivian Clinton, Sergio and Jessica Garcia, Camilo Garizábal Carmona and Carlos Andres Uribe were instrumental in the creation of this book as they hosted me during my field research. Finally, I must thank my parents for their huge investment in and support of my education from its start to finish. Without their sound advice and urging to follow my dreams, I would not have been able to complete my final chapter of learning and completion of this book.

Executive Summary

The Clean Development Mechanism (CDM) allows Annex I countries that have ratified the Kyoto Protocol and must meet greenhouse gas reduction targets to do so in part by purchasing emission reductions from projects registered with the United Nations Framework Convention on Climate Change (UNFCCC) in developing countries. These projects, in theory, result in additional emission reductions that would not have occurred otherwise because they rely on the CDM revenues for their existence. The goals of the CDM are to reduce greenhouse gas emissions in the most economical way possible and promote sustainable development. Thus far, the bulk of these emission reductions come from industrial gas mitigation projects. For successful renewable energy CDM project registration and emission reduction issuance into the future, the project must overcome a variety of political, economic, social and technical barriers. This guide seeks to make these barriers to renewable energy projects in Latin America more well known as a first step towards better achieving the CDM goal of promoting sustainable development. Some solutions are presented, but this section is limited as a full discussion of these solutions merits another book altogether. The two most important barriers to project development are politically and bureaucratically related. The first major barrier to CDM project entry in a given country is related to the openness of its electrical sector. Fully privatized electrical sectors are more receptive to Independent Power Producer (IPP) participation. This IPP involvement is necessary because state-run utilities have little incentive to and in some cases cannot by law implement CDM projects. State-run utilities are bound to develop the least-cost project, which, by definition, cannot be a CDM project since it must rely on the emission reduction revenues for its existence. These emission reduction revenues are so new and risky since they must be successfully registered with the UNFCCC that they are not incorporated in state utility least-cost planning processes. Therefore, countries with open electrical sectors that allow IPPs to develop CDM projects typically have the most CDM renewable energy development. The second major CDM barrier is that countries with strong renewable energy incentives or mandates are at a disadvantage since, for CDM registration, projects must be additional to what would have occurred otherwise. If a project that is applying for CDM registration helps fill a renewable energy

x


mandate, then its regulatory additionality is put in question. Likewise, if a feed-in tariff for renewable energy makes a project financially viable, then its financial additionality is negated. The CDM Executive Board’s silence on this important issue of additionality has created a perverse incentive for developing countries to do nothing to address climate change. These and a host of other types of barriers are explained in this book.

List of Acronyms and Abbreviations

AAU AM CAF CD4CDM CDM CER CERUPT CFE CIF DNA DNV DOE EB EIS EPM ERPA ERU ETS EU EUA GEF HFC ICE IPP JI kW kWh MW MWh NGO NREL ODA

Assigned Amount Unit Approved Methodology Corporación Andina de Fomento Capacity Development for the CDM Clean Development Mechanism Certified Emission Reduction Certified Emission Reduction Unit Procurement Tender Comisión Federal de Electricidad Climate Investment Fund Designated National Authority Det Norske Veritas Designated Operational Entity Executive Board Environmental Impact Statement Empresas Públicas de Medillín Emission Reduction Purchase Agreement Emission Reduction Unit European Trading Scheme European Union European Union Allowance Global Environment Fund hydrofluorocarbon Instituto Costarricense de Electricidad independent power producer Joint Implementation kilowatt kilowatt hour megawatt megawatt hour non-governmental organization National Renewable Energy Laboratory Official Development Assistance

xii


OECD PCF PDD PIN PoA PPA PTC PV SEECI UN UNDP UNEP UNFCCC VER

Organisation for Economic Co-operation and Development Prototype Carbon Fund Project Design Document Project Idea Note Programme of Activities Power Purchase Agreement production tax credit photovoltaic Sustainable Energy and Climate Change Initiative United Nations United Nations Development Programme United Nations Environment Programme United Nations Framework Convention on Climate Change Verified Voluntary Emission Reduction

Section 1 CDM Market and this Guide

1 Background and Introduction

Background In order to address climate change, the United Nations formed the Framework Convention on Climate Change (UNFCCC) in the early 1990s. Most countries signed this treaty and pledged to consider reducing climate change and its impacts. The 1997 Kyoto Protocol, which calls for binding emission reduction targets for most developed countries – termed Annex I countries by the Protocol – was created as an extension of this treaty. The Protocol was to go into effect when 55 countries representing 55 per cent of the world’s greenhouse gas emissions had ratified it. The 55-country clause was met by 2002, but it was not until February of 2005, three months after Russia signed the Protocol, that the 55 per cent of the world’s emissions stipulation was met. The Protocol’s time frame is 2008–2012 for the 175 countries that had ratified it by April of 2008 [1]. Flexible mechanisms within the Kyoto Protocol allow countries to fulfil a portion of their carbon obligations by trading emission allowances known as Assigned Amount Units (AAUs) among Annex I countries, purchasing emission reductions from carbon offset projects in other developed countries or economies-in-transition like the former Soviet republics or purchasing Certified Emission Reductions (CERs) from carbon offset projects in developing countries. The latter of these options, known as the Clean Development Mechanism (CDM), defined in Article 12 of the Kyoto Protocol, and overseen by the UNFCCC, is intended to allow countries that ratified the Kyoto Protocol to meet their carbon obligations in the cheapest way possible, achieve the objectives of the Protocol and promote sustainable development, which is contentious because it has not been defined by the UNFCCC [2]. Providing an alternative path to development for non-Annex I or developing countries is essential to curbing global warming since 59 per cent of energy-related carbon dioxide (CO2) emissions will come from developing countries in 2030 [3]. CDM projects absorb CO2 from the atmosphere or decrease CO2 emissions by improving the efficiency of a process, fuel switching

4

CDM MARKET AND THIS GUIDE

or substituting fossil fuel-based energy with renewable energy. If the CDM project is successfully registered and the emission reductions verified, the emissions reduced or absorbed can be sold internationally to the Annex I countries and provide additional revenues for the project owner. The more emissions are reduced, the larger the profits from the project. The process by which projects are registered is essentially the same for both large and small projects and quite costly at between $58,400 and $500,000 [4 and 5].1 Therefore, most emission reductions are derived from large projects such as industrial gas emission mitigation in urban areas. These projects have potentially large revenue streams and can attract foreign investment and interest from project developers and carbon brokers, who buy reductions from project owners and sell them to Annex I countries. Renewable energy projects tend to result in fewer emission reductions per project and therefore only account for 12 per cent of CERs produced worldwide, while industrial gas mitigation projects account for 72 per cent [6]. In order to allow developers to have greater success in implementing these projects, this book seeks to make these barriers to renewable energy CDM projects better known. This geographic area was chosen because it has been overshadowed by Asia, and there is no major study that assesses the region’s barriers. Some recommendations for how to overcome these barriers will also be offered, but less emphasis is placed on these suggestions since a full elaboration of the potentials and pitfalls of each would constitute another book. The author researched these barriers not only by reviewing the current literature available, electrical background for each country and renewable energy legislation in each country, but also by visiting 12 Latin American countries and conducting interviews with project developers, governmental and non-governmental organization (NGO) representatives, and investors. She also visited 15 project sites during her travels to observe first-hand the barriers to project implementation. See Appendices A and B for a complete list of interviewed persons and project sites visited. It is important to assess the project-specific barriers, as well as the host country environment for implementing CDM projects, since the process for registering and continually earning CERs is interdisciplinary and includes all of these factors. The document used for registration of these projects with the UNFCCC, known as the Project Design Document (PDD), must discuss the technical aspects of the project, the renewable energy legislation and energy situation in the country, provide an argument of why the project would not have occurred in a business-as-usual situation based on a financial or barriers analysis, show the baseline emissions that would have occurred without the project, emission reductions as a result of the project, the environmental impacts of the project and a stakeholder analysis of the project with community members. The process of UNFCCC registration is interdisciplinary because the success of renewable energy projects depends on social, political, economic and technical aspects of the project being well aligned. Therefore, this book is also interdisciplinary and seeks to address each of these compo-

BACKGROUND AND INTRODUCTION

5

nents in order to provide a thorough analysis of the barriers to CDM project success. The appeal of this book is wider than may first appear since virtually all new renewable energy projects in developing countries are now considering the CDM for their project. In a few rare cases, a project developer will not complete the CDM project cycle because it seems too costly or burdensome. However, as the price of CO2 pollution permits has increased in the second phase of the European Union Emission Trading Scheme (EU ETS), there is increasing interest in how to capture these revenues. This book is an essential contribution to the literature since it is the first on-the-ground analysis of CDM barriers in the region and the most up-to-date and comprehensive work of its type. This analysis has the potential not only to help current Kyoto Annex I countries meet their reduction targets through better utilization of the CDM in Latin America, but also to highlight lessons learned that will help guide US negotiations for offset inclusion in future greenhouse gas legislation. The US will most likely incorporate offsets in its future legislation in some way since they have the potential to greatly reduce compliance costs; by the year 2050, the price of carbon mitigation per tonne would be $220 without offsets and $50 per tonne with the use of unlimited offsets [7].

Clean Development Mechanism market In order to understand the barriers to renewable energy project implementation, it is essential to understand the CDM market. Since its inception in 2001, when the rules were finalized at the seventh Conference of Parties in the Marrakesh Accords, until May of 2008, the CDM market has matured, with exponential growth from 2006 to 2008 [8]; there were just 181 registered projects in May 2006 and by April 2008 over 1000 existed [9]. In 2007, the CDM generated $12.8 billion of the estimated $64 billion in the overall global carbon market [10]. This market could grow six to eight times by the end of the 2012 commitment period [11]. CDM projects have generated 45 million CERs, which each represent the mitigation of one metric tonne of CO2 [12]. The value of CERs varies widely. The primary reason for this fluctuation is the nature of the nascent carbon market, which is most developed in Europe. Within the Kyoto Protocol, groups of countries were allowed to create regional markets to make reductions. The European Union (EU) chose to do this and created the European Trading Scheme (ETS), which is a cap-and-trade system whereby polluters can trade allowances with other EU countries to reach overall Kyoto country-based emission targets. The ETS has two compliance periods, 2005–2007 and 2008–2012. At the end of each, the entities that the ETS regulates, power and heat generators and selected industrial sectors, must fulfil their carbon reduction goals [13].2 Governmental officials known as the Designated National Authority (DNA) within each country decide how to divvy up the total allowances of the country [14]. In the EU 45 per cent of reductions are made within capped sectors and the ETS, 55 per cent are made from activities outside of the cap. Allowance prices started at close to €18 per

6


tonne of CO2 and then soared to €30 per tonne of CO2 in May of 2006 [15]. However, EU Allowances (EUA) prices for the 2005–2007 period dropped to just €0.1 per tonne of CO2 towards the end of 2006 and 2007 because of an over-allocation of allowances. Allowances were given before country baseline studies were completed and not appropriately distributed [16 and 17]. A linking directive set up through the EU allows CERs to count as EUAs for compliance purposes [18]. In addition to being accepted in the EU, CERs are accepted in Japan and Canada as emission reduction units for obligated parties. Japanese buyers tend to be conservative in that they do not wait to see what the carbon market will do, but instead want to make sure they have enough CERs to cover demand and lock in prices for forward streams of CERs. Canada has been slow to be involved in the CDM even though the country’s rules permit CERs to make up 10 per cent of the country’s reductions [19]. CER prices are generally about one-third lower than EUAs because of the project risk involved [20]. Prior to the EU ETS coming online and the Kyoto Protocol being operational, few CDM projects were established, and CERs were bought and sold for speculative future compliance purposes. In 2004, before the Kyoto Protocol had come into effect, CERs were worth much less than they are now; renewable energy projects earned €5.5 per tonne of CO2, while the CERs from fuel switching and methane recovery only earned €3.3 per tonne of CO2 since they were questionable in their support of sustainable development [20]. In the spring of 2007, registered projects that were not yet running could earn €8–11, and CERs issued for existing projects were earning €10–12 per tonne of CO2 [21]. In April of 2008, CERs went up in value because the EUA of the second compliance period of the ETS commanded a higher price. As of March 2008, CERs from registered projects were being sold for close to €16 per tonne of CO2 [22]. Project owners can decide when to sell the CERs, choosing to sell them early as a future stream of offsets that will be generated or holding onto them in hopes that the market price for them will increase [23]. The amount of risk associated with projects and how far advanced the project is in the CDM project cycle determines the exact CER price that buyers and sellers negotiate. Forward-purchased CERs for medium-risk projects earned, in the spring of 2007, €5–6 per tonne of CO2 while forward-purchased, low-risk projects earned €7–8. Each CER transaction fetches a unique price that is determined by the amount of project risk, the degree to which the project fulfils the goal of sustainable development, and the current price of European Union Allowances (EUAs), which are tradable within the EU boundaries [3]. Often renewable energy project owners do not understand how and why CER prices for distinct projects and different compliance periods vary. It is therefore difficult for them to predict how CERs will affect their project profits. They also do not have the connections to sell the CERs on the international market to those generators that need them for compliance purposes. For these reasons, project owners usually contract carbon brokers to handle these transactions. Because the carbon broker tries to make money on the


7

spread between the purchase and sale price of the CER, the carbon broker does not pay the project owner the full market value of the CER [21]. This type of transaction of CERs through a carbon broker is known as the secondary CER market. The secondary CER market grew rapidly in 2006. This market consists of a third party carbon consultant such as Ecosecurities or Evolution Markets buying CERs from project owners and then reselling them to buyers. The third party takes on all of the risk for not delivering the CERs. Usually, this entity has a contract for delivery of CERs and buys extra CERs just in case those CERs are not all delivered. The price that the project owner can obtain is usually less than what he would receive if he were to negotiate directly with a buyer. The third party can then sometimes sell the CERs for more than the average CER price. Secondary CER prices were $10.75–$27 for 2005–2006 [24]. Since CDM projects last for either two ten-year periods or three seven-year periods, brokers negotiate prices now that will last well into the next Kyoto compliance period and beyond 2012 when the Protocol ends and future carbon regulations have not yet been set [25 and 21]. Just as CER prices are linked to the EUA price, the EUA can also be affected by the number of CERs on the market. Chinese CER owners tend to sell CERs as a forward stream for seven to ten years and can flood the market with the creation of large projects, lowering the price of CERs [26]. The future CDM market is difficult to predict for several reasons. In 2005, emission reductions needed annually for all Annex I countries to fulfil their carbon obligations by 2012 were 1.3 Giga tonnes of CO2. However, estimates predicted that this number could grow threefold if the US and Australia joined the Protocol, and Australia has begun to fulfil this demand prediction since it ratified the Protocol in December of 2007. Also, several countries with economies in transition in Eastern Europe were given AAUs based on a baseline year of emissions that was extraordinarily high. Therefore, these countries have extra allowances (known as ‘hot air’). Flooding the market with these allowances would cause the price of CERs to fall dramatically [27]. Adding to the uncertainty for CER demand is the fact that the amount of CERs that can be purchased to fulfil a country’s obligations, known as the supplementary amount, averages 13.5 per cent in the EU. Each country has its own supplementary clause, which ranges from a very low percentage up to 20 per cent in Spain [28]. Canada has set its supplementary clause at 10 per cent of overall reductions. All of these percentages are low compared to the initial EU linking directive that allowed CERs to be counted, as EUAs called for 50 per cent [29 and 30]. A careful analysis of CER future gluts or shortages would need to consider each supplementary amount. The uncertainty in the post-2012 Kyoto rules has caused the future demand and price for CERs to be difficult to predict. The 13th Conference of Parties in Bali in December of 2007, where current and future climate change legislation was discussed by those who ratified the protocol and official observers, set forth a ‘Bali Road Map’ with a ‘Bali Action Plan’, which provided the framework for

8


creating a new negotiation process to address climate change [31]. This process should be finished in 2009. Regardless of what happens with international negotiations, the EU recently announced that it will value allowances and CERs from 2013 to 2020 in Phase III of its trading scheme, but the Phase III draft rules limit the ability of CERs to fulfil reduction targets if the host country for the project-based emission offsets does not have binding target reductions. This provision essentially prevents CDM from growing post-2012 since few developing countries have taken on binding reduction targets. Despite this negative forecast, market participants are optimistically vying for the ability to cover more reduction obligations through CERs during this time frame [32]. The global community has not yet decided if Kyoto or another carbon market will exist [33]. The World Bank and a few carbon brokers like Ecoinvest are buying CERs from projects generated after 2012 for the low price of $4/tonne of CO2 [34 and 21]. Given this uncertainty, there could be a decrease in CDM projects in the coming years since CDM projects create revenues for between 7 and 30 years in the future.3

Industrial gas project impact In general, emission reductions derived from renewable energy projects are overshadowed by the large, industrial gas mitigation projects that now dominate the market. (See Figure 1.1 for the distribution of CERs by Project Type.) In May of 2007, 40 per cent of CERs generated came from just 10 of the 633 registered CDM projects, while the 384 renewable energy projects make up only 18 per cent of the overall emissions reductions produced [12]. These ten projects are all large, industrial emission mitigation from factories, which are mostly located in Asia [2]. The greenhouse gases mitigated from these factories, that create refrigerants, nylon and PTFE or Teflon, include hydrofluorocarbon-23 (HFC-23) and nitrous oxide (N2O) [2]. These gases are potent and generate a large number of CERs since the reductions are distributed on a CO2-equivalence basis; one tonne of HFC-23 equals 14,800 tonnes of CO2 and one tonne of N2O has the warming potential of 310 tonnes of CO2 [35 and 36]. Also, these reductions can be made cheaply since the pollution occurs at a limited number of factories and can be reduced through the utilization of technology already in use in developed countries [2]. At the July 2006 market price for CERs of €9/tonne CO2, refrigerant factories that emit HFC-23 earned twice as much per kilogram for their pollution mitigation as they did per kilogram of product they produced [2]. This high price for the pollution mitigated means that the Annex I nations will annually pay between €250 and €750 per tonne to abate 67 per cent of the HFC-23 emissions; installing the equipment to eliminate 100 per cent of these emissions in developing countries would only cost $31 million per year [2]. Because few projects can dominate the CDM market at this juncture, it makes sense to analyse project distribution by both CERs produced and by project type. Global CER distribution by project type in Figure 1.1 clearly shows how the industrial gas mitigation projects dominate the CDM market.


6%

1%

9

0% 0% 0% HFCs and N2O reduction

9%

Renewables CH4 reduction and cement and coal mine/bed Supply-side EE Fuel switch Demand-side EE

12%

Afforestation and reforestation Transport

72%

Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and database, 1 April.

Figure 1.1 CER distribution by project type Perhaps because of the questionable sustainable development benefits of these projects, this reality is not highlighted on the UNFCCC website; instead the CDM statistics portion of the site boasts the number and distribution of CDM projects by type. Considering just project type distribution without any regard to the number of emission reductions the project yields can be misleading since renewables made up 62 per cent of the projects registered and N2O and HFC-23 projects made up only 2 per cent of the projects in April of 2008 [6]. Taking into account projects registered can give one an understanding of the amount of technology transfer that is occurring, but this indicator alone is not enough to get an accurate picture of the overall market. See Figure 1.2 for a global distribution of CDM projects by type. While more is being paid for emissions reductions from industrial gas mitigation projects than would have been necessary to simply install abatement equipment, the reductions from these projects are additional as they were not controlled under developing countries’ pollution regulations prior to the implementation of CDM. Also, these projects are able to make reductions at the cheapest price. However, they do not, according to many critics, fulfil the Kyoto goal of promoting economically and culturally sustainable development since they support factories that would exist without these carbon revenues [37]. Critics like the Gold Standard, a CDM certification body, argue that these projects do not promote sustainable development since they support existing industries that rely on non-renewable fuels and raw materials. The Gold Standard recognizes only energy efficiency and renewable energy projects as valid offset projects. An NGO called CDM Watch urges the rule makers to ban

10


5%

2% 1%

0% Renewables

3%

CH4 reduction and cement and coal mine/bed Supply-side EE

10%

Fuel switch Demand-side EE HFCs and N2O reduction Afforestation and reforestation Transport

17% 62%

Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and database, 1 April

Figure 1.2 CDM projects registered by type these types of projects from the post-2012 Kyoto rules [38 and 39]. However, because the UNFCCC has not clearly defined sustainable development, these projects qualify under the current rules. The allocation of CERs for industrial projects has raised such controversy that it made the front page of the New York Times on 21 December 2006 [40]. The current definition of sustainable development is ‘development which meets the needs of current generations without compromising the ability of future generations to meet their own needs’ and was published by the Brundtland Commission in 1987 and proposed at the United Nations Conference on Environment and Development in Rio de Janeiro in 1992. This definition is vague as it does not provide guidance on how many cultural, economic or environmental factors should be considered in order for future generations to meet their needs [41]. As a result, each non-Annex I CDM host country makes its own determination on what qualifies as sustainable. The Chinese government has begun to show preference for energy efficiency and renewable energy projects that fulfil sustainable development goals by taking 65 per cent of the CERs generated from HFC projects and 35 per cent of those from N2O projects [42]. The tax on renewable energy and energy efficiency projects is only 2 per cent of the CERs generated [14]. As critics of the industrial gas emission projects influence the UNFCCC’s future rules of what qualifies as an offset, and most of the industrial gas mitigation projects have already been completed, renewable energy and energy efficiency CDM projects may become an increasingly important way for Annex I countries to fulfil their carbon obligations.


11

After the low-hanging fruit of industrial gas mitigation projects has been seized and no more factories exist for retrofitting, the price of CERs will be driven up, making renewable energy projects more financially viable. Even after the obvious large-scale renewable energy sites have been developed, the number of small-scale renewable energy CDM projects that could be implemented is virtually limitless since there are 1.6 billion people without electricity that would be served by biomass and fossil fuel sources in the future if project support from aid organizations and finance options like the CDM did not exist [43]. Furthermore, European CER buyers are increasingly choosing to invest in offset projects to hedge their risk against volatile ETS allowance prices [44 and 16]. This increased interest could pave the way for additional renewable energy CDM development. However, numerous barriers are currently preventing this development from occurring.

Overview of CDM project cycle Many of the barriers to CDM project development exist because of bureaucratic obstacles in the project cycle of CER issuance. Therefore, it is essential to understand the current process by which a project earns CERs. This section will provide a broad overview of the CER issuance for all project sizes and the following section will outline the differences between small- and large-scale project cycles. An overview of the process, its prices and timing are provided in Figure 1.3. The CDM project cycle is usually completed by the project developer or a carbon broker who is typically from an international energy or carbon consulting firm. For simplicity, the author will refer to this entity as the carbon broker in this section. The carbon broker may choose to receive a flat rate for the services or deduct a portion of the project’s future emission reductions as payment. The carbon broker has the option to first submit a Project Idea Note (PIN) to the host country’s Designated National Authority (DNA), which reviews the project and makes a determination of whether or not the project contributes to sustainable development. The DNA then issues a ‘Letter of No Objection’ to the project’s activities and the CDM project cycle continues to the next step. Then, the carbon broker creates a Project Design Document (PDD) outlining the project in detail, the expected emission offsets, a monitoring plan, an environmental analysis and stakeholder comments. If the project is deemed appropriate by the DNA, then a contracted Designated Operational Entity (DOE) that has been certified by the UNFCCC to validate the methodology selected for the project is tasked with inspecting the PDD and ensuring that it meets the CDM project guidelines and is accurate. One of the key pieces of the PDD is an additionality argument that explains how the project generates additional offsets that would not otherwise occur. In other words, the project must exist independently of financial incentives or environmental regulations that would promote the construction of the project in a business-as-usual scenario [45]. This requirement is known as additionality. Additionality can

12


either be proven on financial grounds or through a barrier analysis, which shows how this project deviates from standard practices and overcomes hurdles because of its first-of-a-kind nature. After the PDD and project inspection, the DOE prepares a validation report of his findings. Usually, several revisions of the PDD are necessary based on the validation report findings. The PDD and often this validation report are required for the national approval process. Therefore, these reports and any ancillary required documents are sent to the host country’s DNA for review. This entity decides, based on the country’s own definition, whether or not the project fulfils sustainable development and approves or denies the project accordingly. Then the carbon broker and DOE submit the revised PDD and validation report to the CDM Registration and Issuance Team, which is run by the UNFCCC and formed in 2007 by the CDM Executive Board. The CDM Executive Board oversees all CDM project activities and methodologies. If accepted by the Registration and Issuance Team, the proposed activity commences as a ‘registered’ project. After one year of operation, another DOE from a different firm is contracted to assess the baseline emissions and emission reduction calculations to determine the amount of emissions that the construction of the project avoids. The CERs generated for renewable energy projects are typically calculated by multiplying the capacity factor of the project by the emission factor of the regional grid times the hours in a year. The performance of the project is measured in terms of gases mitigated. Once the second DOE has verified the emission reductions, he or she issues a request for certification to the Executive Board. The Executive Board reviews the data gathered and then makes a determination about issuing CERs to the project [46]. This process is known as verification and must occur annually for CER issuance to take place each year. Both the PDD and validation reports are posted on the UNFCCC’s CDM website and available for the public to view. Some projects that failed registration are also on this site with explanations for why the project failed. Because of the complexity of the overall project cycle, most projects use carbon brokers or project developers to navigate this process. See Figure 1.3 for a graphical overview of the CDM project cycle, its timing and costs. The overall process of getting CERs issued and verified annually costs anywhere between $58,000 for a very simplified small-scale project and $500,000 for a complex larger project [4 and 5]. CDM project costs include project identification, PDD creation and validation, project monitoring, DNA approval, registration, legal fees and carbon brokerage fees [27]. These costs are higher if a new methodology must be written for a project. Carbon funds like the Prototype Carbon Fund, which is organized by the World Bank and funded by public and private investors, pick CDM projects to invest in and sometimes have reduced transaction costs because they specialize in certain project types and have a rubric of standard contracts and practices [27].


Step in cycle Project idea note

Project design document

$2–8000 1–2 months (optional step)

Responsible entity

$25–38,000 2–4 months

Project developer or carbon broker

Designated national authority

Approval

Validation

$15–30,000 2–3 months

After the first crediting period (7 or 10 years), project owner must go

Registration

13

$6000 and up 2–3 months

Designated operational entity

Registration and issuance team

through project cycle again to earn revenues for next period

Implementation and monitoring

Verification

Project owner

$7000 annually 1–2 months Designated operational entity

Certification

Registration and issuance team

Issuance of CER Legal fees $23–38,000

Source: United Nations Environment Programme and Risø Centre (2004) CDM Information and Guidebook, 2nd Edition, UNEP/Capacity Development for CDM, April 2008.

Figure 1.3 CDM project cycle Small-scale renewable energy projects, defined by the UNFCCC as those under 15MW, have a streamlined methodology that is meant to reduce transaction costs, which constitute the biggest barrier to their implementation. However, even with this streamlined methodology, these projects suffer from having to complete almost all of the same steps as large-scale projects. The overall process is almost as expensive while the number of CERs that can be earned is limited. Therefore, carbon brokers are generally not interested in these types of projects, and small-scale projects had only generated 6.4 per cent of the overall CERs created from registered projects by April of 2008 [6]. The details of the small-scale methodology, and challenges developers of this project size face, will be described in more detail in Chapter 8, ‘Small-Scale Barriers’.

14


Step-by-step guide The complex CDM process can also be understood as a series of steps that various entities must undertake. The section below describes the process in this way. Investors’ and project developer’s steps 1 Identify project opportunity. 2 Do initial financial analysis of project. 3 Contract carbon consultant or someone in-house to complete CDM paperwork. 4 Work with carbon consultant to provide needed information. 5 Ensure that CDM registration is completed in tandem with project construction so that project is registered before it begins generation. 6 Contract a Designated Operational Entity (DOE) to validate project after Project Design Document (PDD) has been completed by carbon consultant. The carbon consultant will contract the DOE if requested. Payment for DOE services is decided in contract between carbon consultant and project developer. 7 Assign someone to implement the monitoring plan to verify emission reductions created. 8 Contract a separate Designated Operational Entity (DOE) (if large-scale project) to complete annual verification of emission reductions. 9 If contracted to market and sell the CERs, then find a buyer and complete transaction. 10 If three seven-year crediting periods are selected, begin the process of contracting a carbon broker to complete new PDD after about five years of operation. Consultants’ steps 1 Conduct a feasibility study and/or PIN to assess project’s CDM potential. 2 Work closely with project developer to glean necessary system operating information. 3 Make host country contacts with DNA office to determine if project fulfils the goal of sustainable development. If the DNA believes that it fulfils this criterion, then a Letter of Approval will be issued. 4 Make host country contact with grid information managers to get emission data for baseline calculation. 5 Create additionality argument, baseline calculation, environmental impact assessment, stakeholder analysis with community members and monitoring plan for PDD. 6 Submit PDD to DOE for validation. 7 Work with DOE to complete revisions necessary to PDD. 8 Stay in close contact with UNFCCC Registration and Issuance Team to follow the progress of the project and make any necessary revisions.


15

9

Be in contact with DOE that verifies emission reductions to be aware of actual emission reductions generated. 10 If contracted for sale of CERs, sell them after they have been issued. DNA steps 1 Assess PIN if submitted and issue Letter of No Objection if appropriate. 2 Consider project for fulfilment of sustainable development (based on fixed or variable criteria) and issue Letter of Approval if appropriate. UNFCCC steps 1 Registration and Issuance Team reviews PDD and validation report for accuracy. 2 If a new methodology is proposed, the Methodology Panel and Executive Board consider this new methodology for acceptance. 3 After project has operated for a year and created emission reductions, the Registration and Issuance Team analyses the verification report and issues CERs if deserved.

Current CDM landscape General analysis CDM projects are only successful in countries that already have financial and political stability [47]. This stability can attract foreign investment and allows locals to develop projects. Many of the project types that generate CERs for the cheapest price, such as the aforementioned industrial gas emission mitigation, methane capture from coal exploration, landfill gas capture and energy efficiency upgrades are only suitable for countries that have large cities and have achieved a high level of development. Countries like Colombia or sub-Saharan Africa that are deemed undesirable for CDM development because of political instability, inadequate domestic bureaucratic structures or a lack of low-cost projects benefit from fewer CDM revenues [14]. Some countries’ innate ability to be more suitable for projects than others, and low levels of governmental corruption because of their level of development, skew the development funds and benefits. This unequal distribution of projects has recently raised concerns by CDM watch-groups. They contend that sustainable development is not being shared equitably [48]. Even the UNFCCC has solicited comments on how to improve the regional distribution of projects [49]. Latin America was slated to lead the CDM market because of its early aggressive investment solicitation for CDM projects [50] and lead in setting up DNA offices [33]. In 2003, Latin America dominated the CDM market with 66 per cent of the projects [51]. However, by May of 2007, Asia led the CDM market, generating 84 per cent of total CER volumes. China alone captures 60 per cent of the world’s CDM activity [52]. This current distribution of the market will most likely shift again towards Latin America since most of the polluting factories in Asia have already been retrofitted with emission reduc-

16


Source: UNFCCC CDM (2008) Project’s Location: Interactive Map, 20 April, available from http://cdm.unfccc.int/Projects/MapApp/index.html

Figure 1.4 Global distribution of CDM projects tion equipment. See Figure 1.4 for a worldwide distribution of projects and Figure 1.5 for the global distribution of CERs. Within Latin America, project development follows the worldwide patterns. Most of the projects have been implemented in urban areas and the countries that have received more project development are those that are more politically and economically stable. See Figure 1.6 for a distribution of projects by country in Latin America. Latin America, like the rest of the world, has a CER market that is dominated by industrial gas emission reduction projects. However, these types 400,000 350,000

CERs issued

300,000 250,000 200,000 150,000 100,000 50,000 0

Latin America

Asia and Pacific

Europe and Central Asia

Sub-Saharan Africa

North Africa and Middle East


Figure 1.5 Global distribution of CERs


1% 1% 2% 3%

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7% Brazil Mexico Chile

6%

Argentina Colombia Peru

8%

Guatemala Honduras Ecuador Others

10% 45%

17% Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and database, 1 April

Figure 1.6 Distribution of CERs by country in Latin America of HFC and N2O emission reduction projects are less prevalent in Latin America because there are fewer factories that release these emissions and therefore fewer opportunities for reductions. Renewable energy, landfill gas and agriculture projects make up the remaining large CER market opportunities. See Figure 1.7 for a distribution of CERs by project type in Latin America. As of February 2008, most of the CERs in the region were derived from landfill gas, biomass and hydro projects. A handful of wind and no solar projects exist in the region. See Figure 1.8 for a graphical representation of the CERs derived from various renewable energy projects and Figure 1.9 for the renewable energy project distribution in Latin America. A lack of project type diversity points to another failure in the CDM as a wide variety of technology transfer is not achieved. Technology transfer is an implicit, rather than a stated goal of the CDM. It was highlighted as a deficiency in current CDM activities at the Seminar of Governmental Experts in the tenth Conference of Parties [53]. Also, PDD authors are required to ‘include a description of how environmentally safe, sound technology, and know-how to be used is transferred to the host Party(ies)’ in section A.4.3 [54]. According to a report prepared for the UNFCCC in December of 2007, technology transfer was more likely to occur in large projects that occurred in industrialized countries with international partnerships for project development [55]. Clearly, these criteria can only occur in specific instances and will not lead to an equitable distribution of technology transfer.

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1% 0%

2% 2%

HFCs and N2O reduction

12%

Renewables

36%

Landfill, etc. Agriculture Fuel switch Supply-side EE Demand-side EE Afforestation and reforestation

19%


Figure 1.7 Distribution of CERs generated by 2012 by type in Latin America

1% 0%

2% 2%

HFCs and N2O reduction

12%

Renewables

36%

Landfill, etc. Agriculture Fuel switch Supply-side EE Demand-side EE Afforestation and reforestation

19%


Figure 1.8 CERs derived from various renewable energy projects in Latin America


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19

4 Hydro Biomass

65

134

Landfill gas Non-landfill methane capture (with the option for electrical production) Wind Geothermal

87

131 Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and database, 1 April

Figure 1.9 CDM renewable energy project distribution in Latin America

Project type analysis It is important for the reader to have a brief knowledge of the landscape and history of renewable energy in the region prior to analysing the distribution of clean energy CDM projects. This background is key for consideration of project additionality and barriers analysis. The clean energy mix of the region was 72.8 per cent of overall generation in 2005. This generation is almost exclusively hydro, which the region as a whole can support with its heavy rainfall and diverse topography. However, many of the countries that rely heavily on hydro generation, such as Costa Rica and Brazil, are growing to fulfil demand with fossil fuel-intensive additions because of the high cost of new hydro capacity additions [56]. Overall in the region, hydro is expected to grow at 2.2 per cent annually while natural gas annual growth is predicted to be 4.4 per cent [57]. The rest of this section briefly mentions the renewable energy CDM projects that exist by type in the region to give the reader an idea of where the CDM has had relative success. The current renewable energy projects in Latin America that have received CDM revenues or are in the process of doing so include generation from hydro, wind, geothermal, landfills, and biomass from sugarcane production. Hydro The hydro industry dominates generation because this industry was already well developed with both public and private sector generation facilities before CDM revenues were available. Firms from around the world, like Enel of Italy, owned hydro applications because of the ability to make a profit from this type

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of generation. Estimated potential hydro resources are enormous because of the abundant rainfall and mountains that traverse the region of both Central and South America; Honduras alone estimates that there is 5000MW of developable potential in the country [58]. The prevalence of these projects before CDM revenues were available puts into question the additionality of the projects. As each successive project is developed, it becomes progressively more difficult to prove this additionality since ensuring that the project is not financially feasible without CDM revenues is necessary for qualification. Twenty per cent of the projects, accounting for 15 per cent of the CERs that will be produced by 2012, in the region are hydroelectrics, making them hard to prove additionality [59]. Additionality can be easier to show for a small hydro project. The smaller a hydro project is, in general, the more difficult it is to make a profit since the work necessary to procure generation and environmental permits, as well as the CDM paperwork, is the same for all projects regardless of their size. For that reason, some countries like Guatemala have laws that help promote small hydro applications that are under 5MW. And, although these projects are profitable, they are not without technical challenges that will be detailed in Chapter 2, ‘Technical Barriers’. Wind Only one commercial wind farm in Costa Rica existed prior to the CDM. Now, a handful of them have achieved registration in the region and more are on the books. This rapid increase in development can be attributed to the rise in importance of the CDM for project finances and/or the growth in the wind industry. Mexico has much activity in the wind sector. Its initial CDM project was Bii Nee Stipa developed with Gamesa of Spain in December 2005 and February 2007. CEMEX and ACCIONA Energía have a bid for a 250MW wind farm called EURUS. The state-run utility called CFE registered La Venta II in June 2007 and plans on developing La Venta III, IV, V and VI, which will each be close to 100MW. Iberdrola got involved with La Ventosa in December 2007 [9]. A small Mexican independent power producer called Fuerza Eolica plans to develop a 10MW farm on Baja California Norte y Sur [60]. The prospects for wind generation in Central America are limited. Only one project in the region has successfully achieved CDM registration to this point; the state-run utility of Costa Rica has registered La Tejona, a 19.8MW farm [61]. There is also movement from Mesoamerica Energy to expand their 23MW Plantas Eólicas SRL site in Costa Rica and develop a 60MW site in Honduras [62]. Jamaica and the Dominican Republic each have one CDMregistered wind farm that is approximately 20MW. Panama has prospective sites that have 12 months of wind, and interest from a few groups like Santa Fe Energy with a bid for an 81MW farm [63]. Guatemala has limited excellent sites for development, but Ecomino is aggressively moving towards developing a 33MW project that they hope to expand to 120MW called Piedras Blancas in


21

the southwest of Guatemala [64]. Nicaragua has huge potential, but few developers are pursuing this market because of the country’s difficult climate for investors. Central America is most hindered by participation in the current market for wind generation because a global shortage of turbines has led to the requirement of an order of several hundred MW in order to attract the attention of turbine manufacturers [65]. In South America, a small cooperative in the Patagonia region of Argentina called Antonio Moran was the first to register a 10MW farm, in December 2005. Empresas Públicas de Medellín followed with the registration of a 19.5MW farm in Colombia in April 2006. Gamesa of Spain is interested in developing a wind farm of 10MW in Uruguay for CDM. Now, Endesa has an 18MW farm that is under construction in Chile. Brazil has nine registered projects and several more under construction because of its renewable energy legislation, which will be discussed in more detail in the chapter on Brazil. Geothermal Within the geothermal sector, there are just two projects that have achieved registration. San Jacinto in Nicaragua is registered for 66MW of generation. With 10MW of this capacity installed and running and tests underway for the 34MW expansion, it is a success story thus far. The failed governmental application of Momotombo gave this type of generation a bad reputation in Nicaragua. Momotombo was overextracted in the late 1980s in a time of capacity shortage, and water was not reinjected properly due to a poor understanding of aquifer currents. (A more detailed explanation of Momotombo is described in Chapter 2.) San Jacinto’s success, however, could be an anomaly instead of a trend setter in geothermal development because interested Russian parties drilled several perforations, some of which the plant is now using for steam extraction. These holes, which average $2 million each, are the largest capital cost of the plant. Polaris, which developed San Jacinto, is currently planning on developing another geothermal application in Nicaragua called La Casita that will be 130MW [66]. There is also a CDM-registered project in El Salvador called Berlin Geothermal Power Plant, which will expand a 66MW plant by 44MW. This application, along with the 95MW Ahuachapan plant, makes El Salvador the country with the most geothermal generation in the region; however, Costa Rica and Guatemala have huge potential. In Costa Rica, the 162.5MW Miravalles plants have been developed with the support of the state-run energy company, but these plants did not earn CDM credit because most of them were built before CDM came into effect in 2001. Another 35MW geothermal plant called Las Pailas is scheduled to open in 2011 in Costa Rica [67]. The state-run Costa Rican utility is studying a new deposit called Diquís for extraction [68]. In Mexico, the state-run utility has a tender to develop a geothermal site called Cerro Prieto [69]. In South America, there is much interest in geothermal development even though there is not yet one commercialized plant. Isagen is

22


studying geothermal prospects in Colombia [70] and the Ministry of Energy and Mines in Peru is planning a geothermal project [71]. Landfill gas Within the landfill gas sector, few plants produce electricity; instead, they simply flare the methane to create the less potent greenhouse gas of CO2. Also, the relatively small size of the electrical applications that can be supported by landfill gas makes them less appealing. Some entities, such as the University of Antioquia and German Green Gas in Medellín, Colombia, have chosen to simply flare emissions instead of attempt to produce electricity because of the reduced complexity and lower capital costs [72]. Landfill gas projects have had the most success in the more developed countries of the region such as Brazil, Chile, Argentina and Mexico that have high concentrations of people. These countries have landfills that are not only of a critical mass that is large enough to justify the project development costs, but they also have landfills that are lined, have water extraction methods and sorted trash. Projects in areas that do not have these specifications have been less successful. Río Azul Landfill in San José, Costa Rica, was planned for CDM revenues from methane destruction in a turbogenerator for electrical production and has completed the initial steps of the paperwork necessary with a PDD. However, there are a variety of problems with its operation (that will be described in detail in Chapter 2) [73]. Other sites like La Chureca in Managua, Nicaragua, seem to have potential with 52 acres of 20 metres of trash, but would be difficult to develop. Most dumps in Latin America like La Chureca are unlined holes or piles where trash is not sorted before it is deposited. Therefore, the organic matter available for methane production is unpredictable. Also, approximately 1000 people live by scavenging the remains of this landfill. Although it would seem as though these poor people who live in shacks near the trash and cook by sticking a pipe directly into the garbage to collect the methane would not carry much political weight, a similar community blocked development of a site in Baranquilla, Colombia [74]. Despite these challenges, two exploratory methane wells exist on site at La Chureca in Managua [75]. Other methane capture Brazil and Mexico dominate the landscape for these types of projects since they both have agricultural industries that are large enough to produce a significant amount of methane that can be flared for emission reductions and justify the development costs for digesters. Brazil has 12 of these projects and Mexico boasts 37, while no other country in the region has more than five. Other than generating methane from farm animals, it can be created and mitigated from industrial processes to produce liquor and beer. A few factories have begun taking advantage of this source of reductions.


23

The future of these projects is uncertain since they have had a relatively poor performance in Mexico. The details of the failures of these projects are described in Chapter 2. Biomass The last area of renewable energy development for CDM revenues is the conversion of biomass residue from the sugarcane plant into electricity. Therefore, the countries like Brazil with large sugarcane crops are those that have registered the most projects. Other industries that can capture this type of energy include palm plantations, sawmills and other types of biomass. Most sugarcane plants already auto supply by burning their crop residues to heat water, produce steam and spin a turbine in a Rankine cycle plant. However, many mill owners are earning CDM revenues by making these processes more efficient and/or providing generation that can be sold back to the grid. Currently these plants are just operational during the harvest when the residue is available. Owners have creatively begun to consider using the plant’s facilities and already purchased equipment to supply electricity throughout the year by purchasing biomass residue from nearby plantations of other crops. The transport costs of accessing this other biomass and the higher cost of purchasing a boiler that can accept other fuels are preventing the rapid development of this type of CDM project from being immediately implemented [76]. Because of these obstacles to generating power year-round with other biomass residues, most plants that have achieved registration for this type of project have done so by increasing plant efficiency without additional biomass inputs [61]. The large number of coffee farms in the region suggests that there are opportunities within this sector for development of CDM activities. Coffee farms can capture methane from the pulp and wastewater discarded. In Costa Rica, the Dutch government sponsored nine of these projects as Activities Implemented Jointly, the precursor of CDM [77]. However, the cost of the systems was prohibitively expensive without a grant [78], and technical problems led to project failures [79]. See Table 1.1 for a complete list of the CDM projects undergoing validation or already registered in the region as of 1 April 2008.

Introduction Book organization This book is divided into four sections: (1) introduction to the CDM market and this guide; (2) barriers to project implementation; (3) country-specific challenges and opportunities; and (4) solutions to CDM barriers and recommendations for future work. This chapter (with this ‘Introduction’) constitutes the first section and therefore does not need further explanation. The other three sections are described below. Following a description of these sections, a few key concepts used in this book are described.

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Table 1.1 Renewable energy CDM projects registered or in the process of validation Country

Argentina Bolivia Brazil Chile Colombia Costa Rica Cuba Dominican Republic Ecuador El Salvador Guatemala Guyana Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Uruguay Total

Hydro

Wind

Geothermal

Landfill Non-landfill Biomass methane methane capture capture (with option for electrical generation)

Total

1 3 57 10 6 2 0

1 0 7 1 1 1 0

0 0 0 0 0 0 0

9 1 31 15 6 1 3

1 1 12 2 2 0 0

6 0 89 9 2 2 0

18 5 196 37 17 6 3

0 9 1 9 0 9 0 4 0 7 1 15 0 134

3 1 0 0 0 0 1 10 1 1 0 0 0 28

0 0 2 1 0 0 0 0 1 0 0 0 0 4

0 1 1 1 0 0 0 14 0 0 0 2 1 86

0 1 0 2 0 5 0 37 1 0 0 1 0 65

0 4 2 2 1 6 0 2 1 0 1 0 2 129

3 16 6 15 1 20 1 67 4 8 2 18 3 446


Barriers section The barriers section topically addresses technical, social, financial, informational, host country institutional, UNFCCC procedural and methodological and small-scale project-specific challenges in individual chapters. Some of these barriers are CDM-specific, and others are common to all renewable energy projects. A short description of each of the types of barriers that are encountered and a description of what is covered in the chapter are listed below. Technical In this section, general technical barriers to project implementation, as well as technology-specific challenges, are addressed. Social Using concrete experience from projects in Latin America, this chapter addresses the social barriers that have prevented development or are currently facing developers.


25

Financial Receiving pre-investment funds, educating the bank about the value of CERs, and gaining loans for the long-term renewable energy project investment are obstacles that face project developers. Specific examples of financial struggles and success stories will be presented in this chapter. Informational The lack of knowledge about or specific understanding of CDM opportunities and Emission Reduction Purchase Agreements (ERPAs) can create insurmountable barriers for developers. The various agencies that have provided capacity development, including the host country’s DNA office, are discussed. Institutional The degree to which the host country supports project development through its laws and practices can create an environment that either promotes or hinders these projects. Examples of how development is both facilitated and hindered are presented. UNFCCC procedural and methodological The rules dictating how project developers earn CERs are complex and everchanging as methodologies evolve and are proposed. Barriers due to renewable energy-specific methodologies are addressed. Small scale Projects less than 15MW face special challenges given the high transaction costs in comparison to the number of CERs that can be generated. This section explains the special streamlined methodology that exists for these projects and points out examples of where small-scale projects are supported by Latin governments and where they are indirectly discouraged because of existing laws.

Country-specific section The country-specific section addresses each country in Latin America, presenting its vital statistics for CDM development including the portfolio mix of the grid, the country’s emission factor, the average price of electricity, whether or not the market is privatized, if the country has capacity payments and a spot market, and the names of the pertinent electricity-coordinating institutions to provide a rough idea of the country’s suitability for CDM projects. Then in each country-specific chapter, there is a discussion of the transition to a privately operated electrical sector. Following this background information, a description of current and pending renewable energy legislation and a CDM portfolio of projects for each country are presented. Finally, country-specific challenges and opportunities are addressed. This section systematically addresses the quality of the DNA office, other domestic institutional support or barriers that may exist, carbon broker offices and activity in the country,

26


renewable energy potential (if known), unique experiences that are pertinent to only that country, and a summary of the country’s suitability for CDM renewable energy projects. Some project-specific anecdotes will be found twice – in both the ‘Barriers’ chapters and the country-specific chapters. The information will be elaborated in the area that it best fits. The point of mentioning the information twice is to alert readers who use this book topically and others who search for countryspecific barriers.

Future developments The third section of this book addresses solutions to overcoming each of these CDM barriers. This section consists of a compilation and short discussion of solutions proposed by the author and other analysts. Finally, a concluding discussion will follow.

Definitional notes Throughout this book, the author will refer to various players and markets in the electrical sector. It is essential to define these entities now so as to prevent confusion. The most common definitions of players and markets that exist are defined here. If there is a country with a unique situation that deviates from these definitions, it will be noted in the section in which it appears. Market players The entities most often mentioned will be industrial and residential customers and those who control generation, transmission, distribution and retail sales. In some countries discussed, these categories blend and can be owned by the same company. However, these cases are rare as most Latin American countries have privatized the electrical sector and now prevent vertical integration or the ability of one company to own all stages of electrical generation, delivery and sale to a customer. When vertical integration is permitted, it will be mentioned as an exception to the rule. When referring to generators, the author means those companies responsible for literally producing the electrons fed into the grid. By transmitters, the author is referring to the company that handles long-distance transmission. In most Latin American countries, the transmission grid has remained under state control since it is a natural monopoly that does not lend itself well to competition. Sometimes these transmission companies are actually regionally based organizations that cross country borders. By distribution company, the author is describing the company that is responsible for operating and maintaining the lower voltage system of electrical lines that serves customers after the electricity has been sent over large distances through transmission. These distribution companies often also sell the electricity to the end user. Confusion arises because sometimes a separate retailer, instead of the distributor, handles the advertising, branding, contract bundling and billing of the electricity to the customer even though this entity does not physically deliver it to them [80 and 81].


27

Customers that are non-residential and consume more energy than the residential designation are considered industrial consumers. The definition of a ‘large consumer’ is one that by law can negotiate directly with a generator to structure a Power Purchase Agreement (PPA) or purchase wholesale electricity through the spot market. The size of these customers varies by country. Electrical markets The electrical markets discussed throughout this book should also be briefly defined to avoid confusion. Throughout the region of Latin America, a trend of restructuring the electrical sector has occurred. This phenomenon also occurred in the late 1990s in the US, but has now stopped after some states like California suffered the ill effects of this change. For the purposes of this book, the terms restructure, deregulate and privatize all refer to the same occurrence: the shift from state-owned and operated utilities to privately owned ones as a result of energy legislation. The reader will learn that the degree to which Latin American countries choose to privatize their sectors varies and has profound consequences for the country’s suitability to host renewable energy CDM projects. Variations on three models of market restructuring have been utilized in Latin America. The first represents a high level of private sector integration and consists of a competitive wholesale power market. A wholesale market consists of generators, distributors, marketers and large consumers trading electricity in spot transactions and long-term contracts. Both spot markets and long-term contracts will be discussed in more detail below. Guatemala and Chile are examples of highly privatized energy markets. The second model is that of a single buyer of electricity in long-term contracts. Sixty-five per cent of the countries in Latin America have implemented this type of wholesale market. Honduras, Nicaragua and the large island countries of the Caribbean are examples of this model, in which the former state-run utility acts as a single buyer for long-term contracts. Finally, a vertically integrated monopoly model entails the sale of electricity by independent power producers to the state-run monopoly at avoided cost or a price determined by competitive bidding. Costa Rica and Mexico have reformed their electrical sectors according to this hybrid state–private model [82].

28


Appendix A: Interviewed persons Country

Company

Contact Name

Mexico

COMEX HYDRO DNV Terracarbon/Private Consultant Ecosecurities Ecosecurities Ecosecurities DNA AgCert AgCert AgCert CEPAL CEPAL Granjas Carroll Mexico Granjas Carroll Mexico Geosistemas Fuerza Eólica Fuerza Eólica Sumitomo CO2 Solutions Fondo Mexicano de Carbono – Bancomext Fondo Mexicano de Carbono – Bancomext ETEISA Comision Regulatoria de Energía CESPEDES representative

Jacobo Mekler Gustavo Godínez Manuel Estrada Porrua Gabriel Quadri Mathieu Dumas Joaquin Pereyra Miguel Cervantes Anon Martinez Ignacio Castillo Hector Galvadon Fernando Cuevas Debora Ley Victor Ochoa Leon Velario Jorge Landa Pablo Gottfried Mario Gottfried Hiroshi Ueda Adrian Magaña Cervantes Eugenio MacGregor Marian Aguirre Nienau Francisco Marquez Francisco Barnes Rosa Maria Jímenez

Dominican Republic

Instituto Dominicano de Desarrollo Integral Inc

Mathilde Laval

El Salvador

AEA – Alianza de Energía y Ambiente Universidad Centro Americana Simeon Cañas

Otto Garcia Ismael Sanchez

Guatemala

Centro Guatemalteco de Producción más Limpia Fundación Solar Fundación Solar Fundación Solar Guatemala Renewable Energy Generators National Rural Electric Cooperative Association (NRECA) MARN INDESA Ingenio Trinidad Madre Selva Grupo Riviera startup wind Empacador Toledo Ministerio de Energía

Maria Amalia Porta Marta Rivera Iván Azurdia Mario Hernandez Christhian Escobar

Former director of AHPPER+B20 Assessor of Special Projects Former DNA, now project developer Director of Energía, SERNA DNA Assistant Former DNA office employee AHPPER, INVERSA

Eda Zapata Cardona Moises Starkman Gerardo Salgado Marcos Flores Olga Aleman Reinario Zepeda Elsia Paz

Honduras

Hugo Arriaza Raul Casteñeda Rodrigo Erales Victor Unda Oscar Conde Arturo Riviera Lloyd Joongezon Julio de la Parra Otto Ruiz


INCOMERH and ENERGIZA ENEE - Head of Sustainable Development 3 Valles

Carlos Bueso Glenda Castillo Sr Ramirez

Nicaragua

Centro de Producción más Limpia Director of Grupo Fenix Polaris Polaris Polaris Polaris Ministerio de Energía y Minas Ramacafe UPANIC DNA housed in MARENA DNA housed in MARENA ENEL former DNA UNDP Ministerio de Energía y Minas Ministerio de Energía y Minas Ministerio de Energía y Minas EMCAMI ECAMI Technosol

Cesar Barahona Susan Kinne Adriana Romero Javier Dias Manual Callejas Jim Randle Miguel Barrios Henry Hueck Manual Alvarez Carlos Rivas Ing Manual Madriz Mario Torres Marina Sthagtagen Leoni Arguello Herminia Martinez Elieneth Lara Harold Sommerriba Luis Lecayo Max Lecayo Vladimir Delagneau

Costa Rica

Biomass Users Network (BUN-CA) E+CO/CAREC ACOPE ICE ICE Ecosecurities Plantas Eólicas Energía Global International Mesoamerica Energy DNA located in Instituto Meteorologico Nacional DNA located in Instituto Meteorologico Nacional Companía Nacional de Fuerza y Luz Ministerio de Ambiente y Energía SARET SARET FEDEMUR SARET Private CDM Consultant

Jose Maria Blanco Fernando Alvarado Mario Alvarado Francisco Cordero Gravin Mayorga Mauricio Castro Jay Gallegos Jorge Dengo Allan Broide Paulo Manzo William Alpizar Walter Delgado Gloria Villa Ramon Samora Francisco Delgado Ileana Rojas Javier Sandoval Oscar Coto

Panama

DNA – ANAM – Office of Cambio Climatico DNA – ANAM – Office of Cambio Climatico ASEP – Asociación de Servicios Públicos Sicmar International Panama Santa Fe Energy Comisión de Pólitica Energetica B77 ASEP – Asociación de Servicios Públicos

Zarati Cartin Cheril Hernandez Rafael de Gracia David Shaw Roberto Moreno Fernando Dias Claudia Candanedo

Colombia

Antioquia University

Carlos Hildebrando Fonseca Zarate Carlos Andres Uribe Edigson Pérez Marta Patricia Castillo Thomas Black Alonzo Cardonas

Antioquia University Institución de Planificación de Zonas Aisladas CAF CAEMA Ministerio de Minas y Energía

29

30


UPME Comisión Regulatoria de Energía DNA – Unidad de Cambio Climatico DNA – Unidad de Cambio Climatico DNA – Unidad de Cambio Climatico DNA – Unidad de Cambio Climatico Fedepalma Interaseo Empresas Públicas de Medellín Empresas Públicas de Medellín Empresas Públicas de Medellín Empresas Públicas de Medellín Empresas Públicas de Medellín Empresas Públicas de Medellín Empresas Públicas de Medellín MGM International MGM International MGM International

Henry Josue Zapata Gerson Castaneda Soto Paola Bettelli Andrea Garcia Sandra Graviator Roberto Esmeral Laura Patricia Mantilla Soto Juan Gonzalez Ana Sandoval Fernando Colorado Jaime Aramburo Camilo Garizabal Carmona Carlos Enrique Velez Restrepo Olga Velez Arango Jorge Alonso Arboleda Gonzalez Adriana Montoya Mauricio Gonzalez Margarita Cabrera

Ecuador

Climate Focus former CENACE Hidalgo e Hidalgo Equigener Unidad del Cambio Climatico Alquimiatec Cordelim Accion Ecológica Hidrovictoria Unidad de Gestion Ambiental Unidad de Gestion Ambiental CONELEC CENACE Ecoelectric ERD Consultants (former Minister of Energy) Las Iguanas Landfill Guayaquil San Carlos Ingenio San Carlos Ingenio

Ines Manzano Dias Eduardo Melendez Sixto Durán-Ballén V. Leonardo Duran Julio Cornejo Richard Zeller Ana Maria Núñez David Reyes Fernando Muñoz Patricio Oliva Alonso Romero Moreno Roberto Carrión Max Molina Bustamente Jorge Chang Gomez Donald Castillo Andres Intriago Almario Puga Julio Hidalgo

Peru

Visiting Professor CU Law School Redes Electricas Peruanas Kennedy School of Public Policy Sociedad Peruana de Derecho Ambiental Unidad de Cambio Climático y Calidad del Aire Ministerio de Energía Ministerio de Energía Ministerio de Energía FONAM CONAM NorWind Paramonga Santa Rosa OSINERG former CONAM Intermediate Technology Group (Practical Action)

Armando Guevara Vanessa Meza Jorge Gastalumendi Bruno Monteferri Siles María Pilar Zevallos Maria Melindo Humberto Armas Juan Olazábal Reyes David Garcia Ricardo Gieseke Jaime Barco-Roda Hugo Ayon Guillermo Cox Harmon Daniel Cámac Gutiérrez Patricia Iturregui Javier Coello

Bolivia

CINER CINER Natsource

Alba Gamarra Sra Marikely Aguilar Sr Ramiro Trujillo


Chile

UN ECLAC UN ECLAC UN ECLAC CEPAL FIA Hidromaule SolFocus SolFocus SolFocus SolFocus Andes Energy ICEP International Ecoingenieros Info Carbon Furniture chile 3C 3C Sec of Energy Servicios Eólicos PFAN World Bank – Carbon Finance Unit Laja Hydropower Pacific Hydro UTEC Colbun CORFO

Daniela Simioni Jose Javier Gomez Jose Luis Samaniego Eduardo Sanhueza Aquiles Neusadlfjwander Jose Manuel Zack Bongiovanni Ty Jagerson Kelly Desy Nelson Stevens Juan Guillermo Walker Manuel Madrid-Aris Pablo Faundez Estevez David Vargas Nunez Francisco Torres Francisco Avendano Arturo Brandt Patricia Chotzen Juan Walker Patrick D’Addario Pedro Huarte-Mendicoa Pedro Matthei Janine Hoey Hector Miranda Carlos Alberto Frias Javier Garcia

Argentina

Abo Wind MGM International Ecoinvest Fondo Argentino de Carbono DNA INTA IMPSA

Alejandro Tubal Garcia Eduardo Piquero Alejandra Camara Sebastian Galbusera Eugenia Magnasco Ignacio Huerga Eduardo Guerra

Uruguay

DNA MIEM Ministerio de Energía UTE Dirección Nacional de Energía

Mariana Kasprzyk Jorge Lepra Gerardo Triunfo Daniel Tasende Daniel Larissa

Whole Region

Organization of American States A2G Inter-American Development Bank Ecosecurities World Bank World Bank World Bank Ecoinvest Ecoinvest The Gold Standard AgCert AgCert SouthSouthNorth MSc Oxford/Japanese consultant Hamburg Institute of International Economics UN Consultant

Mark Lambrides Francisco Avendano Juan Pablo Bonilla Eron Bloomgarden Chandra Shekhar Sinha Edward Anderson Fernando Cubillos Karla Canavan Christopher Salgado Jasmine Hyman Dan Linsky Hernan Mateus Alexandre d’Avignon Eisuke Kawano Axel Michaelowa Debora Ley

31

32


Appendix B: Renewable energy sites visited Country

Company

Project Name

Project Type

Mexico Mexico Mexico Mexico Mexico Mexico

AgCert AgCert AgCert AgCert AgCert Granjas Carroll Mexico/Ecosecurities Granjas Carroll Mexico/Ecosecurities ENERGIZA INCOMERH Municipality of Managua SARET Green Gas/ University of Antioquia Alquimiatec Valdez/ Ecoelectric San Carlos

Rancho Grande Sitio III La Joya Sitio III El Angelito/La Gloria La Cruz Sitio III Rastro Vargas Sites 15 and 6

La Coronado La Babylonia La Chureca

Methane capture Methane capture Methane capture Methane capture Methane capture Methane capture and electrical generation Methane capture and electrical generation Hydro Hydro Landfill gas

Río Azul Curva de Rodas

Landfill gas Landfill gas

Zambizá Valdez San Carlos

Landfill gas Sugarmill Sugarmill

Mexico Honduras Honduras Nicaragua Costa Rica Colombia Ecuador Ecuador Ecuador

Site 11-3A

Appendix C: Sample interview guide and questions Guide for project developers 1 2 3 4

Please tell me the story of how you developed this project. Why did you choose to develop this project? Who are your clients for CERs? What type of preference, if any, do your clients have for the type of CER generated? 5 Do you require an upfront payment for the installation of equipment and/or CDM project cycle work? Or, do you deduct these costs from future CER revenues? 6 How is the validator chosen for your projects? 7 Who communicates with the CDM Executive Board during the CDM project cycle? 8 When are the CERs delivered for this project? 9 How was the ERPA structured? (Did you engage in an ERPA for upfront purchase of a forward stream of CERs for this project or will the CERs be sold at a later date?) 10 How often do you do the PDD, project development and the purchase of CERs from the seller for a project? Which of these steps did you do for this project? 11 How do you entice project owners to stay with your company for all of these steps? (Do you offer a discount for those projects where you do the PDD and develop the project by installing the equipment?) 12 Who were your competitors for this project?


33

13 What are the biggest challenges you think you will tackle in this project? 14 How has your interaction with the DNA been? Has it provided you with help or added delays to the project cycle?

Guide for project owners 1 2 3

4 5 6 7 8 9 10 11 12 13 14 15 16

17 18 19 20 21

Please tell me the story of how this project was developed. How did you hear of CDM revenues? Can you tell me about someone who has earned revenues? Do you know someone who tried, but failed to earn the revenues? What was their project? Did you hire a carbon broker to help you through the project cycle? Why or why not? Did you consider doing the PDD yourself? Why or why not? What are the predicted annual CDM revenues for this project? Did you choose to do the ten-year crediting or seven-year crediting periods? Why? Will you plan on renewing the project by completing a new PDD after the first crediting period? Why or why not? Would you do the process yourself for the second period? Or, would you hire the same firm to complete the project cycle for you? Have you noticed that there are more projects like your own since the CDM began? Was the project begun before knowledge of CDM revenues? Will you hire a lawyer to complete the ERPA if there is one for this project? Are you relying on CDM revenues for any upfront project costs? How much will CDM revenues add to your profit margin? If the CDM revenues were not enough to make the project cycle worthwhile, how much more would they have to provide to make it so? Did you have to pay any more to complete the CDM project cycle than expected? In other words, did you have to pay any bribes to make the project move along in the CDM cycle? What are the biggest challenges to earning CDM revenues? How will you ensure that the project performs each year? Do you have someone on site who will be the technical support person for the project? How will new parts be ordered? Do the local people benefit at all from the project? If so, how do they benefit? How is this benefit measured? What do you use to determine the amount of sustainable development provided?

Guide for Designated National Authorities 1 2 3

Please tell me how you became interested in the CDM and came to work in this office. How many people work in the office full time? Part time? When was the office established?

34

4 5 6 7 8 9 10 11 12 13 14 15 16 17

18

19 20 21


How many applications has it handled? How many successful projects have been approved? How many projects have been turned down by this office? Why? What does this office do (if anything) to promote projects? Does the office have a website? What does it include? Who maintains it? What type of financial or institutional support has the government provided you thus far? What do you wish that you had in terms of financial/institutional support? What are the criteria used to establish sustainable development? Does the country’s government take a percentage of CER revenues? Why or why not? Does the percentage taken differ for project types? Do you prefer to work with established foreign project developers or local project developers? Do you do site visits? Why or why not? Do you provide feedback to the UNFCCC? Are you audited to ensure that your definition of sustainable development is applied consistently? What kind of coordination is there within the governmental offices between one ministry and the other on CDM projects? Do you receive help and funding from other ministries? To what degree does the work of the DNA fall in line with national development plans? How many existing CDM projects are counted towards or fulfil existing domestic energy programmes? What is your definition of sustainable development? How strictly is this definition enforced when deciding if a project will be accepted or not? What are your thoughts on the whole CDM process? Is it too troublesome? How could the CDM project cycle be made easier for the DNA?

Guide for Designated Operational Entities (DOEs) 1 2 3 4 5 6 7 8

Please tell me the story of how you came to be a DOE. Describe the typical project site visit. Do project owners understand why you are there? Have you been offered a bribe to validate a project that was not additional? How do you advertise your services? How do you compete with local and international entities? What response have you gotten from the developers? What barriers have you encountered as a DOE? What would make the project cycle easier for you?

Questions for village residents, village owners, and NGOs involved in programmatic CDM 1 2 3

Describe how this project came to be implemented in your village. Do you like having the project? Does it make your life easier? How? How do other villagers perceive the project?


4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

35

Has the project created any difficulties for village residents? Who is responsible for the maintenance of the project? How will replacement parts be ordered? Do you pay for your use of the energy? Is the rate for energy flat or do you pay based on the amount you use? Is the project owned by the town, a municipality or a private company? Is the project paid for by a loan or grant? Will this loan be repaid in a timely manner? How are fees collected? Who manages the fees? How was the governance system for the management of the system created? Do you think it works well? How could it be improved? Has this new governance for the system caused tension in the village? Was an outside project developer involved with the installation of the project? Did that person or his colleagues provide technical training for the system? Was there a feasibility study for the project? Did community members help in the installation of the system? Did village members pay a portion of the first costs of the system? What is the geography of the area around the system? Do you think the system is at risk of being destroyed by a hurricane, mudslide, guerilla activity, a fire or other outside forces? What measures were taken to protect the project from these risks? Does the system contribute to the sustainable development of the community? How is this measured?

Notes 1 In this book, the author used both euros and US dollars because she quoted prices from reports that were written during the past seven years. Because the precise date when the price was found was not always available, the author chose to keep the price in its original currency rather than use an arbitrary conversion rate in the year of publication. 2 The industrial sectors included in the first ETS compliance period are combustion plants, oil refineries, coke ovens, and iron and steel, cement, glass, lime brick, ceramics, and pulp and paper plants [13]. 3 Forestry CDM projects can last for one crediting period of 30 years, or 20 years with two renewal periods [48].

References 1 2

UNFCCC (2008) ‘Essential background’, available from http://unfccc.int/essential_background/items/2877.php Wara, M. (2006) ‘Measuring the Clean Development Mechanism’s performance and potential’, Program on Energy and Sustainable Development Working Paper no 56, July, Stanford University, Stanford, CA

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3 4

5

6 7

8

9 10 11 12 13 14

15

16 17 18

19 20 21 22 23


Ellis, J., Winker, H., Corfee-Morlot, J. and Gagnon-Lebrun, F. (2007) ‘CDM: Taking stock and looking forward’, Energy Policy, vol 37, pp15–28 Bhardwaj, N., Parthan, B., de Coninck, H. C., Roos, C., van der Linden, N. H., Green, J. and Mariyappan, J. (2004) ‘Realising the potential of small-scale CDM projects in India’, November, IT Power and IT Power India, Puducherry OECD Environment Directorate and International Energy Agency (2001) ‘Fasttracking small scale CDM projects: Implications for the electricity sector’, OECD, Paris CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and database, 1 April Ramseur, J. L. (2008) ‘The role of offsets in a greenhouse gas emissions cap-andtrade program: Potential benefits and concerns’, Congressional Research Service, 4 April Krupa, P. (2008) ‘Central America and the carbon market: The region’s role in the $30 billion carbon market’, World Business Council for Sustainable Development, 29 February CDM UNFCCC Project Search, 1 May 2008, available from http://cdm.unfccc.int/Projects/projsearch.html Capoor, K. and Ambroisi, P. (2008) State and Trends of the Carbon Market 2008, World Bank, Washington, DC Ellis, J. (2006) ‘Issues related to implementing “programmatic CDM”’, OECD, Annex I Expert Group, UNFCCC, 27 March UNFCCC (2007) ‘CDM statistics’, January, available from http://cdm.unfccc.int/Statistics European Commission (2005) ‘EU emissions trading: An open scheme promoting global innovation to combat climate change’, January United Nations (2006) ‘ECLAC study for the 4th meeting of the Economic and Society Working Group of Forum for East Asia–Latin America Cooperation’, 7–8 June, Tokyo, Japan Burke, M. (2006) ‘Carbon prices drop in the EU, putting pressure on climatechange policy’, Business & Education News, Environmental Science and Technology Online, 5 July Point Carbon ‘EUA price last 30 days’, available from www.pointcarbon.com/ Connor, Dr P. (2007) Email correspondence with Dr P. Connor, 9 March, Camborne School of Mines, Cornwall Campus, University of Exeter European Parliament (2004) Directive 2004/101/EC of the European Parliament and of the Council, amending Directive 2003/87/EC, establishing a scheme for greenhouse gas emission allowance trading within the Community, in respect of the Kyoto Protocol’s project mechanisms, 27 October European Commission (2006) ‘Emissions trading: Commission decides on first set of national allocation plans for the 2008–2012 trading period’, 29 November Zhang, Z. X. (2007) ‘Toward an effective implementation of clean development mechanism projects in China’, Energy Policy, vol 35, pp1088–1099 Salgado, C. (2007) Interview with C. Salgado, Carbon Broker, Ecoinvest, 20 March 20, Cartagena, Colombia Carbon Positive (2008) ‘Flat CER prices ignore EUA market’, Carbon News and Info, 30 April Liptow, H., Michaelowa, A., Raubenheimer, S. and Jahn, M. (2004) ‘Measuring the potential of unilateral CDM: A pilot study’, Discussion Paper 263, Hamburg Institute of International Economics, January


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24 Capoor, K. and Ambrosi, P. (2007) State and Trends of the Carbon Market 2007, World Bank, Washington, DC 25 Point Carbon (2007) ‘Historical EUA prices’, 1 March 26 Streck, C. and Manzano, I. (2007) ‘A new contracting model for ERPAs: Equity and efficiency in legal and contractual issues’, presentation at CDM Tech. Conference, 19–21 March, Cartagena, Colombia 27 Michaelowa, A. and Jotzo, F. (2005) ‘Transaction costs, institutional rigidities and the size of the clean development mechanism’, Energy Policy, vol 33, pp511–523 28 Diamont, A. (2008) ‘The key role of greenhouse gas emissions offsets in evolving GHG cap and trade programs’, RMEL Generation Conference, Carbon Issues and Strategies, 17 April, Denver, CO 29 Michaelowa, A. and Wucke, A. (2007) ‘CDM Highlights 44’, Gesellschaft für Technische Zammerarbeit (GTZ) Climate Protection Programme, January 30 Peters, R., Brunt, C. and Luce, C. (2004) ‘The Clean Development Mechanism (CDM): An international perspective and implications for the LAC region’, The Pembina Institute for the Latin American and Organización Latinoamerica de Energía 31 UNFCCC (2007) The United Nations Climate Change Conference, 3–14 December, Bali, http://unfccc.int/meetings/cop_13/items/4049.php 32 Point Carbon (2008) ‘Traders, green groups call for laxer CDM limit in EU ETS Phase Three’, Carbon Market News, 9 April 33 Michaelowa, A. (2007) Interview with A. Michaelowa, Head of the International Climate Policy Research Programme, 23 February, Hamburg Institute of International Economics 34 Sinha, C. S. (2007) Interview with C. S. Sinha, Portfolio Manager, Carbon Funds, World Bank, 6 March 35 Jiao, L. (2006) ‘World’s biggest greenhouse gas deal takes effect in win–win situation for China, industrialized nations’, Worldwatch Institute, 3 October 36 Forster, P. et al (2007) ‘Changes in atmospheric constituents and in radiative forcing’, in Climate Change 2007: The Physical Basis, Contribution of the Working Group I to the 4th Assessment Report of the IPCC, Cambridge University Press, Cambridge, New York 37 Olsen, K. H. (2007) ‘The Clean Development Mechanism’s contribution to sustainable development: A review of the literature’, Climatic Change, vol 84, pp59–73 38 Gold Standard ‘Rationale’, available from www.cdmgoldstandard.org/rationale.php 39 CDM Watch (2004) ‘CDM Scorecard’, February 40 Bradsher, K. (2006) ‘Outsize profits, and questions, in effort to cut warming gases’, New York Times, 21 December 41 Barland, K. (2006) Sustainable Development: Concept and Action, United Nations Economic Commission for Europe, Geneva 42 Resniera, M., Wang, C., Du, P. and Chen, J. (2007) ‘The promotion of sustainable development in China through the optimization of a tax/subsidy plan among HFC and power generation CDM projects’, Energy Policy, vol 35, no 9, pp4529–4544 43 Martinot, E. and Reiche, K. (2000) Regulatory Approaches to Rural Electrification and Renewable Energy: Case Studies from Six Developing Countries, World Bank, Washington, DC 44 Nicholls, M. (2006) ‘Trials and tribulations: Market survey GHG emissions’, Environmental Finance, December 45 CDM Watch (2003) ‘CDM Toolkit: A resource for stakeholders, activists, and NGOs’, November

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46 United Nations (2003) ‘Implementation of the Clean Development Mechanism in Asia and the Pacific: Issues, challenges, and opportunities’, ST/ESCAP/2292 47 Gastelumendi, J. (2007) Interview with J. Gastelumendi, Kennedy School of Government at Harvard University, Master’s of Public Policy student (Former Head of Environmental Division at Estudio Grau), 4 March 48 Turnbull, D. (2006) ‘Equitable distribution in the CDM’, Climate Action Network International Nairobi, ECO Newsletter, Issue 8, 13 November 49 UNFCCC Executive Board 27 (2006) ‘Annex 19: Regional distribution of clean development mechanism project activities’, 1 November, UNFCCC, Bonn, Germany 50 Wilder, M. (2005) ‘Implementing the Clean Development Mechanism and emissions trading beyond Europe’, in F. Yamin (ed) Climate Change and Carbon Markets: A Handbook of Emissions Reductions Mechanisms, Earthscan Publications, Sterling, VA, pp231–261 51 Zhang, Z. X. (2000) ‘Estimating the size of the potential market for the Kyoto flexibility mechanisms’, Faculty of Law and Faculty of Economics, University of Groningen 52 Gordon, A. and Schrader, K. (2007) ‘State of carbon market report update shows strong impact of Asia in market’, press release 2007/116/SDN, World Bank, 26 October 53 UNFCCC (2005) ‘Technology Transfer’, Proceedings of Seminar of Governmental Experts, Tenth Conference of Parties, 16–17 May, Bonn, Germany 54 CDM Executive Board, Guidelines for Completing the Project Design Document (CDM-PDD), the Proposed New Methodology: Baseline (CDM-NMB), and the Proposed New Methodology: Monitoring (CDM-NMM), Version 04, UNFCCC 55 Seres, S. (2007) ‘Analysis of technology transfer in CDM projects’, UNFCCC Registration & Issuance Unit CDM/SDM, December 56 UNFCCC CDM (2008) Project’s Location: Interactive Map, 20 April, available from http://cdm.unfccc.int/Projects/MapApp/index.html 57 International Energy Agency (2007) World Energy Outlook 2007, IEA, Paris 58 Salgado, G. (2007) Interview with G. Salgado, CDM Consultant, former Designated National Authority of Honduras, 11 September, Tegucigalpa, Honduras 59 CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, March 60 Gottfried, P. (2007) Interview with P. Gottfried, Project Manager for Fuerza Eólica of Mexico, 17 August, Mexico City, Mexico 61 UNFCCC (2007) ‘CDM project activities’, December, available from http://cdm.unfccc.int/Projects/projsearch.html 62 Broide, A. (2007) Interview with A. Broide, Development Manager for Mesoamerica Energy, 26 September, San José, Costa Rica 63 Moreno, R. (2007) Interview with R. Moreno, President of Santa Fe Energy, 4 October, Panama City, Panama 64 Jongezoon, L. (2007) Interview with L. Jongezoon, Developer of Renewable Energy Projects for Ecomina, SA, 6 September, Guatemala City, Guatemala 65 Holloway, B. (2008) ‘Turbine waiting list hits wind farm’, in Waikato Times, 22 November, Waikato, New Zealand 66 Dias, J. (2007) Interview with J. Dias, Site Engineer for Polaris, 19 September, San Jacinto, Nicaragua 67 Loy, D., Fütterer, H., Jüttemann, P. and Reiche, D. (2004) Energy-Policy Framework Conditions for Electricity Markets and Renewable Energy: 21 Country Analyses, Terna Wind Energy Programme, Deutsche Gesellschaft fur


68 69 70 71 72 73 74 75 76 77

78

79 80 81 82

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Technische Zusammenarbeit (GTZ) GMbH and Federal Ministry for Economic Cooperation and Development, June Business News Americas, ‘ICE launches Diquís geotechnical study bidding’, 16 March 2008 Business News Americas, ‘Cerro Prieto geothermal tender attracts 4’, 16 March 2008 Business News Americas, ‘Isagen seeks proposals for geothermal project study’, 20 December 2007 Business News Americas, ‘Ministry to complete renewables, geothermal plans mid-2008’, 20 December 2007 Uribe, C. (2007) Interview with C. Uribe, PDD Author of Curva de Rodas, 17 October, Medellín, Colombia Samora, R. (2007) Interview with R. Samora, Head of the Rio Azul Plant for SARET, 28 September, San José, Costa Rica Gonzalez, J. (2007) Interview with J. Gonzalez, Project Developer for Interaseo, 16 October, Medellín, Colombia Cinteno, M. (2007) Interview with M. Cinteno, La Chureca Site Manager for the City of Managua, 19 September, Managua, Nicaragua Gomez, J. C. (2007) Interview with J. C. Gomez, Plant Manager for Ecoelectric at Valdez Sugarmill, 28 October, El Milagro, Ecuador World Bank, UNDP and World Business Council for Sustainable Development (2004) ‘Case Studies: Costa Rica: Reducing the impact of agro-industry wastewater’, at Energy for Development Conference, 12–14 December, Noordwijk, The Netherlands Beuermann, C., Langrock, T. and Ott, H. (2000) Evaluation of (Non-Sink) AIJProjects in Developing Countries (Ensadec), Wuppertal Institute for Climate, Environment, and Energy, Wuppertal, pp1–48 Coto, O. (2007) Interview with O. Coto, CDM Consultant, 1 October, San José, Costa Rica Shiverly, B. and Ferrare, J. (2004) Understanding Today’s Electricity Business, Enerdynamics, San Francisco, CA Millán, J. and von der Fehr, N. (eds) (2003) Keeping the Lights On: Power Sector Reform in Latin America, Inter-American Development Bank, Washington, DC Energy Sector Management Assistance Program (2007) Latin America and the Caribbean Region (LCR): Energy Sector – Retrospective Review and Challenges, 15 June, World Bank, Washington, DC

Section 2 Barriers

2 Technical Barriers

Technical barriers result because of a poorly designed, sited, maintained or installed system. If a project fails a yearly monitoring and verification test for technical or other reasons, it does not generate Certified Emission Reductions (CERs) and earn the associated revenues. For example, in Mexico, three of the six methane capture projects the author visited were not functioning properly. Local farmers were not concerned with the malfunctioning because they did not realize that the flaring of the methane to create the less potent greenhouse gas of CO2 was how the CERs and associated revenue were generated. Furthermore, they most often worked on the farm but did not own it and most likely had little incentive to facilitate the generation of CERs as they would receive none of the CDM revenues. The technical barriers to project development tend to vary based on the type of technology utilized. However, there are some problems that apply to almost all areas of development. Therefore, this chapter first addresses general technical barriers to development and then discusses the individual challenges to each technology type one by one. This chapter also covers barriers that relate to the high cost of or lack of availability of certain technologies used for renewable energy generation.

General technology challenges Most technical challenges that face CDM project development in the region are technology-specific, but there are some problems that apply to almost all areas of development. Unreliable electrical grids, which stem from a lack of spinning reserves to back up peak demand, poor and overtaxed transmission lines, and rudimentary dispatch centres,1 lead to frequent grid outages and voltage fluctuations that can harm equipment. For example, in Colombia the average number of grid failures that affected one customer per year was 186 and the number of hours annually that customers went without electricity was 66 [1]. The gas turbines used at Río Azul landfill in Costa Rica are designed to withstand 12 outages per year. Plant managers contend that there are usually about seven outages per day due to the introduction of oxygen into the system,

44

BARRIERS

because the tubes that carry methane from the landfill to the generator are routinely stolen. The result is levels of gas that are too low to provide adequate fuel for the generator [2]. Turbines at La Babylonia hydro site in Honduras have a special device to divert water from the turbine when the grid fails and operators stand by to handle about three grid interruptions per day during peak demand. They must be ready to resynchronize the equipment to the grid manually when these failures occur [3]. More than being just a technical challenge, these grid interruptions cause plants to lose money since many markets in the region provide generators with a fixed price per kWh produced and energy is not produced when the plant has to stop operations [3]. For purposes of Clean Development Mechanism (CDM) revenues, emission reductions are also not produced during these times.

Hydro In general, renewable energy sites for development can be complex and expensive given their remote nature. However, renewable energy is often the most economical form of electricity for these isolated areas, since serving these areas by the grid would be even more expensive. Hydro facilities can be especially burdensome to access since areas where there is a large difference in elevation and a stream tend to be in mountainous regions with poor or no infrastructure. For some sites, such as La Babilonia and El Coronado in Honduras, construction workers had to carry equipment such as tubes, cement and compressors for tunnel construction on their backs and on mules 4km with 500 metres of elevation gain to the site in order to construct the run-of-river sites, which were under 5MW [3]. Replacing parts and having technicians service these remote areas is also complicated. Project owners are responsible for connecting their electricity to the closest three-phase point in a transmission line. The remote location of wind, geothermal and hydro sites can mean that this distance is very significant. Even cheap labour in the region cannot always compensate for the costs of this type of construction. Companies often must budget for the construction of a road, cable car or bridge in project costs in order to safely transport components. In this way, these new infrastructure improvements can help modernize communities, increasing commerce [3]. Frequent hurricanes hit this region during the months of August, September and October. Hurricane Felix of 2007 caused a landslide that smashed part of the tubing at El Coronado hydro site in Honduras and decimated photovoltaic (PV) panels that were installed on the eastern coast of Honduras. These storms also create hazards for hydro projects by causing trees to fall in the watershed that leads to the river. Deforesting of the area can impact stream flows and cause siltation and debris build-up that blocks dams. Although the equipment for hydro generation has been in use for over 100 years, some project developers are proving ‘first-of-a-kind’ additionality by

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Figure 2.1 Hurricane damaged pipe for hydro electric adding slightly new parts to the system, such as a tunnel-boring machine for an 8km pipe in a run-of-river application that tried to make minimal environmental impact by not displacing the vegetation on top of the tunnel area [4]. Overall, the common use and long history of hydro makes it difficult to prove technological barriers are broken. Hydro projects also face a new challenge in that the European Union (EU) will no longer accept CERs from projects larger than 20MW unless the dam complies with the World Commission on Dams guidelines. The exact guidelines for CER purchases above 20MW was unclear as of March 2008 and the rules to better define qualifying projects were being formulated [5]. The reasoning behind this size requirement is that it would help prevent the negative impacts of large dams, like having areas of land flooded, creating methane emissions. Run-of-river projects, which consist of turbines placed directly in the river and moved by the river’s flow or the diversion of water into a pipe that is run downhill through turbines, have no dam or smaller dams that hold water for just a few days of generation and therefore tend to displace or disturb fewer people and cause less evaporation from reservoirs [6]. The UNFCCC has a limit on the surface area of reservoirs within the existing Approved Consolidated Methodology 0002 [7]. Small-scale hydro projects in Chile also may be at an advantage as hydro projects must be under 30MW in order to be eligible to fulfil the country’s 10 per cent renewable

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energy mandate by 2024. These new guidelines may directly provide project support for small-scale projects as it is more difficult to get larger projects registered.

Wind Wind energy projects in Latin America can be challenging because the technology for this type of energy generation is still relatively new and unproven in many of the Latin American countries [8]. This unfamiliarity with projects makes investors and project developers alike hesitant to get involved. However, some areas with excellent resources, such as Oaxaca, Mexico, Chile and the northeast coast of Brazil, have been recognized by international companies like Gamesa, Pacific Hydro and Iberdrola [9]. With the backing of these large companies, wind farms of 100MW and larger are being installed in some of these areas. Countries like Uruguay and Peru that do not yet have a wind map are at a disadvantage. Even though the coast of Peru is not very well studied, it seems to have potential [10]. A combination of a lack of renewable energy incentives, resource information and investor confidence has not allowed sites in Peru to develop quickly [10]. Even when there is a wind map of the country showing areas suitable for development, there may not be an appropriate place to hook into the grid. In Uruguay, a team of German developers did studies and found that a site on the Uruguayan coast on the border with Brazil was a good wind resource. When they then went to see how they could connect with the Uruguayan grid, they found that the voltage in the area was low, and that they could not produce and transmit electricity in this area of the grid [11]. Some of the investor fear in this fairly new technology is merited since certain areas of the region have unusual wind regimes of Class 7, which is 8.8 metres per second (m/s) and higher, that have not been extensively tested by today’s large turbines [12]. Patagonia is a region with excellent average wind speeds of close to 10m/s that at first consideration seems like an ideal place for wind farms. However, the wind speeds there can be very strong, up to 16m/s, or non-existent. Therefore, turbines that are specially designed for this wind regime are necessary. The large, 1.5–2MW turbines that are currently being installed for most new wind farms in Europe work best with lower, steady wind speeds and may not survive the intermittent strong winds of Patagonia and Oaxaca. Industrias Metalúrgicas Pescarmona SA (IMPSA) of Argentina has designed a turbine without gears, able to handle variable wind speeds more efficiently. However, in a test situation, an IMPSA turbine was pulled out of the ground by the high wind of Patagonia and injured three people [13]. The newness of wind energy complicates the permit process for farms. Often, countries do not have a standardized procedure for wind farms, and hydro or other permit procedures have to be modified to fit the new technology. This modification process can be time-consuming and discourage developers since the bureaucratic process of facilitating a new permit

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procedure can involve long delays. Empresas Públicas de Medellín had to modify a hydro permit for use at a wind farm [14]. The permit process can be complicated by those who fear that the turbines could interfere with bird migration patterns and bat activities or create a noise disturbance. Project developers in Mexico found ornithologists wanted bribes in order to allow the development of a farm [15]. Physically installing the wind turbine equipment can be challenging in areas that do not have infrastructure that supports the installation of turbines. For example, developers of Nuevo Mantanial, a 4MW wind farm in Uruguay, had to rent cranes from out of the country to install the turbines. The process was very costly as the minimum rental time for this equipment is one month [11]. Another complication is that in countries with dispatch rules that do not prioritize wind energy, this resource could be incorporated into the grid’s system last, and for a limited amount of time, attracting few energy payments. Most wind advocates argue that wind is a ‘use it or lose it’ resource that must be put on the system when available and therefore should have dispatch priority above other resources. Improving storage capabilities with large-scale vanadium redox batteries, pumped hydro reservoirs or compressed air energy storage would make this resource more dispatchable and may be pursued more in the future. However, thus far, these storage techniques used in conjunction with wind energy are largely experimental and confined to developed countries. Therefore, some countries like Colombia have taken steps to make ‘use it or lose it’ resources under 20MW the first energy dispatched as a part of the national law [16]. But others that do not have this exception expect wind to compete in the least-cost bid process that requires wind energy to compete on a price basis with other technologies and only receive payments when it is selected by grid managers as one of the least-cost options. Other problems with integrating wind projects into the national grid include the complexity of putting an intermittent resource into a grid and ensuring that it will not cause instabilities in the system. The maximum amount of wind on the three US transmission grids that utilities predict can be utilized before it would produce grid instability is close to 25–30 per cent of the overall generation [17]. This estimate is based on the flexibility of the system’s dispatch centres as well as the current portfolio mix of resources, which includes many baseload sources. Grid managers in Latin America are less familiar with this resource and unsure of how much wind energy the grid can sustain. One way to remediate the problem of grid interconnectivity is by making the hydro and wind portions of the grid complementary. If there is a large portion of hydro on the system that is susceptible to drought conditions, wind could exacerbate the unpredictability of when energy would be available. However, some areas have wind regimes that are complementary to hydro availability [18].

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In Uruguay, a team of German developers did studies and found that a site on the Uruguayan coast on the border with Brazil was a good wind resource. When they then went to see how they could connect with the Uruguayan grid, they found that the voltage in the area was low, and that they could not produce and transmit electricity in this area of the grid [11]. A recent barrier to wind energy development in the region has been the inability to get the equipment needed for small applications because of a global wind turbine shortage. In many of these countries, a 15MW farm is a significant capacity addition. This size farm is all that can be financed and anything larger would flood the country’s grid with too much intermittent generation. This is especially the case in the small countries of Central America and has been the experience of developers in Honduras. Also, in Ecuador, a 15MW project called Salinas received all of the necessary permits and completed a Project Design Document (PDD) only to find that turbine manufacturers were not interested in an application that small. The current global shortage of turbines has created a significant barrier for small projects since little orders are not the priority of manufacturers. The wind developer for Cristelería Toro of Chile had to source turbines for its 3.45MW wind farm in part from a new Chinese manufacturer called ZheJiang Huayi and partially from used turbines from Germany [19].

Biomass Biomass can be a high-energy fuel that can be gasified or burnt in a boiler that operates a turbogenerator. The history of biomass utilization for power production in Latin America dates back to over 100 years ago as sugarcane producers burnt the stalk residues, known as bagasse, in order to get rid of the waste and produce electricity to sustain the sugarmill plant’s operations. These electrical applications are also used for process heating; the bagasse that is burnt heats water for electrical production in a Rankine cycle and is used to evaporate water in the process of isolating the sugar. The bagasse is generated when the sugarcane water is extracted at the factory by machines that flatten the stalk. Therefore, the stalk residues are already at the plant and would have to be trucked away if not utilized for energy production. Efficiency was not especially important to plant operators since there was typically more bagasse than the owner needed and selling electricity back to the grid was not an option. In some cases, these sugarmills were not even connected to the grid [20]. Now, sugarcane producers are more interested in efficiency since they can, in most cases, earn money for the excess electricity they produce through net metering.2 Some countries like Ecuador even provide incentives like lucrative feed-in tariffs for this type of generation. Sugarmill owners are now considering making their facilities more efficient by installing better boilers and generators in order to take advantage of the CDM and renewable energy incentives at the same time as lowering their electricity costs [21]. Typically, the baseline for these projects is the burning of the bagasse. So, no additional reductions for preventing the decomposition of the bagasse and associated

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methane emissions are earned. Emission credits are earned for the electricity on the grid that is displaced because of the generation. These upgraded sugarcane biomass projects have tended to succeed in countries like Ecuador and Central America that have a shortage of capacity. Companies in these countries may face expensive electrical outages if their complete electrical needs are not met. These countries are also the ones that offer aggressive incentives for the development of these projects as a means to take pressure off the national grid. Countries like Uruguay and Argentina are just now beginning to consider these projects since the availability of natural gas and associated affordable electricity has disappeared as a secondary result of the Argentine economic crisis of 2002 [22]. More information about the Argentine economic crisis and its ties to natural gas supply shortages can be found in Chapter 10, ‘Argentina’. Beyond using the bagasse, sugarmill operators have considered co-firing the other residue of leaves from sugarcane and husks from a variety of crops such as rice, water hyacinth and peanuts because it would provide a valuable 12-month, reliable power source. However, thus far, using this high volume, low energy waste has not been pursued. The primary reason for not using other crop residues is that the transportation costs of moving it from the fields to the factory costs more than purchasing other fuels, making it prohibitively expensive. The sugarcane leaves and other residue, which are not taken to the sugar mill and are left on the ground after the harvest, must be collected and transported for the expressed purpose of electricity generation. This process increases the cost of harvest by three times and necessitates the purchase of a mechanical harvester [20]. Most of this residue also has a lower energy content than bagasse [21]. An economic analysis of the prospects for co-firing different types of biomass with bagasse by Ecoelectric, which is running the cogeneration portion of the Valdez Sugarmill in Ecuador, showed that in order for biomass to be economical for power generation, it needs to cost about $2–3 per tonne to transport from the fields to the factory. At this site, eucalyptus from a plantation 50km away costs about $30 per tonne to purchase and transport to the factory. The company has begun prospecting on its own land for areas to plant fast-growing eucalyptus trees. Water hyacinth from 300km away was also considered as co-firing fuel, but transportation costs alone are $15 per tonne for this fuel because of its high moisture content. Ecoelectric has chosen to use the palm fruit for $15 per tonne for purchase and transport to co-fire in a 90 per cent bagasse, 10 per cent palm ratio at its plant [20]. Another reason why other types of residue have not been co-fired with bagasse at sugarmills is because boilers that can accept a variety of biomass products are more expensive than those that just burn bagasse. Also, the approximate moisture content of different residues would have to be matched for successful co-firing. In some cases, for the use of water hyacinth, commercial equipment and the electricity to run it would have to be purchased to dry this crop. Ecoelectric is unsure how their equipment will respond to palm fruit being burnt with bagasse and plan to do several months of testing [20].

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Taking the crop residues away from the fields would leave areas without organic residue to decompose and provide a natural fertilizer. Using this residue would have to be weighed against the cost of fertilizer to replace these nutrients. As previously mentioned, plant operators are interested in co-firing other biomass with bagasse because it would allow year-round electrical production. Only a few areas like Paramonga, Peru have year-round harvest. In all other places, sugarmill owners are fixing repairs and not producing electricity during three to four months of the year. During this time they suffer losses as they are not receiving money for electrical payments, purchasing electricity from the grid and not receiving CERs. The equipment used in the combined heat and power process of the sugarmill is designed to create low-pressure steam that evaporates the water off the syrup but does not provide optimal power production. Therefore, in the non-harvest season when this steam for evaporation was not needed, the plant would release this steam to the environment and could annoy neighbours. Shifting to year-round electrical production would necessitate different generation equipment that would not be optimal for the overall plant’s operations during sugarcane production [20]. Considering electrical production outside of a sugarmill with just crop residues has not yet been economical. The aforementioned problems of energy density and transportation costs prevent this practice from occurring. In Chile, there are a few projects that have been able to take advantage of the harvesting of wood biomass for generation. At Nueva Aldea biomass plant, wood will fire a 37MW cogeneration plant to sustain the operations of a paper mill [23]. At Trupan wood panel plant, excess biomass on land will partially sustain the plant’s operations and sell back to grid in a 30MW plant [24]. At Russfin sawmill, wood scraps like stumps and branches that would otherwise decay on the ground will be used in a 1.2MW plant [25]. These applications were successful because they existed near plants that were already in the business of harvesting wood and transporting it to a central facility, suggesting that a traditional biomass plant using wood that is harvested specifically for electrical production is not economically viable.

Geothermal Being located on the ‘ring of fire’ affords many Latin American countries excellent opportunities for geothermal electrical development. However, few countries have explored this potential because of the high capital costs of these plants. The first costs of drilling one hole for steam extraction average about $2 million. This high cost led developers of San Jacinto geothermal plant in Nicaragua to choose a site that had already been partially developed by Russians in the 1980s [26]. The depth of the hole for steam extraction can vary the first costs of geothermal development significantly. Alquimiatec developers in Ecuador are interested in a site near Quito for its potential as a shallow field. Precise feasibility studies that show a close approximation of the earth’s structure and how deep developers would need to drill are necessary to minimize costs [27].

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If the geothermal prospecting team is not experienced at returning the extracted steam into the hydrological deposit where it came from, this form of energy is not renewable. Poorly designed steam extraction and water reinsertion at Momotombo geothermal power plant in Nicaragua depleted this resource prematurely and necessitated a rehabilitation project to correct the mistakes made [28]. The equipment for drilling geothermal holes is the same as the equipment for extracting oil. Drills tend to be large and not always available. When considering where to develop these sites, it is important to keep in mind the accessibility of the site for this heavy, bulky machinery [26]. Economies of scale are also key when considering geothermal development. Because of the cost of prospecting a site in detail, renting the drills, buying the power generation equipment and running transmission lines to the closest point of interconnection, it makes more economic sense to develop several extraction wells for a large generation facility rather than to develop few holes for small-scale electrical production [26].

Landfills For landfill gas projects, emission reductions are derived from converting the methane that would have been released into the atmosphere from the decomposing garbage into CO2. Since CO2 is a 21 times less potent greenhouse gas (in a 100-year time scale), converting the methane to CO2 results in a reduction of overall warming potential [29]. This conversion can take several forms. It can be completed through burning the methane in flares. It could theoretically be liquefied and used as fuel, but this technique is still experimental [30]. Or, the methane can be burnt to produce CO2 in a turbo-generator and produce electricity. In the latter conversion method, emission reductions are derived not only from creating a less potent greenhouse gas out of the methane, but also from a displacement of fossil fuel, grid-based electricity. Gas is collected from landfills by a system of vertical and/or horizontal holes filled with perforated tubes. A negative pressure is applied to the tubes and the methane is transported to a central flaring or power generation facility. The large number of emission reductions from these projects with lucrative possibilities has led to the aggressive pursuit of landfill gas projects throughout the region with a total of 86 implemented by March of 2008 [31]. Developers like Green Gas and carbon brokers like Ecosecurities were immediately interested in these projects since they seem to offer a plethora of reductions with a minimal amount of infrastructure. Also, the additionality argument for these projects is solid since none of the countries require the bulk of the methane from landfills to be destroyed. However, some countries, such as Mexico, Colombia and Costa Rica, require off-gassing and flare from landfills for safety concerns. Because of this off-gassing requirement there are rudimentary chimneys that have been sporadically inserted in landfills in countries with the requirement. However, these

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chimneys are poorly maintained with flares that are rarely lit and moved infrequently, so the amount of landfill gas that they off-gas is estimated to be only 3–7 per cent of the total gas available in the landfill [32 and 33]. So, even landfills with off-gassing chimneys and flares have sparked the interest of developers. Landfill methane capture projects have to be implemented quickly since the gas in municipal solid waste peaks within a year of the site being covered, and then diminishing amounts of gas are produced over 30 to 50 years [34]. A study for a landfill gas capture project for Mexico City began, but difficulties coordinating with all of the municipalities, trash collectors and local stakeholders has delayed the project past the point when large amounts of methane can be extracted [33]. Therefore, these projects are most economical if implemented while trash is still accumulating or soon thereafter. Also, piping can be installed horizontally and vertically to capture the maximum amount of methane if the project is started while the landfill is still in operation. Methane capture works best when the site is a designated landfill and not a dump. In Latin America, landfills have a plastic liner below the trash, have a water drainage system, and sometimes have materials sorted before they enter. Sorting trash before it enters and having a plastic liner beneath the pile helps ensure that there will be a certain amount of organic waste content [2]. Also, when the landfill is constructed with a stepped design that is based on when the trash was dumped, it is easier for engineers to know where the most gas can be found based on the age of the trash [32]. Experience from landfill projects in the region points to some of the challenges with these projects. Río Azul is a dump (not a landfill) in San José that was retrofitted in 2003 for gas capture and electrical production. A technical closure to repair erosion and make space for new trash coincided with this methane capture project and led to the crushing of 40 per cent of the landfill wells drilled for methane extraction because of poor communication between the various entities that own the plant. Some other holes for methane extraction have been destroyed as the mound of trash has shifted. And, tubes used to transport the methane from the field to the site of generation are now frequently stolen since there is less activity after the technical closure and fewer guards on the site. All of these factors have led to the plant producing 25 per cent of the expected gas and associated emissions reductions [2]. The Zámbiza dump in Quito, Ecuador was retrofitted for flaring and future electrical production and is also under-producing gas by 50 per cent [27]. The lack of a liner on the top of the trash at the Zámbiza dump has not been problematic since the volcanic clay that existed naturally in the area and was used to cover the trash is impermeable and prevents rainwater from entering and methane from escaping so that it can be extracted through piping. However, a river runs under the landfill site and is allowing some methane from the trash to escape. Also, the river is compromising the structural integrity of the site by transferring pollutants from the site to the watershed below and allowing shifting that may one day cause the mountain of trash to move and destroy a highway that the city has constructed on top of the site [27].

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Another landfill in Ecuador, called Las Iguanas, near the city of Guayaquil, is in the process of being converted for methane capture. The project manager is hopeful that the fact that the site is a true landfill and has a stable support system will make the project a success [35]. In Medellín, Colombia, the University of Antioquia is working on how to improve the amount of methane that could be extracted from Curva de Rodas landfill by better covering the site with an impermeable material to allow less oxygen to enter [32]. Although most of the landfills or dumps that are retrofitted for methane capture hope to also generate electricity, few actually do. Often the electrical generation portion of the project is added on after the initial infrastructure to capture methane is put in place. The electrical portion is usually relatively small in comparison to the size of the landfill. For example, of the Ecomethane landfill to energy projects in Mexico, the sizes of electrical capacity will be as follows: Durango 2MW [36], Tultitlan 1.3MW [37], Aguascalientes 2–4MW [38] and Ecatepec 2–5MW [39]. However, because of the low volumes of gas that most of these sites are generating in comparison to the predicted amounts calculated during the feasibility studies, purchasing a generator and other power generation equipment and connecting to the grid is too costly to justify [27]. In some cases, not producing the predicted amount of gas can cost developers more than just the poor investment in equipment. Operators of Río Azul in Costa Rica are currently paying a penalty for not being able to provide the expected electricity because of the low volumes of gas reaching the generators. Developers who also entered a contract for sale of the CERs from this type of project may also be subject to a penalty [2].

Agro-industry and other methane capture possibilities There are other important methane capture possibilities for the region beyond landfills. There are several methane capture options within the agro-industry for farmers that produce methane from animals’ excrement, crops that have residues or wastewater used for processing of organic materials. Fedepalma of Colombia is an association of palm oil producers that has aggregated farmers to collectively undertake construction for methane capture and flaring and/or electrical production. Within the palm oil production, much water is used to extract and clean the palm fruit. This water is full of organic material and is usually treated by allowing it to sit in a series of artificial swamps before being released into the closest waterway. Fedepalma is a group of 32 palm producers collectively taking advantage of CERs by treating this wastewater in a biodigester that would be covered with a plastic liner. Fedepalma has contracted CAEMA of Colombia to create one PDD for all of the biodigesters under an umbrella project. Each palm owner will get a portion of the CERs derived [40]. Other palm producers in Central America are interested in CDM, but this project with Fedepalma is more developed and economically viable than these Central American interests because of this bundling technique.

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The Public Utility of Medellín (Empresas Públicas de Medellín (EPM)) has boldly pioneered methane capture in Latin America from human wastewater treatment plants. The first experiment with this technology began operating in 1999 and has been a huge success. Since this initial application was installed before CDM came into effect in 2001, EPM is hoping that their planned subsequent locations will earn CERs [41]. Japanese bank Sumitomo is also interested in developing methane capture for CDM credit in the wastewater treatment plants they have invested in near San Luis Potosi, Cuidad Juarez and Coyocan, Mexico [42]. Within farms that have a critical mass of animals that is large enough to support methane capture, there are possibilities for the capture of methane from excrement. There are few of these farms in the small Central American countries. Approximately 5000 hogs in full cycle (sows, gilts, boars, weaners and finishers) are needed in order to justify the costs of the biodigester. These animals also have to be in fairly close physical quarters since trying to consolidate wastes from many locations is complicated and expensive. Hog farms have been the ones to be most extensively developed, but there is also interest in dairy farms since the cows are kept in one facility instead of grazing in fields. Also, there could be potential within slaughterhouses to cover and capture methane from the discarded animal blood. Because of these size requirements, only countries with large farms and developed industries can support these projects. Mexico and Brazil dominate the landscape for these projects with 75 per cent of the total in the region as of March 2008. While these projects seem like a relatively easy way to earn reductions, they can be deceptively difficult. An in-depth description of the Mexican experience with these biodigesters follows.

Mexican methane capture case study 3 Introduction Mexico’s well-developed hog industry, which is composed of some 5 million farms and over 18 million pigs, has successfully capitalized on revenues from the Kyoto Protocol’s CDM [43]. Since most hog farms in Mexico used anaerobic lagoons where methane was created during decomposition, the industry in this country was ripe for development of credits from the destruction of this methane. These anaerobic lagoons consist of open pools where solid and liquid waste settles, allowing methane from the excrement to be released into the environment before the contents of the lagoon are eventually discharged into a local waterway, evaporated or sprayed on crops. These lagoons provide minimal remediation of the wastes before they enter waterways and only a rudimentary way of preventing water contamination. Other farms, usually of a smaller size, did not treat the waste at all and simply let it run into waterways and decompose aerobically as it was oxygenated in moving water. At these farms, small quantities of greenhouse gases are emitted as the excrement decomposes and no emission reduction projects can be developed. Therefore,

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only the hog farms with lagoons that produce methane are suitable for digester construction and generation of CERs since in the absence of these digesters, the lagoons would have released methane [44]. In addition to providing local farmers with a solution to the odour and water contamination problems that had begun to create tense relationships with neighbours, these projects are considered desirable from a financial perspective. Occasionally, farmers without biodigesters have to pay fines for the polluted water they discharge from the waste lagoons, which must be 90 per cent free of solid organic matter [44]. By November 2007, 56 per cent of the CDM projects in Mexico were methane capture from hog farms, and these projects constitute 49 per cent of the CERs that will be generated within the country by 2012. With a predicted 11,000 more CERs than will be derived from their closest competitor, Brazil, by 2012, Mexico has also benefited from more biogas capture projects than any other country in the region [45]. Mexico has enjoyed such success with these projects for several reasons. Unlike its neighbours to the south, Mexico has hog farms with a critical mass of animals that is enough to make a digester viable. Also, many of the hog farms belong to a group of farms all pertaining to the same owner, such as Granjas Carroll Mexico (GCM) and Soccoro Romero Sanchez. It is therefore easier in Mexico than other countries to bundle multiple farm sites in order to take advantage of the small-scale methodology, and it is less risky to bundle several biodigesters with the same owner because compliance and communication with farm veterinarians and operators is simplified. The small-scale methodology applies for projects that yield less than 60,000 tonnes of CO2 destroyed annually. These projects can be combined for the sake of lowering project costs by creating only one PDD and being evaluated by one auditor and verifier [46]. These farms have also been developed in Mexico more than any other country in the region because AgCert, the self-proclaimed ‘worldwide leader in agriculturally derived emission reductions’, set up operations in the country and aggressively developed and registered 58 projects by March 2008 with more than 120 staff serving the country [47]. Ecosecurities also took interest in these projects by doing the carbon qualification for 29 methane capture projects from hog farms in Perote, Mexico with Granjas Carroll Mexico. As some farmers began to take advantage of the opportunity to earn money from their hog waste, word spread, and more farms became interested. Despite Mexico’s important role in the market, technical problems with the operation of these farms have placed their future in jeopardy. Future methane capture opportunities in the country could be focused on other types of agroindustries or landfills. Digester functioning Understanding the technical barriers facing biodigesters in Mexico is enhanced by knowledge of how a digester operates. Hog farm or feedlot effluent in the form of excrement runs or is swept into pits and is then pumped or drained into

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Figure 2.2 La Joya Site III biodigester in Puebla, Mexico a large container. Here the excrement is collected and allowed to sit for approximately 30 days in a plastic-lined and capped container. Depending on the density of the excrement, plastic walls are sometimes placed inside the digester to slow the movement of the excrement through the process so that it produces sufficient methane. Sometimes Mexican digesters involve heating, mixing or a plug-flow process where the waste moves through the digester over time. The more simple systems without these features are termed ‘covered lagoons’. See Figure 2.2 for an image of a functioning pressure biodigester in Mexico. After methane is produced, it runs through pipes and a meter to a flare where it is burnt to produce CO2, a greenhouse gas that is 21 times less potent when considered in a 100-year time scale [49]. Sometimes, fans that blow the methane from the digester to the flare must be turned on to ensure that too much methane does not accumulate under the plastic cover. This seemingly simple system is a relatively new technology that has been implemented in several places throughout the world from India to the US. However, each digester is different because of the animals that contribute to its contents and its location; therefore, each system must be considered individually in order to ensure proper functioning [50]. Prerequisites There are certain prerequisites for healthy digester functioning that must be fulfilled in order for CERs to be created. The site of the digester is perhaps the most important factor in digester functioning since digesters that are located at high altitudes or in cool weather have a hard time maintaining the 25–30°

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Celsius temperatures needed. Hog farms at high altitudes in Mexico have had difficulty maintaining a constant temperature. To remediate this problem, operators of several hog farms at high altitude in Perote, Mexico are considering heating the contents of the biodigester with the excess heat from a microturbine that would burn methane from the digester [51]. Also, if located in a site with frequent rain, the digester can remain too cool as pools of water gather on the surface, deflating the methane bubble and lowering the temperature of the excrement. In Mexico, AgCert hog farms in the state of Veracruz often have pooling of water because of the frequent storms during the rainy season. If the project has no full-time grounds keeper and relies on weekly visits from an engineer who lives remotely, then there is sometimes not a pump on site to move the water off the top of the digester surface. And, even if the local farmer has a pump, he does not always cooperate and use it in a timely fashion [44]. The diet of the pigs can cause fluctuations in the pH, which needs to remain close to 7. Adding ingredients to the excrement to make it more acidic or alkaline can cause large pH swings that overcompensate for the original problem. However, one project developer from Granjas Carroll Mexico has found that their excrement is too alkaline at an average of 7.9. This project developer is planning on adding buffer tanks that will neutralize the excrement before it enters the main repository [51]. If the animals suffer from a disease and are prescribed antibiotics or given vaccinations, the medicine can harm the bacteria living in the digester. A close relationship with the farm veterinarian can help prevent the overprescription of antibiotics, and use of medicine on a rotating group of animals to decrease the impact of medicine on the digester. Likewise, non-biodegradable chemicals used to clean animal stalls can also limit the productivity of the digester by killing the micro-organisms that anaerobically decompose the excrement. Empacador Toledo hog farms in Guatemala found that using too much water to clean stalls made the waste too dilute. Toledo managers cut back on their water use from 20 litres per pound of excrement to 5 by manually sweeping waste into pits instead of hosing it and so resolved the digester problems [51]. The most essential part of the system for carbon credits is the actual burning of methane from a flare after it has been captured. Often the pilot light that flares the methane will get blown out by the wind, rain or a piece of the flare that falls on top of it. Many flares have begun to install a solar-powered backup pilot light since failure is so common [51]. However, three of the six digesters the author visited had not properly insulated the cables from the solar pilot light to the flare. The cables were therefore burnt. If the methane does not burn clearly, there is a problem with the gas content. Often an orange flame is indicative of too much CO2 in the digester. Lime is mixed in to reduce the CO2 content. If there is too much hydrogen sulfide in the gas, it can damage the flare over time. To reduce the amount of hydrogen sulfide in the gas, the methane is sometimes passed through a pipe with a piece of iron that attracts the harmful gas. Water is also condensed out of the gas in another filter [44].

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Communication breakdowns Communication between the farmer and the engineer is a critical component of the success of digester projects. If the farmer or grounds keeper cannot pass messages directly to the engineer, critical components of the system like fans, pumps and pipes cannot be repaired in a timely fashion. Often parts for systems have to be transported from the capital or even ordered from abroad. Relying on a remotely located engineer to service a region of farms proves problematic since engineers and farmers often do not have a direct line of communication and messages do not always get relayed successfully [44]. Contacting a project developer that is located abroad is even more complicated if the company does not have permanent operations and staff in the host country. Granjas Carroll Mexico had the experience of paying high project costs for a foreign company called UEM Group, a Kuala Lumpur-based company, to develop a project that used sophisticated technology that replicated a design used on dairy cows. The tubes used have a diameter that is larger than needed and better suited for cows instead of pigs. The plastic cover is susceptible to tears from the mechanical devices that tighten it. The open flare for the system worked for 24 hours before it burnt the pilot light cables and threatened power lines that were sited too close to the flare. Since the project developer is based abroad, they did not have a local engineer who could frequently visit the project and offer technical assistance. As a result of this experience, the project owner hired the locally based and more economical Geosistemas to handle the rest of their digester development [51]. Electrical generation Some of the digester project developers intended to have the system generate electricity from the methane and wrote the PDD to include displacement of carbon-intensive fuels from the electrical grid. While the use of methane to produce electricity is a proven technology, several concerns about this aspect of the project’s operations suggest that the first few years of electrical generation could be a period of trial and error. Too much hydrogen sulfide not only damages the flare, but can also cause malfunctioning of a generator or microturbine. Doubts about the amount of gas that will be produced and the most appropriate form of equipment make it difficult to size the system precisely [52]. AgCert has decided not to incorporate electrical generation in its projects in Mexico because of the high capital costs of electrical equipment and uncertainty about how to use some gas in the generator and then switch the stream of gas to the flare. This project developer points out that for utilization of gas in both a generator and flare, when excess gas builds up, the pilot light must be ready to fire and the switch controlling the flow of gas streams must be synchronized well to prevent the release of unburned gas into the atmosphere. According to one of AgCert’s engineers, the gas cannot be sent to both the flare and generator simultaneously [44]. Despite these doubts about electrical generation, the farmers at many of this project developer’s farms are planning on

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buying generators themselves to make use of the methane and reduce or eliminate their electricity bills, as they have heard can be done [53]. Excess electricity that is not used by the farm could theoretically be fed into the grid as is being proposed by Ecoinvest in Empacador Toledo’s hog farms in Guatemala. However, the structure of the Mexican market is such that it is complicated to sell excess electricity back to the grid. Generators can either earn 85 per cent of the state-run companies’ avoided cost or apply to be a selfsupplier and structure a Power Purchase Agreement (PPA) with a large consumer who must own part of the generation project. Under both schemes, the generator must pay high transmission tariffs. Also, the project owner is responsible for setting up electricity lines from the point of generation to the load [54]. Thus far, no hog farms have chosen to invest in a generator that can produce more electricity and feed it into the grid with the hope of earning money from the excess generation. Therefore, electrical generation only serves the farmer’s needs and earns carbon credits equal to the emissions that would have been burnt if the farm was served by energy from the national grid or used in a diesel generator on site. Regulatory hurdles Several upcoming regulations will make it more difficult to demonstrate additionality for biodigester projects in Mexico. Additionality is a prerequisite for CDM projects that attempts to ensure that all projects that receive credit would not have occurred in a business-as-usual scenario. If regulations or financial incentives exist that mandate or encourage the creation of a project, then it is more difficult to earn CDM revenues.4 The benefits of biodigesters and new law that requires their existence may jeopardize the additionality of these projects. Farmers were in some cases paying fines for the water they emitted as effluent because their remediation ponds did not eliminate 90 per cent of solids and qualify as acceptable according to the Secretary of the Environment and Natural Resources (1996) Standard [55]. Digesters improve the quality of the water, avoiding the payment of fines, which for some farms amounted to $1000 per year. The digester also negates the purchase of expensive equipment like solids separators to improve the quality of the water [53]. For these reasons, a 2007 regulation mandates that new hog farms install biodigesters. This law will probably limit future development for CER production to only those currently existing farms that do not have digesters and use lagoons to process waste [50]. The only way that new digesters could be additional with this regulation is if this regulation is routinely not followed for a few years and the PDD author can prove that the regulation is not enforced [56]. Hog farms often have strained relationships with neighbours not only because of the quality of water emitted from their operations, but also because of the odour of the farms. There is no formal odour ordinance, but resolution of these issues through the creation of biodigesters could be seen in the future as necessary to maintaining cordial relations with those surrounding the

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project. About ten years ago, the state of Colorado in the US passed a law requiring the state to regulate odours from hog farms [57]. An incentive for farmers to buy generators and use the methane produced from their hogs to produce electricity exists in the state of Puebla. This incentive supposedly pays half of the first costs of a generator, but there are doubts as to whether there will be enough money in the budget to cover all farmers that may be interested in this incentive. Socorro Romero Sanchez’s farmers have begun taking advantage of this law; the government purchased the first of three generators this company began using on its farms [50 and 53]. If the use of this incentive became widespread, then financial additionality would become difficult to prove. Future development of methane capture projects Given the aforementioned problems of methane digesters in Mexico, AgCert has not been able to earn the emission reductions it expected from these projects, which make up a large part of the company’s portfolio, and has defaulted in forward-sale CER contracts. As a result, the AgCert stock has dropped and in May of 2008, AES was in the process of buying AgCert [58]. Ecosecurities had similar problems when it guaranteed CER delivery and was left with a quarter fewer CERs than it predicted in November of 2007 [59]. However, by the third quarter of 2008, both of these companies’ stocks had begun to recover, and the problems initially encountered with the biodigesters began to be resolved and gas started to be produced in more significant quantities [44]. Hog farms were the first biodigesters to be developed in Mexico, but opportunities for methane capture exist within several other industries. AgCert was doing tests on slaughterhouses in September 2007 to see if blood that currently pools in artificial lagoons before being discharged into waterways is viscous enough to produce significant amounts of methane. While AgCert had dropped this effort by the end of 2008, Geosistemas had successfully constructed a slaughterhouse biodigester in the Mexican state of Veracruz. High density dairy farms and chicken coops are future areas being considered for methane capture [44]. As of March 2008, 14 landfill gas projects had been registered in Mexico [60]. All of these landfills plan on having small amounts of electrical generation like the first three projects in the country, which had capacities of 1–7MW [61]. The future potential within landfills in Mexico for methane capture is immense, but riddled with the challenges that were discussed previously in this chapter. Mexican methane capture conclusion Given the questionable impact of future regulation that could negate digester additionality, plus technical difficulties and communication barriers, the future of methane capture for hog farms in Mexico is uncertain. The presence of large hog farms with one owner has contributed to the success of these projects thus

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far, but Mexico’s portfolio of projects may be diversified significantly to include other types of CDM projects in the coming years as the challenges of these projects become better known. Or, the period of digester trial and error may be less onerous than expected and push development in new areas of industry such as slaughterhouses, dairy farms, coffee farms, palm oil plantations and landfills. Of these fledgling industries, landfills seem to be the most promising in terms of emission reductions and investor interest. However, experience from landfill gas capture projects throughout the region suggests that these projects may be as difficult to operate as hog farm gas capture, as a different set of technical, regulatory and social problems plague them.

Conclusion The experience of CDM project developers shows that no type of renewable energy project is immune to technical and technology problems. Even hydroelectric projects that have been implemented for hundreds of years are not without challenges, because of the remote nature of sites and the instability of the grid. Less familiar projects, such as methane capture and wind, which necessitate different equipment and conditions that locals are not familiar with, have created more difficulties. Developed countries are still refining the technologies for these systems and studying them as intermittent resources that will impact the grid dynamics. As familiarity with these renewable energy technologies and their maintenance increases in developed countries, increased expertise, training and knowledge should be transferred to Latin America.

Notes 1 Spinning reserves are extra generating capacity that is synchronized to the grid system and runs constantly in order to provide power backup and can be quickly utilized by increasing the amount of torque on the turbine’s rotor [62]. 2 Net metering allows electrical customers who generate their own electricity to sell it back to the electrical company. 3 A revised version of the content in this section was published as an article entitled ‘The Status and Future of Methane Destruction Projects in Mexico’ in Elsevier’s Renewable Energy in June of 2008. 4 Even though these regulations could make it more difficult to prove additionality, small-scale projects have the benefit of only having to demonstrate additionality in one of the several additionality categories, which include technological, financial, prevailing practice and other categories. Large projects must show additionality in all of these categories [46].

References 1

2

World Bank (2005) ‘Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005’, available from http://info.worldbank.org/etools/lacelectricity/ Samora, R. (2007) Interview with R. Samora, Head of the Rio Azul Plant for SARET, 28 September, San José, Costa Rica

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8 9 10 11 12 13

14 15 16

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19 20 21 22 23 24 25

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Bueso, C. (2007) Interview with C Bueso, Coronado Hydro Site Engineer for ENERGIZA, 13 September, San Esteban, Olancho, Honduras Union Fenosa International (2006) La Joya Hydroelectric Project Project Design Document, UNFCCC, 28 July Point Carbon (2008) ‘EU member states draw closer to common guidelines on “large” hydro’, Carbon Market News, 5 March Climate Focus (2008) ‘Trading secondary CERs from hydropower projects above 20MW’, Carbon Market Background Paper, January Coviello, M. F. (2007) Renewable Energy Sources in Latin America and the Caribbean: Two Years after Bonn, Economic Commission for Latin America and the Caribbean (ECLAC), GTZ, and One World, p20 Garizabal, C. (2007) Interview with C. Garizabal, Departamento de Planificación Empresas Publicas Medellín, 15 October, Medellín, Colombia Iberdrola (2007) La Ventosa Project Design Document, UNFCCC, 14 June Barco-Roda, J. (2007) Interview with J. Barco-Roda, NorWind Project Developer, 7 November, Lima, Peru Tasende, D. (2007) Interview with D. Tasende, Director of Renewables, UTE, 27 November, Montevideo, Uruguay National Renewable Energy Laboratory (2005) ‘Advancing clean energy use in Mexico’, Innovation for Our Energy Future (Fact Sheet), September Nuestromar Foundation (2006) ‘Se desmoronó el primer molino eólico fabricado en el país: 3 heridos’ (Comodoro Rivadavia, Chubut), newsbrief, 18 July, available at www.nuestromar.org/noticias/destacados072006_se_desmorono_el_primer_ molino_eolico_fabricado_en_el_pais_3_heri Vélez, O. L. (2007) Interview with O. L. Vélez, Empresas Públicas de Medellín, Subdirección Medio Ambiente, 18 October, Medellín, Colombia Gottfried, P. (2007) Interview with P. Gottfried, Project Developer for Fuerza Eólica, 27 August, Mexico City, Mexico Sandoval, A., Colorado, F. and Aramburo, J. (2007) Interviews with A. Sandoval, F. Colorado and J. Aramburo, Empresas Públicas de Medellín, 18 October, Medellín, Colombia Randall, G., Vilhauer, R. and Thompson, C. (2001) ‘Characterizing the effects of high wind penetration on a small isolated grid in Arctic Alaska’, NREL/CP-50030668, September, National Renewable Energy Laboratory, Golden, CO Feitosa, E. A. and Carla, A. (2006) ‘Brazilian Wind Energy Programme: Status and perspectives’, presentation at Fifth World Wind Energy Conference, New Delhi, 6–8 November Faundez, P. (2007) Interview with P. Faundez, Engineer for Ecoingenieros, 14 November, Santiago, Chile Gomez, J. C. (2007) Interview with J. C. Gomez, Plant Manager for Ecoelectric at Valdez Sugarmill, 28 October, El Milagro, Ecuador Puga, A. (2007) Interview with A. Puga, San Carlos Sugarmill Engineer, 5 November, Guayas, Ecuador Camara, A. (2007) Interview with A. Camara, Ecoinvest Carbon Consultant, 22 November, Buenos Aires, Argentina Celulosa Aruco y Constitución SA (2006) Nueva Aldea Biomass Power Plant Phase 2 Project Design Document, UNFCCC, 5 January Celulosa Aruco y Constitución SA (2006) Trupan Biomass Power Plant in Chile Project Design Document, UNFCCC, 24 May Forestal Russfin Limited (2006) Russfin Biomass CHP Plant Project Project Design Document, UNFCCC, 4 October

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26 Dias, J. (2007) Interview with J. Dias, Site Engineer for Polaris, 19 September, San Jacinto, Nicaragua 27 Zeller, R. (2007) Interview with R. Zeller, President of Alquimiatec, 24 October, Quito, Ecuador 28 Romero, A. (2007) Interview with A. Romero, Project Developer for Polaris’ San Jacinto Geothermal project, 18 September, Managua, Nicaragua 29 US Environmental Protection Agency (2006), ‘Methane: Greenhouse gas properties’, http://epa.gov/methane/scientific.html, 19 October 30 Energy Bulletin (2005) ‘“Stranded” natural gas to liquid fuel: Is it time?’, 15 January, available from www.energybulletin.net/4057.html 31 CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April 32 Uribe, C. (2007) Interview with C. Uribe, PDD Author of Curva de Rodas, 17 October, Medellín, Colombia 33 Márquez, F. (2007) Interview with F. Márquez, Estudios y Técnicas Especializadas en Ingeniera, 29 August, Mexico City, Mexico 34 Falzon, J. (1997) ‘Landfill gas: An Australian perspective’, in Proceedings from the Sixth International Landfill Symposium, 13–17 October, Cagliari, Italy 35 Intriago, A. (2007) Interview with A. Intriago, Site Manager of Las Iguanas, 2 November, Guayaquil, Ecuador 36 Ecosecurities, Durango (2007) EcoMethane Landfill Gas to Energy Project Project Design Document, UNFCCC, 10 November 37 Ecosecurities, Tultitlan (2007) EcoMethane Landfill Gas to Energy Project Project Design Document, UNFCCC, 10 August 38 Ecosecurities, Aguascalientes (2007) EcoMethane Landfill Gas to Energy Project Project Design Document, UNFCCC, 5 February 39 Ecosecurities, Ecatepec (2007) EcoMethane Landfill Gas to Energy Project Project Design Document, UNFCCC, 7 April 40 Mantilla Soto, L. P. (2007) Interview with L. P. Mantilla Soto, Project Developer for Fedepalma, 12 October, Medellín, Colombia 41 Carmona, C. (2007) Interview with C. Carmona, Departamento de Planificación Empresas Publicas Medellín, 15 October, Medellín, Colombia 42 Ueda, H. (2007) Interview with H. Ueda, Sumitomo Corporation, 27 August, Mexico City, Mexico 43 Ecosecurities (2007) Granjas Carroll Mexico (GCM) I Project Design Document, UNFCCC, 18 September, p10 44 Gavaldon, H. (2007) Interview with H. Gavaldon, AgCert Field Engineer, Mexico, 20 August, Veracruz, Mexico 45 CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April. 46 United Nations Development Programme (2006) ‘Simplified procedures for smallscale projects in CDM’, 1 August 47 AgCert, ‘Welcome to AgCert’, www.agcert.com/, accessed 3 November 2007 48 Castillo, I. (2007) Interview with I. Castillo, AgCert Engineer, 17 August, Mexico City, Mexico 49 US Environmental Protection Agency (2006) ‘Methane’, www.epa.gov/methane/ scientific.html, updated 19 October 50 Ochoa, V. (2007) Interview with V. Ochoa, General Manager of Granjas Carroll Mexico, 22 August, Perote, Mexico 51 Landa, J. (2007) Interview with J. Landa, Granjas Carroll Engineer and Construction Supervisor, 22 August, Perote, Mexico

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52 Landa Herrera, J. L. (2007) Interview with J. L. Landa Herrera, Director de Construcción, Medio Ambiente, y Mantenimiento of Granjas Carroll Mexico, 24 August, Perote, Mexico 53 Perez, J. (2007) Interview with J. Perez, Farm Veterinarian for Soccoro Romero Sanchez farms, 20 August, Teohuacan, Mexico 54 Secretaria de Energía de Mexico (1992) ‘Ley del Servicio Público de Energía Eléctrica’, in Articulo 3º, 23 December 55 Secretary of the Environment and Natural Resources of Mexico (1996) Standard NOM-002, p8 56 CDM Executive Board 36, ‘Methodological Tool: Tool for the demonstration and assessment of additionality’, Version 04, UNFCCC, p4 57 Legislative Council of Colorado (1998) Amendment 14: Regulation of Commercial Hog Facilities, State of Colorado 58 Point Carbon (2008) ‘U.S. power company AES proposes AgCert rescue package’, Carbon Market News, 13 May 59 Carbon Finance (2007) ‘EcoSecurities’ woes prompt CER rethink’, 20 November 60 CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, March 61 CDM UNFCCC, Project Search, 30 October 2007 available from http://cdm.unfccc.int/Projects/projsearch.html 62 California Independent System Operator (2006) ‘Settlements guide: Spinning reserve due ISO’, 1 January

3 Social Barriers

Social barriers to project development fall into a variety of categories. The most issues arise when there is resistance to a project by the country’s citizens. Sometimes these conflicts arise because locals want revenues or other benefits from the project owners in exchange for permission to develop. Other times, problems result when the project is not incorporated into the community in a way that is equitable and sustainable. These issues in general, as well as examples from two of the most controversial projects, landfill gas capture and hydro development, will be described. Other types of social problems that jeopardize Clean Development Mechanism (CDM) project success include stolen electricity, maintaining the security of sites, legal issues of acquiring land ownership, and difficulty facilitating productive relationships among foreign developers.

Stealing electricity A culture of not paying for electricity and hooking into the grid illegally has led to black losses of 42 per cent in the Dominican Republic, 31 per cent in Paraguay, 28 per cent in Nicaragua and 24 per cent in Ecuador [1]. Typical transmission and distribution losses due to natural causes average about 7–8 per cent. (This topic is covered in more detail in Chapter 18, ‘Ecuador’) These huge losses affect a project’s ability to exist. The distributor that pays the generator measures the kilowatt-hours produced on site and sent into the grid. Therefore, the distributor is responsible for paying the wholesale price for all of the electricity produced, even if one-quarter to one-half of it is stolen. Then distribution companies begin operating at a loss and eventually cannot pay generators for the electricity produced. Waiting months for late energy payments and having to file paperwork to eventually receive payment creates a disincentive for project developers. Machala Power of Ecuador even had to sue its distributor for an overdue energy payment [2]. Rate makers in Ecuador have attempted to recover some of these financial losses for distribution companies in the rate formula, but are hesitant to increase the price of electricity too much as it would prevent customers from paying and encourage more theft [3].

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In areas like Ecuador where the unnatural distribution losses are very high, neither distribution company representatives nor the police are adequately equipped to enter neighbourhoods and demand payments. The national army is required for this task. While one may assume that only poor neighborhoods steal electricity, the truth is that in Ecuador both rich, gated communities and poor slums that have sprung up on the outskirts of cities are stealing power in almost equal amounts [4]. Better metering devices, a culture of paying for electricity, and improved energy quality that locals can pay for are steps to help solve these problems. The Colombian government hired psychologists to help design a programme to reduce losses and has had success at lowering them from 23 per cent to 16 per cent from 1995 to 2005. One of the tactics used was to offer customers who pay their electricity bills for the first few months free professional soccer game tickets [2].

Security Renewable energy sites, as previously mentioned, tend to be located in remote areas. Often it is not safe for investors or engineers to travel and visit the site alone, and developers must hire bodyguards to accompany all visitors and station permanent guards on site. The province of Olancho, Honduras requires this type of vigilance for the sites of La Babilonia and El Coronado [5]. Río Azul landfill in Costa Rica, which uses methane for electrical generation, needs more than the one guard that watches the premises now that the site is temporarily not accepting trash and has fewer people in the grounds. However, technical problems have reduced the project’s revenue from electricity payments and Certified Emission Reductions (CERs), and the managers cannot afford extra security [6].

Legal challenges Sometimes developers must first establish who the rightful owner of the land is before they can buy or rent the land for generation activities. Often the people living on the land are not the legal owners and the company must then go through the process of compensating the owner and also providing relocation or local benefits for the residents [7 and 8]. This situation occurred during Fuerza Eólica’s attempt to develop a wind farm in Oaxaca, Mexico [8]. This process can be lengthy, cause project delays and add an extra expense not budgeted for in the project plan.

Other social issues Latin Americans can be either fiercely patriotic or sceptical of their own countrymen’s ability to do project development. These prejudices can influence the success of CDM projects as people often have to work with CDM consultants or engineers from both their own country and abroad. According to an

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Ecuadorian project developer, Colombians do not want to work with other Latin American engineers from other countries [4], and local Honduran developers prefer to work with foreign engineers and brokers [9]. At Valdez Sugarmill in Ecuador, where sugarcane residue was being used for electricity and generating CERs through the replacement of grid electricity, locals were at first resistant to working with Brazilians. The Brazilians made a recommendation for putting in additional structural support for the new power house. Valdez’ plant operators did not follow this suggestion and after five days of downpours during the rainy season, the foundation was unstable. Then, the advice was followed and stabilization beams were installed [10].

Community resistance Community acceptance of a project is paramount to the project’s success since locals may bar project development. In Peru, 80 per cent of the community must be in agreement with the project in order for the developer to get the land permit [11]. Since the local acceptance of a project in the form of a stakeholder meeting is a required part of the CDM process, dissatisfied citizens or communities unwilling to participate can prevent CER issuance. In Guatemala, Río Blanco could not even gain the national CDM approval because it was so controversial among locals [12]. Within the Latin American countries, high levels of corruption lead to difficulty siting projects. Communities often refuse to allow the development of projects until terms which may include political concessions, construction of soccer fields, health centres, schools and water treatment plants are completed. In Oaxaca, Mexico, Benito Juarez hydroelectric has been stalled because locals associate private business with the government, against which they are striking in order to influence decisions made by the Oaxacan governor [7]. Also, communities may demand free or reduced-cost electricity, or step-down transformers to access the electricity from the project. Local officials may require bribes before construction can start. Both La Babilonia and El Coronado, small hydro projects looking for CDM revenues in Honduras, suffered delays due to attempts to block development in exchange for bribes [13]. Sometimes these bribe attempts happen because community members think power companies are rich and can afford to make payouts. Other times community members make demands because they think that they will suffer from the operation of the hydro project in terms of water or agricultural land lost. In the case of El Coronado, only one part of the community benefited from the project development by receiving step-down transformers and access to electricity. The part of the community that did not benefit, because it was not in close proximity to the project site, was responsible for making demands to the power company [13]. These types of social barriers could be even more prevalent in the future if the programmatic CDM methodology, which was recently accepted in July of 2007 and is described in Chapter 8, ‘Small-Scale Barriers’, allows future rural

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energy projects to be viable. If some people do not receive the electricity from these systems or are charged more for it, disagreement between village members could occur. Also, the person who maintains the system must be chosen carefully so as not to disrupt the hierarchy of the village, but also to ensure that a capable individual is in charge of the system. Opportunities for corruption are prevalent if the CDM revenues are not managed in a responsible way. In order to ensure that these pitfalls are not realized, locals must be trained in non-technical skills of administration and rule-making in order to successfully run a mini-utility [9]. Or, parts could be stolen if the system is not incorporated well into the community’s existing hierarchy and structure [14]. Sandia National Laboratories has implemented projects that incorporate training and safeguarding measures in order to avoid these pitfalls [15 and 16].

Project-specific conflicts Hydro Hydro projects can be particularly controversial because they can displace communities as large areas of land are flooded and prevent communities from having access to the water for current and future needs. These problems are of such a magnitude that some hydro projects face opposition from groups that are not just local communities. Large hydro applications that were constructed in the 1970s and 1980s like Chixoy in Guatemala, Bayeno in Panama and Río Cajon in Honduras had no environmental impact plan, and displaced people. Those who resisted Chixoy were even killed, and were made martyrs in a Public Broadcasting Service documentary about dam construction [17]. This violent history attracted the attention of international and local environmental groups that now block the development of both small and large hydro applications on the grounds that these projects destroy natural river ecosystems and local cultures. Communities can be impacted greatly by having their water regime changed. Hydro plants limit some illicit harvesting from small coffee and bean plantations and prevent locals from harvesting wood as the upstream land is usually purchased in order to provide watershed protection [5]. Sometimes tracts of land that were owned or occupied by farmers for agriculture or dwellings must be sold to project owners to provide watershed protection and a buffer zone for upstream flooding.1 Because of this land seizure, locals are resentful of the construction and see the developers as unwanted foreign entities in the community. Remote communities off the grid become resentful of the project as it often does not provide them with electricity. Acción Ecológica of Ecuador contends that companies will apply for the rights to water for hydroelectric generation and steal these rights from locals. According to the Water Law of 1972, the rights to water belong to the state in order to reduce conflicts between landowners over irrigation rights. Private citizens and companies have to petition for the right to the water. If the

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community has not formally petitioned and earned their water right, then the company can earn it and leave the community with a dearth of water [18]. NGOs tend to have success barring hydro projects in countries where the community of environmental groups is active and focused on the hydro industry. In countries like Guatemala, NGOs have rallied against hydro development. There, this clean form of electricity is seen as a disturbance to locals and equated to mining as both industries involve foreign developers and disrupt local communities and environments. Therefore, there is a strong movement against both hydro and extractive industry development that is led by the group Madre Selva in Guatemala City. This NGO has drawn the attention of other NGOs in Europe to support its causes [19]. This opposition has grown so strong that now NGOs will sometimes oppose a project simply based on its type as being hydro even if there is nothing in particular about the project that is environmentally or socially damaging. Peru, on the other hand, has had little resistance to new hydro projects because environmentalists have targeted their efforts on the mining development sweeping the country [20]. Guatemalan environmental groups have lumped together hydro and mining companies because the issue of privatization and increased trade liberalization, with adoption of policies such as the Central American Free Trade Agreement, is very controversial. The debate over privatization has tended to polarize people. Those who support private investment tend to think it brings efficiency and lower prices to the consumers while those who support more governmental control think that privatization only benefits the wealthy and leaves the poor without money to pay for newly privatized services, such as water and electricity, that are basic needs. This debate has caused some to demonize hydro facilities and all private development because of its connection with foreign private investment [19]. More details about the electrical sector privatization experiment and its results in each country are described in the country-specific chapters. Developers claim that communities are extorting them to get their way. And often developers would rather appease this extortion by paying a bribe rather than have their project delayed and revenues forgone. Developers claim that they often have to build schools and bridges, provide free electricity and satisfy other bribes in order to develop their projects. International environmental groups, they contend, are only involved in the hydro development because they want to stall the project, demand money for the community, and benefit from part of these proceeds [21]. The location of many excellent hydro resources in protected parks or indigenous territory provides environmentalists and human rights groups with compelling legal arguments against development. In Ecuador, the Environmental Impact Statement for Hidro Victoria was complicated and took longer than expected because part of the tubing for this run-of-river project passes through a buffer zone on the outside of a national park. Developers needed a presidential decree that said that the project was necessary for the stability of Ecuador’s electrical grid in order to gain access to this buffer zone [22].

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Landfills Landfills and dumps can create special social problems as people who once scavenged the garbage are suddenly left without jobs. Usually, landfill gas capture coincides with the technical closure of the plant. So, the scavengers would not have a source of income anyway as the site is covered with dirt and a plastic liner regardless of whether the project was retrofitted for landfill gas capture and made eligible for CDM revenues. However, scavengers are apt to blame the entity developing the project or technical closure for their lack of a livelihood. Sometimes these people are legally contracted by the site operator to help recycle garbage. Most often, though, scavengers are self-employed by gathering material for resale or recycling and live close to the site. In Managua, Nicaragua, hundreds of scavengers live around La Chureca dump. Locals living on the site were offered new homes in different parts of the country after Hurricane Mitch ravaged the country in 1998, but many of these scavengers chose to sell the house and return to the job they knew at La Chureca. There are two exploratory wells on the site monitoring the possibility of gas capture, but trying to develop the site would inevitably lead to conflict [23]. Managers of Río Azul landfill in Costa Rica have had locals living around the site enter illegally at night to cut and steal the plastic tubing that carries the methane from the trash to the power house. Plant engineers hypothesize that some of this theft has resulted because the people who were employed to sort the trash have been out of work since a temporary technical closure of the plant began during the summer of 2007 [6]. In Colombia, the social experiences with developing municipally owned landfills have been mixed. MGM International tried to develop sites in Barranquilla, but found that many scavengers lived on the site. Because the local environmental authority mandated that the company provide alternative sources of income for these people, MGM proposed that a percentage of the CERs go to a recycling centre where the people would work since they are already masterful sorters. However, the project is currently at a standstill [24]. Interaseo of Colombia, on the other hand, has had no problem developing its privately owned landfills for methane capture. This firm refuses to pay scavengers or make other concessions for the community and uses Decree 1713 of 2002, which prohibits scavenging, as its legal backing [25].

Possible remedies Community resistance to projects in many cases results from a lack of socialization whereby the project, its goals of producing electricity and, in the case of the CDM, producing emission reductions and sustainable development, are not clearly articulated to community members. The project developers that had the most success with hydro projects in general were those that attempted to have a direct and frequent dialogue with the community [22]. Making sure that communication and verbal agreements with communities are clear may involve

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hiring translators and/or spending enough time with the community to be considered trustworthy. Having community members sign documents that they cannot read can lead to confusion on the part of both parties about what is expected and delivered. It is also important to note here that not all hydro projects experience resistance from the community. In cases where project developers experienced community opposition, it is essential to investigate which procedure the project developer followed for implementation of the project and compare it to case study examples documented by entities like Sandia National Laboratories that show successful project implementation [26]. Some project developers have proposed creating a matrix that shows the required remunerations for development to ensure an equitable negotiation for both the company and locals [27]. Standardizing the benefits that the community earns would help prevent communities and companies from being taken advantage of in the negotiation process. However, creating this matrix is complicated since each project has singularities that need to be considered individually. There is a need for clear education and frequent communication about project effects on communities to improve the tense relationship between locals and developers. These solutions for community involvement could also be applied to landfill gas capture projects to mitigate the social concerns of scavengers who will be left without jobs. Companies in Costa Rica have begun addressing these concerns by encouraging companies to comply with the International Standards Organization’s 14,000 certification series for environmental responsibility [27]. Panama has taken a different approach by proposing a law that requires 20–30 per cent of the CERs generated to go to community development [28]. Colombia offers a 35 per cent income tax deduction on the project if 50 per cent of the CERs are reinvested in community development [29]. Hidro Victoria of Ecuador has solved the social problem by having the community have an equity stake in the project. The community will own 25 per cent of project. The Canje de Deuda of Spain is paying for this equity stake and cancelling some of Ecuador’s debt to Spain in exchange for having the first rights to buying the CERs derived from the projects. The total equity stake comes to $2.2 million at the start of the project. The community is very satisfied with this agreement and has been assured that the water from the run-of-river application will be returned to the river, on which they rely, before it reaches the community. The active environmental community in Ecuador has not protested against this particular project [22]. Empresas Varias of Medellín, Colombia, has resolved the landfill social problems for the Curva de Rodas site they hope to develop by asking a local university to partner with them. Empresas Varias, who operated the landfill until 2003 and was responsible for the technical closure, has given money many times to try to help compensate people for living near a landfill, but the money sometimes filtered through the municipal government and did not actually benefit the locals. Therefore, Empresas Varias was sceptical that it

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would be able to undertake a transformation of the site that required the community’s approval. Empreas Varias decided to have the Antioquia University help them with the CDM project cycle and community relations because this school has a reputation of being of and for the people and could use the CDM revenues as a social investment since it has many students from the lowest social classes (1 and 2), which Colombia categorizes to structure cross incentives and pricing differences for utility payments. This selection has helped give credibility to mediators, and university students and faculty from an interdisciplinary committee of anthropologists, sociologists and engineers have had successful experiences talking with the community. All of the money the university earns from this project will be invested in research projects of this public education facility. Using a carbon broker like MGM International, which has a large presence and office in Medellín, may have lent more expertise to the project, but, in general, locals are suspicious of companies. The Antioquia interdisciplinary group has specified in a contract that 5 per cent of the CER revenues that will be generated will be reinvested back into the community for construction of new roofs, a soccer field and a bus stop. While these examples of resolving social problems can serve to guide future project developers, they will not be able to address all future community relations problems. The individual nature of each project will necessitate careful consideration of the appropriate steps to take to avoid conflict.

Conclusion A variety of social problems ranging through stolen electricity, site security, land deeds and community resistance jeopardize CDM project success. In particular, hydro and landfill projects tend to raise the most social issues. As a result of recent societal integration problems, a variety of creative solutions to these problems have been pioneered for individual projects.

Note 1 These communities can also be educated to protect these watershed zones as is being done by Fundación Defensores de la Naturaleza in Guatemala [30].

References 1 2 3 4

World Bank (2005) ‘Benchmarking data of the Electricity Distribution Sector in Latin America and the Caribbean 1995–2005’, World Bank, Washington, DC Castillo, D. (2007) Interview with D. Castillo, President of ERD Consultants, 18 November, Guayaquil, Ecuador Carrión, R. (2007) Interview with R. Carrión, CONELEC Administrator in Planning, 26 October, Quito, Ecuador Zeller, R. (2007) Interview with R. Zeller, President of Alquimiatec, 24 October, Quito, Ecuador

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5 6 7 8 9

10 11 12

13 14 15 16 17 18 19 20

21 22 23 24 25 26 27

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Bueso, C. (2007) Interview with C. Bueso, Coronado Hydro Site Engineer for ENERGIZA, 13 September, San Esteban, Olancho, Honduras Samora, R. (2007) Interview with R. Samora, Head of the Rio Azul Plant for SARET, 28 September, San José, Costa Rica Mekler, J. (2007) Interview with J Mekler, Project Developer for COMEXHIDRO, 15 August, Mexico City, Mexico Gottfried, P. (2007) Interview with P. Gottfried, Project Manager for Fuerza Eólica of Mexico, 17 August, Mexico City, Mexico Ley, D. (2007) Interview with D. Ley, United Nations Consultant for Economic Commission for Latin America and the Caribbean, 16 August, Mexico City, Mexico Gomez, J. C. (2007) Interview with J. C. Gomez, Plant Manager for Ecoelectric at Valdez Sugarmill, 28 October, El Milagro, Ecuador Harmon, G. C. (2007) Interview with G. C. Harmon, Santa Rosa Project Developer, 7 November, Lima, Peru Castaneda, R. (2007) Interview with R. Castaneda, Designated National Authority of Guatemala, Ministerio del Medio Ambiente y Recursos Naturales, 3 September, Guatemala City, Guatemala Mayin, C. A. M. (2007) Interview with C. A. M. Mayin, Presidente Patronato, 13 September, San Esteban, Olancho, Honduras Nathan Associates (2006) ‘Integrity in Bangledesh’s rural electrification’, prepared for USAID, April, p5 Ley, D. (2006) ‘Solar power meets rural energy needs in Guatemala’, Sandia National Laboratories Ley, D. (2006) ‘Using renewable energy to promote ecotourism’, Sandia National Laboratories Johnson, B. R. (2007) ‘Chixoy Dam legacy issues study’, available from http://shr.aaas.org/guatemala/chixoy/chixoy.htm Reyes, D. (2007) Interview with D. Reyes, Acción Ecológica Director of Hydro Project, 26 October, Quito, Ecuador Conde, O. (2007) Interview with O. Conde, Representative from Madre Selva, 6 September, Guatemala City, Guatemala Melindo, M., Armas, H. and Reyes, J. O. (2007) Interview with M. Melindo, H. Armas and J. O. Reyes, Ministerio de Energía y Minas, Unidad de Electrificación, 6 November, Lima, Peru Riviera, A. (2007) Interview with A. Riviera, CEO and President of Groupo Riviera, 7 September, Guatemala City, Guatemala Muñoz, F. (2007) Interview with F. Muñoz, Hidrovictoria project developer, 28 October, Quito, Ecuador Cinteno, M. (2007) Interview with M. Cinteno, La Chureca Site Manager for the City of Managua, 19 September, Managua, Nicaragua Gonzalez, M. (2007) Interview with M. Gonzalez, Carbon Consultant for MGM International, 19 October, Medellin, Colombia Gonzalez, J. (2007) Interview with J. Gonzalez, Project Developer for Interaseo, 16 October, Medellin, Colombia Smith, B. G. and Ley, D. (2009) ‘Sustainable tourism and clean water project for two Guatemalan communities: A case study’, Desalination (in press) Alvarado, M. (2007) Interview with M. Alvarado, President of Asociación Costarricense de Productores de Energía (ACOPE), 25 September, San José, Costa Rica

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28 Días, F. (2007) Interview with F. Días, Comisión de Política Energética, Ministerio de Economía y Finanzas, 5 October, Panama City, Panama 29 Fernandez, O. (2007) Interview with O. Fernandez, Departamento de Generación de Empresas Publicas de Medellín, 18 October, Medellín, Colombia 30 Ley, D. (2008) Interview with D. Ley, Former United Nations ECLAC Consultant, 30 April

4 Financial Barriers

Financial barriers stem from a variety of areas that include general renewable energy project problems, country instability due to a turbulent political and economic climate, institutional rigidity and low Certified Emission Reduction (CER) prices in general and especially as offered by international development banks, and a host of Clean Development Mechanism (CDM)-specific problems.

General renewable energy project problems Renewable energy projects are unique in their demands on project financing because of the feasibility studies necessary, the long payback of the projects due to the high initial project costs, and the perception of high risk for some technologies. Expensive feasibility studies must be undertaken to choose the proper site for development. These studies consist of a resource assessment and initial environmental impact reports. This stage of the project development is considered pre-investment and may or may not be repaid, depending on whether or not the project is developed. It is usually taken on by the company interested in development with the hope that capital invested during this time will be recovered through the operation of the plant. However, in countries with significant political risk, this investment is lacking and prevents projects from even being considered. Also, project developers can struggle to secure financing since renewable energy projects tend to have a long payback time before the high capital costs will be recovered. (See Table 4.1 for an overview of the levelized and investment costs of renewable energy versus the levelized cost of conventional energy. Generation costs include the initial cost of investment and fuel whereas the investment costs only take into account the first costs of the system.) Typically, an acceptable internal rate of return on a project is 25 per cent; however, investment funds will occasionally not accept lower than a 30 per cent return on investment [1]. This translates into approximately a four to fiveyear payback. Hydro projects will sometimes have up to a ten-year payback.

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Table 4.1 Investment and average generation costs for various energy technologies Technology Natural gas combined cycle Coal Nuclear Wind Biomass Geothermal Small hydro Photovoltaic

Average generation costs (US ¢/kWh)

Investment costs (US $/Watt)

3.5 4.8 4.8 5.5 6.5 6.5 7.5 55

0.6 1.2 1.8 1.4 2 1.5 1 7

Source: Altomonte, H., Coviello, M. and Lutz, W. F. (2003) ‘Energías renovables y eficiencia energética en America Latina y el Caribe: Restricciones y perspectivas’, ECLAC – Division of Natural Resources and Infrastructure, October

The reason these projects are still pursued is that they can operate for over 100 years and recover the costs of investment over a long period of time. Because of these special circumstances, renewable energy projects will often need a longterm Power Purchase Agreement (PPA) of up to 20 years to get financing. This agreement will ensure to the bank that the project owners have off-takers that will purchase the electricity for a set price [2]. Usually power producers are free to make these PPAs with large consumers, but some countries do not permit it. There is currently no wholesale electricity market in Nicaragua. All private generators must have PPAs with the former state-run, but now privatized national utility, Empresa Nacional de Electricidad [3]. Honduras is much the same with no wholesale market and only the state-run Empresa Nacional de Energía Eléctrica (ENEE) as the sale option for independent power producers. Prices that ENEE offers are based on node prices or competitive bids if generation is solicited [4]. Panama has a restriction on PPA length of previously four and now ten years [5]. The necessity to use a PPA is particularly key for countries like Uruguay that have low spot market prices because of the large hydro portion operated by the state utility on the grid. Power producers can command a higher PPA price than the spot market if they guarantee availability of the power. However, this promise is often impossible for intermittent renewables and can lead to penalties if the power expected is not produced. Power producers in Mexico are free to arrange PPAs, but they must be structured so that the off-taker has at least a 1 per cent share in the power producers’ operations. Also, the power producer must pay from 15 to 30 per cent of the price negotiated in the PPA to the state utility as a transmission tariff [6]. Small projects are at a disadvantage in this process since conducting a feasibility study, the bank loan request process, and permit requirements all must be completed for both small and large projects, and these stages take a similar amount of time for both small and large projects. The revenue and CERs that

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can be generated are proportionally less. These barriers and specific provisions that countries have made to overcome them are discussed in more detail in Chapter 8, ‘Small-Scale Barriers’.

Political/financial instability The stability of a country’s economy and politics has a large bearing on whether or not foreign investors will be enticed to invest in the country. Often the reputation a country may have from past political conflict or economic strife is not merited. However, the country’s misfortune often creates such a bad reputation that it will suffer from a lack of investment even after it has recovered. Colombia is a prime example of a country with tremendous CDM project potential but a violent past because of drug-related trade, and the perception of an unstable economy may be limiting project development. In reality, Colombia’s economy is and has been strong, with an average growth rate of 4.5 per cent annually for the last 25 years. This sustained growth is unprecedented in Latin America and is due to its diverse economy, liberalized trade, high investment rates, low government spending and conservative debt management. During this time of growth, Colombia did experience one year, 1999–2000, when the economy declined 4.5 per cent and unemployment grew to 20 per cent. Since 2002, President Alvaro Uribe’s policies have helped the economy begin to recover and improved the country’s image [7]. Uribe’s leadership helps Colombia rank ahead of Argentina, Bolivia and Ecuador in its short-term political risk. Since President Uribe’s second term is nearing its end and no clear successor is in sight, however, Colombia has a less favourable long-term political rating [8]. This long-term negative political rating and its well-publicized violent past due to the drug trade could be preventing Colombia from realizing its potential with regard to CDM projects given its relatively industrialized nature and sustained economic growth [9]. As of February 2008, only ten projects had been registered [10]. Nicaragua is another country that struggles from a lack of interested foreign investors and as a result hosts only three CDM projects. The country’s war-torn past, and political instability which often consists of corrupt administrations and a lack of continuity from one government to the next, have led to the current situation. Nicaragua is a prime example of a country that needs the state or an international bank to develop some CDM projects in order to promote private investment. However, Nicaragua cannot always get loans from these banks since it periodically maximizes its limits on debt [11].1 Argentina is in desperate need of renewable energy capacity additions, but hosts only three renewable energy CDM projects because of the economic crisis of 2001–2002 that left the peso devalued by 30 per cent. The once booming and open economy suddenly became more closed as the government began to regulate the price of electricity to protect customers, and foreign investors began to withdraw from making investments.

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Ecuador had a similar economic collapse in 1998–2000. Inflation rose from 43 per cent to 91 per cent from 1998 to 2000 while the Sucre was devalued 200 per cent in 1999. In 1999, unemployment doubled to 16 per cent and the real GDP shrank 8 per cent. Debt rose from 64 per cent in 1997 to 118 per cent in 1999 [12]. This situation has caused the country to have minimal foreign investment even though there are aggressive feed-in tariffs that offer high, fixed prices for renewable generation. Even project developers that are taking advantage of these tariffs, like the owners of Valdez sugarmill, do not trust that the tariffs will always be available and have contingency plans for sustaining profitable operations [13]. As a solution to the problem of attracting foreign investment, large developers like AES could creatively use a local company as a shield by investing the capital necessary, but not associating the larger company’s name with the project. Then, if the project fails, it is not the foreign company whose reputation is marred. In this situation, however, the foreign firm would still run the risk of losing its financial investment in the project. This arrangement requires a huge amount of trust on the part of the developer and a close relationship between the local and foreign companies [1].

Low carbon prices The overwhelming majority of project developers in the author’s interviews said that the CDM, in and of itself, was not enough to stimulate project development. In other words, the project would have to be financially viable without CDM revenues to make sense. CDM revenues may add 1–2¢/kWh (depending on the grid emission factor and other details). Carbon brokers like 3C claim that the project developers they work with earn an internal rate of return (IRR)2 that is on average 1.5 per cent higher than without CDM revenues [14]. This amount of money certainly entices project developers that were going to develop a project anyway to attempt to earn CDM revenues. But it is not, in the opinion of most developers, enough to have the CDM as the driving force behind the projects [15]. Carbon brokers will claim that CDM revenues make it easier to gain a loan for a project [14], but the risk involved in the registration of a project and verification of its emission reductions means that these revenues are uncertain. Banks’ distrust and unfamiliarity with the Mechanism also hinder the process of having a project developed solely for the prospect of emission reductions since most renewable energy projects have high initial investment costs and require loans. A United Nations Framework Convention on Climate Change (UNFCCC) study on the impact of CERs on the IRR on renewable energy projects shows how this IRR increases over time and with increasing CER prices. Table 4.2 below shows this analysis. These estimates show more optimistic impacts of CERs on IRRs than the 1.5 per cent rate impact that 3C predicts. Of course, the exact impact the CERs will have depends on the number generated, the price per CER and the number of years that the CERs are issued [16].

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Table 4.2 Incremental impact of the CER price on the internal rate of return of the project (percentage per purchase period) CER Price in USD

5 10 15 20

5 years (Numbers in %)




0.5 1.0 1.6 2.2

0.6 1.4 2.1 2.9

0.8 1.7 2.7 3.6

0.6 1.4 2.1 2.9

21 years Impact per (Numbers unit in %) in USD 1.2 2.3 3.3 4.5

3.16/MWh 6.33/MWh 9.49/MWh 12.65/MWh

Source: UNFCCC (2007) ‘Investment and financial flows to address climate change’, Background Paper, available at http://unfccc.int/cooperation_and_support/financial_mechanism/items/4053.php

Often, developers mentioned that they did not trust that they could earn the CDM revenues because of the complexity of the issuance process but were trying for them anyway. Other developers interviewed were somewhat unfamiliar with the Mechanism altogether but a carbon broker had approached them and offered to do the paperwork in exchange for a portion of the reductions generated.3 These admissions in interviews mean that many renewable energy projects are not additional and undermine the purpose of the CDM to reduce global greenhouse gas emissions. As reduction targets become more stringent and carbon prices increase, it is likely that the CDM will have more of an impact on project development. The breaking point at which carbon prices will be high enough to promote additional development is not an absolute. This price will be different as each project developer’s standards for risk tolerance and IRR requirements vary.

Multilateral development banks Multilateral development banks such as the World Bank, the International Bank for Reconstruction and Development (IBRD), Inter-American Development Bank (IDB), Central American Bank for Economic Integration (CABEI), the International Development Bank, and the Corporación Andina de Fomento (CAF) will often complete the CDM paperwork for no upfront costs. Of these multilateral banks, the World Bank dominates CDM project development. Its Carbon Finance Unit is divided into several project-specific funds. In these funds, developers pool their investments to support a certain type of CDM project. The number of funds worldwide, of the World Bank and other funds, has grown from three in 2000 with capital of €351 million to 54 in 2007 with total funds of €6250 million in early 2007 [16]. The World Bank funds include the Prototype Carbon, BioCarbon and Community Development Carbon Funds. It also hosts the Carbon Fund for the Europe Investment Bank, the Netherlands Europe Carbon Facility for the International Bank for Reconstruction and Development and Italian, Spanish, Danish and European funds [17]. Certain of these funds only provide loans only for municipalities and other public entities in the host country. For the Prototype Carbon Fund, countries

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must be members of the Host Country Committee in order to submit projects [18]. A separate division of the World Bank called the International Finance Corporation can provide loans for private investors. Private investors can, however, be involved in funds for public loans by being investors in the fund or by submitting their projects for carbon credits through these funds [19]. The existence of these banks helped promote early CDM project development. These banks were involved in offering loans for CDM-like projects that promoted sustainable development prior to the Marrakesh Accords. They were accustomed to structuring loans that provided up to 80 per cent of the project’s first costs. Therefore, when CDM came about as a way to boost the revenues for renewable energy projects, these banks were already familiar with these projects, which pioneered the CDM project cycle. In this way, they were able to offer their services before many of the carbon consultants existed. This position of dominance in the market allowed CAF and the World Bank to pay low prices for CERs and structure deals where the bulk of the carbon credits were taken in exchange for negotiating the paperwork and/or offering the project loan. These banks also offered low carbon prices because they were operating during the early stages of the carbon markets when the price of carbon was uncertain. They still offer prices that are below the prices offered by carbon brokers and often enforce large penalties for not issuing the CERs promised [20]. Now that there is competition for CDM services, these banks dominate less of the market share. However, many project developers continue to work with these multilateral banks for a variety of reasons. In some countries, banks do not understand the value of CERs and will not consider them for accounting purposes [21]. The financial additionality criterion requires that the project be unprofitable without CERs, and inclusion of these CERs in the pro forma is often essential. Multilateral development banks that are familiar with the value of CERs can offer loans to these projects that developers could not otherwise get. Other developers choose these banks because they are bound to working with approved entities like them by the strict rules of the municipality or state that will own the generation facility [20]. The Public Utility of Medellín (Empresas Públicas de Medellín (EPM)) began pursuing CDM projects in 2001 and was discouraged by the low CER price of $1 they were offered by CAF for their La Sierra fuel switching project. Furthermore, CAF was going to take 43 per cent of the CERs generated as payment for the CDM project cycle. EPM later chose to sell CERs to the World Bank for the Jepirachí wind farm. The CER price and terms offered were not favourable, but were the best option that EPM could secure at the time, which was early in the life of CDM projects. Also, EPM chose the World Bank because it was familiar with implementing a project on indigenous territory, which was necessary for Jepirachí [22]. In the World Bank contract with EPM, EPM received $4.5 per CER, and had to give $1 of each CER to community development. EPM constructed a desalinization plant for locals, but was not put in charge of operating it. The operation of the plant has been unsuccessful, and EPM is being held responsible

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by the project’s Designated Operational Entity (DOE) for the failure because of the way the Emission Reduction Purchase Agreement (ERPA) was structured. The failure of the desalination plant has put the issuance of CERs for the wind farm at risk. Therefore, EPM negotiated a new contract with the World Bank in 2007 that absolves EPM from the responsibility for the desalinization plant.4 Also, the new contract gives a slightly higher CER price of $4.72 and issues the CERs to EPM sooner. However, the renegotiated contract requires EPM to put even more of each CER into community development. In the new contract, $1.22 of each CER must be reinvested into the community [23]. Beyond the unfavourable prices and terms offered, EPM found the World Bank to be inflexible in its negotiations. Also, decisions took a long time since both the World Bank and EPM are large, hierarchical institutions that require many people to sign documents and approve changes and decisions. The delay in EPM was often due to the unfamiliarity of supervisors with the CDM and the time it took to educate them about the opportunity to earn CERs. Because of the rigid structure of the World Bank and low prices offered, EPM looked for a more competitive offering and has chosen to work with MGM International on its most recent project, the La Vuelta/Herradura hydro facilities. EPM negotiated a contract with MGM that pays $11.65 per CER, none of which must be dedicated to community development [24]. Now that project owners have competition for their CERs, they can choose a number of consultants to complete the CDM project cycle; they have multiple buyers in Europe and Japan for CERs, and are able to earn more competitive prices for CERs that are closer to the second European Trading Scheme (ETS) price of ~ €20 (as of February 2008). Again, these banks are utilizing their strong financial position to take advantage of a new market niche, post-2012 CER prices. Since the Kyoto Protocol ends in 2012, these banks are only offering about $4 for CERs produced during this time [25]. Most project developers are waiting to sell their CERs at the time of generation to see if they can achieve a better price, but those projects that need upfront capital from CERs are forced to accept these low prices. There is an interesting future possibility for CDM project funding through the World Bank’s proposed Climate Investment Funds (CIFs), which would provide additional grants and financing for developing countries that address climate change challenges. CIFs would be additional to existing Official Development Assistance (ODA) and make strides towards reducing greenhouse gases in the private sector and through policy reform. All of the CIFs will be host country-led and created as an equal partnership between the implementing entity and the host country. Two of these funds that have been formed are the Clean Technology Fund, which focuses on the role of new technologies as climate change solutions, and the Strategic Climate Fund, which would provide financing for new approaches to address climate change. The Pilot Program for Climate Resilience will be the first project under the Strategic Climate Fund and will explore ways to promote adaptation to climate change and be tied to the Adaptation Fund of the Kyoto Protocol [26]. Since no

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projects have yet been developed through the CIFs, their potential for CDM projects is not yet known.

Direct sale to Annex I country Other than working with a carbon broker or international bank, or attempting to negotiate the project cycle and sale of CERs itself, a project developer now also has the option of working directly with an Annex I country to transfer or sell the CERs. These countries will often offer special terms to project owners in exchange for the first right to buy CERs or a set CER price. Sometimes this exchange will offer the project developer special incentives. For example, Hidro Victoria in Ecuador worked with the Spanish Canje de Deuda by offering this entity the first right to buy the CERs generated from the project at the market price. In exchange for this first right to buy, Spain is paying $2.2 million for the community close to the hydroelectric plant to own 25 per cent of it and cancelling this amount of debt that Ecuador owes Spain [27]. Uruguay has also structured a deal with Spain where a portion of Uruguay’s debt is cancelled in exchange for Spain having the first right to buy the CERs from a 10MW wind farm that the Spanish utility Gamesa is developing [28]. The Netherlands aggressively moved towards using CERs to fulfil its Kyoto reduction targets by creating the Certified Emission Reduction Unit Procurement Tender (CERUPT) in 2001 with a $1.3 billion budget to facilitate the purchase of CERs from developing countries. CERUPT has stimulated many projects and offered a buyer for even more, but with the current maximum price for CERs set at €5.5, it may not be able to offer competitive prices in the second ETS.

CDM-specific problems Some financial problems of the CDM process have come to light after several years of experience with these projects. These problems relate to penalties for not producing a certain number of CERs, questions of legal authority, language barriers, price information and refinance schemes. As mentioned in the previous section, there are occasionally clauses in the ERPA that prevent CERs from being sold. In the case of EPM, the fulfilment of community development was essential for project validation. More commonly, these contracts contain penalties for not producing a certain number of CERs just as utilities will often fine generators that cannot produce the promised generation. These penalties are meant to protect the bank from having too few CERs to supply to its buyers. Projects with uncertain technical aspects should not have ERPAs that obligate them to produce a specified number of CERs [29]. The undersupply of CERs has caused some banks and brokers to have a steep learning curve. Ecosecurities’ stock plummeted by 50 per cent in the last

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quarter of 2007 because the firm had fewer CERs than expected to supply buyers at the end of the first ETS [30]. Now, banks, brokers and consultancies are buying more CERs and from a wider variety of projects to cover this uncertainty. Within ERPAs, entities that are most often from different nations must decide which country’s laws to abide by for issues related to the contract. This simple choice can cause controversy as some project participants think they are being discriminated against if their country is not chosen. Also, which language is used in the ERPA and in discussions becomes problematic. In Colombia, all lawyers are legally bound to work in Spanish for signed documents. Rules such as this complicate and add expense to projects as multiple forms of documents in more than one language must be prepared. Some of the CDM terms are also unfamiliar to project participants even if the documents are in their native language. Therefore, these terms must be defined and explained. The prices for CDM projects can result in complication as well. The price of a CER varies widely as explained in the background section of Chapter 1. This variability is due to whether the CER is forward sold, whether it is sold in a secondary market or through a broker, whether it is for pre- or post-2012 compliance, the type of project that it is generated from, the political risk of the country where it is from and a host of other factors. As project developers try to understand how much they should expect for the CERs, they are sometimes led astray. Project developers at EPM explain how the Andean Center for Environmental Economics (CAEMA) published projected Joint Implementation (JI) Emission Reduction Unit (ERU) prices which were higher than CER prices. The equivalent of the public utilities commission of Medellín (Controlería of Medellín), who watches how the city’s money is spent, saw these higher JI ERU prices, confused them with CERs, and consequently audited EPM. The Controlería demanded justification of the low CER price they were receiving from the World Bank and why the process was taking so long [24]. Other, less sophisticated project developer who have even less little contact with the carbon market than the Controlería de Medellín, do not know whether they are being offered a reasonable CER price by brokers [25]. Now, interested project developers can utilize a variety of new tools to get an estimation of guaranteed CER market value. Thompson Reuters Interactive offers a free online service that indexes European Union Allowance (EUA), CER and Voluntary Emission Reduction (VER) prices [31]. Barclays Capital also offers a CER and EUA price index [32]. As companies try to maximize their profits and minimize their risk, some have considered refinancing projects that qualified for CDM revenues under a financial additionality scenario which did not include the new terms of a refinance [33]. Lower interest loans can change the economics of a project enough to make the CERs unnecessary for the survival of the project. Refinance schemes have not been tested by the CDM rules and could place projects in jeopardy of maintaining an annual flow of CERs [34].

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Conclusion Renewable energy project developers face financial barriers from the general obstacles of a long payback time, lack of bank confidence and a shortage of money for feasibility studies. Specific country situations, such as policies that restrict PPA length and political instability, further complicate the prospects of attracting foreign investors and earning loans. Multilateral development banks that understand the risks of renewable energy CDM projects can offer project financing, but often do so in exchange for taking most of the CER revenues by offering low CER prices or a small percentage of CERs for the project owner. CDM-specific financial barriers like penalties for not producing the CERs promised, difficulty choosing the legal rules to follow for enforcement of the ERPA, ERPA language barriers and asymmetric CER price information create complex and confusing financial negotiations for project developers.

Notes 1 It should be noted that despite this limit on debt, Nicaragua did receive a $32.7 million loan from the Inter-American Development Bank for strengthening the electrical sector in December of 2007 [35]. 2 The internal rate of return is the annualized effective compounded return rate that can be earned on the invested capital or, in other words, the amount of return on investment earned. It is often used to compare the investment to alternative investments [36]. 3 Specific references to project developers and projects are absent in this section to protect the privacy of interviewed participants. 4 The failure of the desalination plant draws into question the merit of the community development portion of this arrangement.

References 1 2

3

4

5 6 7

Zeller, R. (2007) Interview with R. Zeller, President of Alquimiatec, 24 October, Quito, Ecuador Altomonte, H., Coviello, M. and Lutz, W. F. (2003) ‘Energías renovables y eficiencia energética en America Latina y el Caribe: Restricciones y perspectivas’, ECLAC – Division of Natural Resources and Infrastructure, October Millán, J. (1999) ‘The power sector in Nicaragua’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC Millán, J. (1999) ‘The power sector in Honduras’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC de Gracia, R. (2007) Interview with R. de Gracia, Association de Servicios Públicos, 5 October, Panama City, Panama Mekler, J. (2007) Interview with J. Mekler, Project Developer for COMEXHIDRO, 15 August, Mexico City, Mexico Global Security (2008) ‘Colombia: Economic conditions’, available from www.globalsecurity.org/military/world/colombia/colombia_briefing.htm

FINANCIAL BARRIERS

8

9

10 11 12

13 14 15 16

17

18

19 20 21 22

23 24 25 26 27 28

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Business Monitor International (2004) ‘Colombia: Political risk under the microscope’, available from www.fdi.net/bmi/bmidisplay.cfm?filename= OEMO_20070913_146003_xml.html Bettelli, P., Garcia, A. and Graviator, S. (2007) Interviews with P. Bettelli, A. Garcia and S. Graviator, Designated National Authority en la Unidad de Cambio Climático de Ministerio del Medio Ambiente, Vivienda, y Desarrollo Territorial, 12 October CDM UNFCCC Project Search, 1 May 2008, available from http://cdm.unfccc.int/Projects/projsearch.html Feinstein, C. (2008) Interview with C. Feinstein, World Bank Europe and East Asia Department, former member of Latin American Department, 14 January Ycaza, J. L. (Chairman of the Board of Directors of the Central Bank of Ecuador) (2000) ‘Andean integration and dollarization: Some reflections about Ecuador’s case’, 25 August, available from www.comunidadandina.org/ingles/press/speeches/ Ycaza25-8-00.htm Corporación Andino de Fomento (2006) Ecoelectric-Valdez bagasse cogeneration plant Project Design Document, UNFCCC, 16 June Woods, R. (2008) ‘Renewable energy is booming in Latin America’, Business News Americas, 6 May Bongiovanni, Z. (2008) Interview with Z. Bongiovanni, SolFocus Project Developer, 19 March, Palo Alto, California UNFCCC (2007) ‘Investment and financial flows to address climate change’, Background Paper, available at http://unfccc.int/cooperation_and_support/ financial_mechanism/items/4053.php The World Bank Carbon Finance Unit (2008) ‘Catalyzing markets for climate protection and sustainable development’, available from http://carbonfinance.org/Router.cfm?Page=Home&ItemID=24675 Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An assessment of DNAs in Latin America and the Caribbean’, 2 June, Inter-American Development Bank, Washington, DC Baroudy, E. (2008) Interview with E. Baroudy, Manager of the BioCarbon Fund of the World Bank, 21 March, Manzano, I. (2007) Interview with I. Manzano, President and CEO of Manzano and Associates, 1 November, Guayaquil, Ecuador Garcia, D. (2007) Interview with D. Garcia, FONAM Energy and CDM Specialist, 5 November, Lima, Peru Sandoval, A., Colorado, F. and Aramburo, J. (2007) Interviews with A. Sandoval, F. Colorado and J. Aramburo, Empresas Públicas de Medellín, 18 October, Medellín, Colombia Garizábal, C. (2007) Interview with C. Garizábal, Departamento de Planificación Empresas Públicas de Medellín, 15 October, Medellín, Colombia Vélez, O. L. (2007) Interview with O. L. Vélez, Empresas Públicas de Medellín, Subdirección Medio Ambiente, 18 October, Medellín, Colombia Salgado, C. (2007) Interview with C. Salgado, Carbon Broker, Ecoinvest, 20 March, Cartagena, Colombia World Bank (2008) ‘Proposed Climate Investment Funds’, 22 April, available from www.worldbank.org/cif Muñoz, F. (2007) Interview with F. Muñoz, Hidrovictoria Project Developer, 28 October, Quito, Ecuador Tasende, D. (2007) Interview with D. Tasende, Director of Renewables, UTE, 27 November, Montevideo, Uruguay

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29 Streck, C. (2007) ‘A new contracting model for ERPAs: Equity and efficiency in legal and contractual issues’, at CDM Tech. 2007 21 March, Cartagena, Colombia 30 Carbon Finance (2007) ‘EcoSecurities’ woes prompt CER rethink’, 20 November, www.carbon-financeonline.com 31 Thompson Reuters, Carbon Market Community 32 Barclays Capital (2007) ‘Barclays Capital launches first Global Carbon Index’, news release, 6 December 33 Coto, O. (2007) Interview with O. Coto, CDM Consultant, 1 October, San José, Costa Rica 34 Godinez, G. (2008) Interview with G. Godinez, CDM Validator/Verifier for Det Norske Veritas, 16 January 35 Inter-American Development Bank (2007) ‘IDB approves US$ 32.7 million for Nicaragua’s electric system’, press release, 10 December 36 Business Dictionary, Internal Rate of Return (IRR), available from www.businessdictionary.com/definition/internal-rate-of-return-IRR.html

5 Informational Barriers

One of the best explanations for the current distribution of Clean Development Mechanism (CDM) projects is the access to information that people have about opportunities to earn Certified Emission Reductions (CERs). The distribution of projects tends to be clumped because project developers sometimes only become aware of CDM opportunities after their neighbour or colleague has become involved. The Designated National Authority (DNA) office is charged with promoting CDM projects and does so to varying degrees. The other main sources of information tend to come from UN organizations, development banks, industry associations, non-governmental organizations (NGOs), governmental laboratories, regional organizations, carbon brokers and universities. Each of these sources of CDM information dissemination will be discussed in turn. Another type of informational barrier exists for project owners who are not savvy in negotiating Emission Reduction Purchase Agreements (ERPAs). This informational barrier is discussed separately after the CDM information dissemination agents are considered.

DNA office and other institutional support The DNA office can prove to be both an aid and an impediment to CDM projects. The United Nations Framework Convention on Climate Change (UNFCCC) hoped to allow countries to maintain some autonomy in the CDM process by giving this office the discretion to decide where it will be housed, how it will be funded, the degree of promotion it will support and the definition of sustainable development it will apply [1]. The way in which this office operates has managed to lower some informational barriers, while building up other institutional ones. Former CDM Executive Board member and CDM consultant Christiana Figueres studied the DNA offices in each Latin American country and concluded in 2004 that these offices are hindered by three important issues. She explains that:

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(1) the environmental agencies are typically one of the weakest in the array of governmental agencies; (2) they are perceived as enforcers of rules and regulations that the private sector typically resist; and (3) they do not have an entrepreneurial approach to their operations. [1] These issues remain in 2008, but cannot be easily remedied since the DNA office has not been able to survive outside of the government where it receives financing. Some DNA offices have attempted to integrate the private sector by having a board of both private and public sector representatives. But this board only advises the office and does not participate in its day-to-day functions. DNA regulatory offices in the private sectors have all folded or been moved to a governmental agency as they have not been able to continue to earn donations or generate revenue to sustain their operations [1]. Beyond these observations, the author recognized other challenges that these offices face. The DNA office within each country is charged with both promoting and assessing the sustainable development of CDM projects. The establishment of this office is essential to hosting CDM projects. As of February 2007, only twothirds of Latin American countries had set up DNA offices and were therefore eligible for project implementation [2]. At the other end of the spectrum, some countries such as Ecuador and Peru took the promotion assignment seriously and developed a separate office for stimulating CDM activities. Other countries, such as Argentina and Mexico, have carbon funds that are meant to help projects in the initial stages of the CDM cycle for free and then later charge a fair amount of CERs for help creating the Project Design Document (PDD) [3]. In Mexico, this fund is run by a division of Banco Commercial de Comercio Exterior (BANCOMEXT) while in Argentina it operates on grants from foundations [4]. The CDM promotion offices in Ecuador and Peru also operate on grants and therefore may lack permanence [5]. The degree to which DNA offices successfully juggle both tasks of promotion and regulation depends on the resources they are allocated. In general, offices attempt to offer seminars for industry trade groups and the general public to make them aware of CDM opportunities, have a comprehensive website with general CDM procedures as well as the country-specific process for approval, and pamphlets for developers on the status of the CDM in the country. Also, the DNA can choose to accumulate a library of information that can help project developers through the complex CDM project cycle. This library may include regional baseline calculations, financial feasibility studies, and project documents that have successfully proven additionality. Some DNA offices or institutional bodies like those in some countries such as Ecuador, El Salvador, Argentina and Colombia have even created a country baseline of CO2 emissions to cut the project costs for small-scale developers who can use this average in their PDDs [6 and 7]. Other countries such as Ecuador and Uruguay have completed in-depth analyses, often with the help of external aid organizations, of the opportunities and barriers for CDM projects within their

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country [8 and 9]. While some DNA offices reach out to industries that could take advantage of the CDM, other DNA offices are less aggressive or have so few resources that they are barely able to respond to the requests that they receive for capacity building workshops. While the DNA office usually offers project support and guidance, it can also pose significant barriers to project development. Eron Bloomgarden, a consultant for Ecosecurities, contends that DNAs and their offices vary from country to country; ‘they can be a partner in the CDM process or cause unnecessary delays’. DNA offices that do not have a separate office, fund or division for promotion can find that the tasks of promotion and regulation are incompatible. How can a regulator objectively assess the sustainable development of a project if that same person is supposed to be promoting these projects in his country? This situation causes an implicit incentive to be lax on regulation criteria. Critics of Peru’s promotion office, FONAM, claim that there is a potential conflict of interest in having the director of the regulatory DNA office also heading the board of FONAM [10]. However, countries that have not even separated these offices face even more of a direct conflict. The DNA offices of Colombia, Ecuador, Peru and Bolivia have created an Andean Carbon Hub with information about key CDM information, each country’s national CDM entities, the country’s CDM portfolio, and materials prepared for the annual Carbon Expo in Europe [11]. As an extension of the promotion of CDM projects, a few DNA offices are pursuing integration of CDM into national policies. Carbon management is mentioned in Ecuador’s policy agenda. Honduras screens all new renewable energy projects for CDM potential. Nicaragua’s DNA helped promote a National Development Plan that includes small-scale renewable energy generation as a development goal. Colombia provides a tax exemption for project developers that give 50 per cent of their CERs to community development. Panama is proposing that 20–30 per cent of CERs go towards community development and considers CERs when awarding local carbon credit revenues [1 and 12]. Since the regulatory arm of the office allows the DNA to decide whether or not a project fulfils the goal of sustainable development and no specific criteria have been drafted for what constitutes sustainable development, there is the possibility that the DNA would show preferential treatment to project participants that have provided money or other favours to the office and its employees. Most countries interpret the sustainable development criteria to mean that the project must be in compliance with local and national environmental regulations; however, because of recent controversy over this task, several countries including Argentina, Mexico, Peru, Uruguay, Colombia and Chile have begun to adopt social, environmental and economic requirements that the project must meet in order to contribute to sustainable development [13]. If a country has not drafted sustainable development criteria, then DNAs can expand the definition of this term and do an informal validation of the

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CDM project. In Argentina, the DNA initially rejected a project proposed by Ecoinvest because the DNA considered the project to not be additional. When the project was finally passed through the national process in a second submission, the validator and Executive Board of the CDM found the project to be additional and registered it [14]. Critics of the Colombian DNA office claim that it does a legal and technical analysis of the project when that is not its role [15]. The Ecuadorian DNA visits each project site and taxes the CERs from the project to cover the costs of this visit. However, there are no set criteria that the DNA looks for in projects, and the DNA often must assess projects when they are in the early stages of development [16]. Because the regulatory procedures are so different from country to country, it is important for project developers to be familiar with the Letter of Approval process in the host country. This process is usually found on the DNA-operated national CDM website, if it is complex. Some countries have a series of up to 15 steps project developers must follow and require official letters of approval in order to proceed with the project for carbon revenues. First a Letter of No Objection is issued after the developer presents the office with a Project Idea Note (PIN). Then, a Letter of Commitment is issued as the project is under construction. Finally, the Letter of Approval is issued when the project is accepted. Host countries were given total freedom not only in the decision about what constitutes sustainable development, but also about where the DNA office is located within or outside of the government. Usually the DNA is housed under the Ministry of the Environment or Natural Resources, but some countries such as Ecuador and Peru have separate offices for the DNA [13]. Having the office located under another department may bring associated benefits or complications. A benefit of not having the DNA housed in this larger office could be that it is more efficient and has more streamlined tasks. DNA offices like Peru’s that are housed in a larger environmental office sometimes must complete greenhouse gas inventories for the country and organize adaptation activities to climate change impacts [17]. Having the office outside of a larger energy or environmental ministry can mean that it has a lack of contact between entities that must be in dialogue to make a decision about the approval of a CDM project. This slow communication can delay projects’ approval processes, which then impacts the other parts of the CDM project cycle and ultimately when the project can begin operations, since it must achieve CDM registration before generating its first megawatthour. Most countries set a time limit on the national approval process. However, if the deadlines are approaching, the DNA office will often ask project developers for more detailed information that takes a while to track down and provides a legitimate reason for the delay [18]. Delays in giving national approval also stem from the understaffing of most DNA offices. In many cases, the office has only one full-time staff member. Additional personnel serve to assess the technical aspects of projects. Often DNA offices are also tasked with national greenhouse gas inventories and climate change adaptation tasks [1].


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DNA offices have so much freedom in their creation and operations that they can even tax the CER revenues from a project. In Bolivia, the DNA office operates separately from the government but is overseen by a governmental department. This office supports its operations by taxing the CERs between 15 and 35 per cent. The exact amount has not yet been decided [19]. Ecuador also taxes projects, but the amount of CERs taken from projects is much lower at 3–6 per cent (depending on project size) and goes towards paying the costs of evaluating the sustainable development of that project [16]. Promotion offices in Ecuador and Peru are also considering taking a percentage of CERs from the projects that they help, to sustain their operations [5 and 20]. The carbon funds in Argentina and Mexico will take a portion of the CERs when they eventually successfully develop PDDs [3 and 4]. Thomas Black of the Andean Center for Environmental Economics (CAEMA) thinks that the restriction of giving a certain percentage of CERs away weakens the additionality argument for a project. The financial additionality argument should show that without the CERs the project would not be economically viable. Therefore, if a significant portion of the CERs are taken away from the project developer, then the project would have existed without these additional revenues [21].

Other support networks United Nations organizations Most of the CDM analyses and reports, which analyse the CDM, provide insight for prospective developers and assess how well the CDM is meeting its goals, are sponsored by United Nations organizations. The two main organizations are the United Nations Development Programme (UNDP) and the United Nations Environment Programme (UNEP). Independent of these organizations are several climate change technology transfer programmes that have come into existence as a result of UNFCCC negotiations. The UNDP is concerned with the CDM because of its commitment to helping developing countries address climate change. The UNDP helped sponsor a study entitled ‘Engaging the Private Sector in Clean Development Mechanism (CDM) Project Activities under the UNFCCC/Kyoto Protocol’. The UNDP had spent $350,000 to $450,000 in Latin American capacity building by 2004. The UNDP has also published a CDM User’s Guide and helped an online community of CDM-interested persons become acquainted with each other through CDM-Connect [1]. The UNEP/Risø Centre, the World Bank and UNDP helped co-sponsor a CDM Rulebook meant to provide a comprehensive set of CDM legal rules that is organized and easy to navigate. Its sections quote UNFCCC decrees and explain them for developers [22]. The UNEP has been involved in analysing the CDM, especially baseline calculations and additionality arguments, since its inception. It has also partnered with the Risø Centre on Energy, Climate and Sustainable Development, which is sponsored by the Danish International Development

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Assistance and the Technical University of Denmark. The UNEP and Risø Centre’s work has been focused on projects that are a part of the Capacity Development for the CDM (CD4CDM). The CD4CDM project has created a number of useful documents on topics such as CDM financing and pitfalls in PDD writing. It also created a massive set of spreadsheets that show details about current CDM projects and those in the pipeline and provides some regional and project type analysis. In addition to the efforts of the UNEP and UNDP, the UN promotes nonCDM-specific renewable energy projects in its efforts to promote climate change-mitigating technology transfer. In 1995 a coalition of Organisation for Economic Co-operation and Development (OECD) countries and the European Union (EU) established the Climate Technology Initiative (CTI). Then after the 2001 Marrakesh Accords, the Experts Group on Technology Transfer was established. Since then, the US implemented the Technology Cooperation Agreement Pilot Project (TCAPP) from 1999 to 2001 and the Climate Technology Partnership (CTP) in 2001. All of these initiatives seek to work with host countries to identify, prioritize and implement useful climate change-mitigating technology [23].

Development banks There are a variety of development banks that are now interested in financing and carrying out the CDM project cycle for Latin American projects. A full list of these banks can be found in Chapter 4, ‘Financial Barriers’. Two banks in Latin America stand out as providing exceptional capacity development for CDM, the World Bank and Corporación Andina de Fomento (CAF). The World Bank has supported CDM projects since 1999 when it launched its Prototype Carbon Fund (PCF). Then, in 2000, a PCFplus programme was launched with the mission of providing outreach, research and training. It has also worked with DNAs in each country to help initiate the office and its function. From 2001 to 2004, it dedicated nearly $1 million to this cause. The World Bank (with the government of Sweden) also sponsored the National Strategy Studies Programme, which assesses CDM potential and challenges on a country-by-country basis [1]. CAF is a regional developmental bank established in 1970 with the mission of promoting sustainable development and economic integration in the Andean and Latin American Regions. Sustainable Development for the Americas (CSDA) and carbon consultant Econergy International raised and donated €40 million for CAF to create a Latin American Carbon Programme (PLAC) to help CAF shareholder countries participate in the CDM. Through the CAF–Netherlands CDM Facility, CAF became the first regional bank to be a secondary CDM buyer and seller. CAF has also sponsored the operation of the DNAs in Colombia, Ecuador and Bolivia [1]. Development banks have also begun to be involved in the quest for climate change solutions by showing preference for projects that help mitigate greenhouse gases. The Inter-American Development Bank (IDB) created a


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Sustainable Energy and Climate Change Initiative (SECCI) in March of 2007. The goal of this initiative is to support the Latin American and Caribbean region in finding economically and environmentally sound energy solutions. SECCI focuses on financial solutions and will complete its task by helping renewable energy and energy efficiency projects in achieving financing, removing institutional barriers, promoting novel policy ideas, making sustainable energy investment and financing tools more mainstream and accessible, utilizing the carbon finance market, addressing adaptation needs and forming new partnerships with both the public and private sectors [24]. The World Bank has several proposed Climate Investment Funds (CIFs), which would provide additional grants and financing for developing countries that address climate change challenges. CIFs would be additional to existing Official Development Assistance (ODA) and make strides towards reducing greenhouse gases in the private sectors and through policy reform. All of the CIFs will be host country-led and created as an equal partnership between the implementing entity and the host country. Two of these funds that have been formed are the Clean Technology Fund, which focuses on the role of new technologies as climate change solutions, and the Strategic Climate Fund, which would provide financing for new approaches to address climate change. The Pilot Program for Climate Resilience will be the first project under the Strategic Climate Fund and will explore ways to promote adaptation to climate change in conjunction with the Kyoto Protocol’s Adaptation Fund. Whether or not this preferred financing will jeopardize the additionality argument of CDM projects is not yet known as none of the projects under these programmes have applied for CDM revenues [25].

Industry associations Industry groups in some countries can help complement the efforts of the DNA office. For example, in Honduras, an active renewable generators association called AHPPER (Asociación Hondureña de Pequeños Productores de Energía Renovable) has helped provide information about CDM opportunities through workshops and conferences. Likewise, Guatemala has an association called AGER (Asociación de Generadores de Energía Renovable) that works mainly with the small hydro developers. AGER is interested in the possibility of using CDM revenues for its members’ projects, but does not have the capacity to provide the CDM expertise for registering projects. Other associations such as the Biomass Users Network do not think the CDM can be useful for its projects because of the high CDM transaction costs. Table 5.1 below shows the renewable energy trade associations.

Non-governmental organizations (NGOs) Beyond these trade organizations, there are NGOs that also help promote CDM. For example, in Guatemala, Fundación Solar is involved in making policy recommendations for renewable energy and has analysed the market potential for Verified or Voluntary Emission Reductions (VERs) in the volun-

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Table 5.1 Major Renewable Energy Associations in Region Country

Associations

Mexico

Mexican Wind Energy Association (AMDEE) Asociación Nacional de Energía Solar Red Mexicana de Bioenergía Asociación Mexicana de Proveedores de Energías Renovables (AMPER) Asociación de Generadores de Energía Renovable (AGER) Asociación de Biocombustibles de El Salvador Asociación Hondureña de Pequeños Productores de Energía Renovable Asociación Nicaragüense de Promotores y Productores de Energía Renovable (ANPPER) Asociación Costarricense de Productores de Energía (ACOPE) Financiamiento de Empresas de Energía Renovable de América Central (FERNA) Biomass Users Network (BUN-CA) Asociación Panameña de Productores de Energías Renovables (APPER) Federación de Biocombustibles Federación de Cultivadores de Palma de Aceite Asociación Peruana de Productores de Azucar y Biocombustibles (APPAB) São Paulo Sugarcane Agroindustry Union (UNICA) Associação Brasileira das Indústrias de Biodiesel Red de Inversiones y Exportaciones (Rediex) Administracion Nacional de Combustibles (ANCAP) Cámara de Productores de Biodiesel de Uruguay Asociación Argentina de Energías Renovables y Ambiente (ASADES) Cámara Argentina de Energías Renovables Cámara Argentina de Generadores Eólicos (CADEGE) Asociación Argentina de Energía Eólica Federación de Energía Renovable en América Central y el Caribe (FERCA)

Guatemala El Salvador Honduras Nicaragua Costa Rica

Panama Colombia Peru Brazil Paraguay Uruguay Argentina

Central America and Caribbean Latin America

Asociación Latinoamericana de Energía Eólica (LAWEA)

tary market [26]. (VERs are described in more detail in Chapter 8, ‘Small-Scale Barriers’.) International NGOs like the Renewable Energy and Energy Efficiency Project (REEEP) and Practical Action have also been involved in helping to promote CDM activities in several countries.

National laboratories and governments International collaboration also occurs through governmental labs like the National Renewable Energy Laboratory (NREL), which with UNDP funding mapped the wind potential in Oaxaca, Mexico and northern countries of Central America and Cuba with the Solar and Wind Energy Resource Assessment (SWERA). NREL was in conversation with the Ministry of Energy and Mines in Peru to do a wind map of the country [27]. NREL, the World Bank, the US Agency for International Development, US Department of Energy, Winrock International and some private companies have also helped create the Global Village Energy Partnership (GVEP) that has promoted rural electrification with projects in Mexico, Guatemala, Honduras, Brazil, Ecuador and Peru [28].


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Sandia National Lab, with the help of Winrock International and New Mexico State University, has helped pave the way for renewable energy in Central America. Sandia has a strong interest in studying solar energy in Mexico and initiated the Programa Cooperativo de Energía Renovable (PROCER) between Mexico and the US and has done capacity building, pilot projects and training in Central America with the Clean Energy and Environment Programme [29]. A US Agency for International Development initiative called Financiamiento de Empresas de Energía en Centroamerica (FENERCA) and private company E+Co helped promote renewables in Guatemala, El Salvador, Honduras, Nicaragua and Panama by providing capacity building and helping to secure financing from 2000 to 2003 [30].

Regional organizations A group of regional organizations also provide support for renewables by completing pertinent studies. Organización Latinoamericana de Energía (OLADE) covers the entire region and completes studies on energy statistics and the potential for renewable energy. The Economic Commission for Latin America and the Caribbean (ECLAC in English or CEPAL in Spanish) completes studies assessing the potential and current political environment for projects in all of Latin America. Within South America, the Andean Secretaries Network has begun to show interest in renewable energy potential and commissioned a study on the barriers to renewable energy CDM development in Andean countries in late 2007. Within Central America, there are several organizations that support both renewable energy development and the CDM. The Consejo de Eletrificación de América Central (CAEC) was created for regional grid integration in 1985. The Comisión Centroamericana del Ambiente y Desarrollo (CCAD) was formed in 1990 for the utilization of natural resources in the area to control pollution [31]. The Central American Alliance for Sustainable Development (ALIDES) provides political support for promoting renewables. The Central American Integration System (SICA) has an Energy and Environment Partnership (EEP) with Central America which is an initiative of the United Nations World Summit on Sustainable Development of 2002. This system provides non-reimbursable grants to project developers of the private sector, communities, NGOs and the government for feasibility studies and pilot studies for amounts from €20,000 to €50,000. By April of 2007, €3 million had been distributed to 77 projects in the region [32]. In 2006, the Ministers of Environment and Energy of Central America met and signed the ‘San Salvador Declaration’, which provides instructions to create and support regional energy and energy efficiency policies. The US is involved in an agreement called CONCAUSA, a plan to avoid natural disasters like climate change. Currently, there is a Plan Puebla-Panama (PPP) that aims to promote ecological and sociological richness in the region through a major transmission interconnection project [31].

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In addition to these regional organizations, there are several renewable energy initiatives with ties to countries in other regions. The Latin American and Caribbean Initiative for Sustainable Development set a goal of 10 per cent renewable energy in the region by 2010. The Johannesburg Renewable Energy Coalition in 2003 solicited the participation of 78 Latin American and other countries to promote renewable energy. The REEEP conceived at the World Summit on Sustainable Development in August 2002 has the backing of national governments, businesses, development banks and NGOs and strives to influence international, national and regional policy dialogues. The International Energy Agency has a Renewable Energy Working Party to reduce barriers for renewable technologies. The US has an Office of Energy Efficiency and Renewable Energy within the Department of Energy which supports 12 different programmes to facilitate renewable energy worldwide [33].

University participation Local university participation in CDM projects can offer an opportunity for students to learn about the emerging carbon market as well as provide developers with more affordable help navigating the complex project cycle. The University of Antioquia in Medellín, Colombia has begun helping the city of Medellín with a feasibility study and PDD for a methane capture and flare from a landfill called La Curva de Rodas. The students are working with Green Gas of Germany to ensure that their work is consistent with the standards for the UNFCCC. The university is also considering a Master’s level CDM programme that would train students to be involved in the carbon negotiation process. Graduating experts in CDM at the national level would provide Colombia as a country with an advantage, as local project developers could hire more affordable, local consultants [34].

Carbon broker interest and existence CDM projects have also succeeded in countries where there are consultants with offices. Usually, these consultants first set up operations and approached project developers in a particular country because they saw opportunities there. Then, after a few projects were completed, project developers in the country began pursuing the carbon brokers. This situation occurred in Mexico where AgCert first began converting hog farms for methane capture and destruction. Then, Ecosecurities tapped into this market. Now, Mexico’s governmental agency to promote agricultural businesses, Fidecomiso de Riesgo Compartido (FIRCO) of the Mexican Agricultural Department, is investigating the potential of these projects for development [35]. Potential projects near carbon consultancy offices that specialize in developing CDM projects are at an advantage as they will probably be approached by this group. Once a consultancy has host country approval, and familiarized itself with the country’s culture and renewable energy laws, it is easier to complete another project in the same place. Also, some companies that have favourable


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experiences with CDM begin to look for other ways to improve their operations and earn CERs [21]. Additionality arguments in one PDD also become easy to apply to another in the same country and industrial sector. Therefore, the distribution of CDM projects is due in large part to the efforts of the carbon consultants. It is no coincidence that Mexico has approximately 120 AgCert employees in the country and has therefore developed 56 methane capture projects by February 2008, which accounted for 31 per cent of the country’s CERs [36].

Emission Reduction Purchase Agreements (ERPAs) Even if a carbon broker is located in a country and can offer its services to clients, informational barriers can prevent these individuals from deriving the maximum benefit from CDM. Like most legal agreements, the ‘devil is in the detail’ when it comes to who truly benefits from ERPAs – which describe the terms and conditions for the sale of the CERs. These legal documents are typically 50 pages long, use economic terms unfamiliar to project developers, and are in English. This barrier is especially high for local project developers like hog farmers who are not exposed to the daily transactions of the global and European trading schemes. These individuals have to seek out and pay for help from lawyers, other carbon brokers, multinational banks or the local DNA office. Often they are at a price disadvantage for CDM project costs since they do not have multiple entities competing for their work. These folks also suffer from a lack of experience and knowledge about how to structure an ERPA in an advantageous way. Since carbon brokers make a profit on the spread between the purchase and sale price of CERs, there are many ways that the ERPAs can be structured to shortchange the project owner. Hiring a lawyer to decipher what is best for the seller is often too expensive. As a result, project owners can earn less revenue than expected and experience delays in payments because of disputes over when the CERs are delivered, non-compliance fees, the government chosen to handle dispute resolution, which party communicates with the Executive Board, and the price structure (fixed, floating or percentage) of the CERs [37]. Mexican hog farmers inadvertently signed a contract with carbon brokers that left them with no portion of the CDM revenues. This contract gave almost all of the first ten years’ worth of revenues from CERs to the project developer and carbon consultant in exchange for providing flare and biodigester equipment. After that period, the farmers were under the impression that the CER revenues would belong entirely to them. However, the carbon consultant opted for the ten-year crediting period, which is non-renewable. After this time period, another PDD and costly project cycle must be completed to earn additional revenues. And the new baseline after ten years includes the existing methane capture project. So, unless upgrades to the project are made, no CERs will result after the first ten-year crediting period.1

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As a remedy to these ERPA contract asymmetries of information, the UNEP and Risø Centre created a CDM Bazaar website in December of 2007 where CDM buyers and seller can find and directly contact each other. This forum allows project owners to eliminate the carbon broker middleman step where much money can be lost [38]. Also, in June of 2007, lawyers at Climate Focus and Lee International created a generic ERPA in English, Spanish, French, Portuguese and Chinese that project owners and CER purchasers can modify and use free of charge. This project helps eliminate costly legal fees to draft these documents. Funding for this project was provided by the Inter-American Investment Corporation, which is a member of the Inter-American Development Bank Group [39].

Conclusion There are a variety of entities from the country’s DNA office to UN organizations, developmental banks, NGOs, national laboratories, regional organizations, industry associations, universities and carbon brokers that support renewable energy and CDM activities. The distribution of these organizations, their mission, how well they are run, and the resources dedicated to their existence determine their effectiveness. Therefore, not all countries and project developers have equal opportunities to learn about and harness the potential of CDM. This situation helps contribute to an unequal distribution of projects and can lead to poorly understood and unfair ERPAs.

Note 1 This information is not cited to protect the author and the parties involved.

References 1

2 3 4

5 6

7

Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An assessment of DNAs in Latin America and the Caribbean’, Inter-American Development Bank, Washington, DC, October Michaelowa, A. (2007) ‘Fundamentals of programmatic CDM’, presentation at CDM Tech Workshop, Cartagena, Colombia, 21 March Galbusera, S. (2007) Interview with S. Galbusera, Fondo Argentino de Carbono, 20 November, Buenos Aires, Argentina MacGregor, E. and Nienau, M. A. (2007) Interviews with E. MacGregor and M. A. Nienau, Administrators of Fondo Mexicano de Carbono for BANCOMEXT, 29 August, Mexico City, Mexico Núñez, A. M. (2007) Interview with A. M. Núñez, CDM Coordinator in CORDELIM, 23 October, Quito, Ecuador Secretaría de Energía (2006) ‘Cálculo del factor de emisión de CO2 de la Red Argentina de Energía Eléctrica’, Version 2007, available at http://energia3.mecon.gov.ar/contenidos/verpagina.php?idpagina=2311, accessed on 22 April 2009 Zapata, H. J. (2007) Interview with H. J. Zapata, Renewable Energy Coordinator UPME, 10 October, Bogota, Colombia


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Neira, D., Van Den Berg, B. and De la Torre, F. (2006) ‘El Mecanismo de Desarrollo Limpio en Ecuador: Un diagnostico rápido de los retos y oportunidades en el Mercado de Carbono’, Banco Interamericano de Desarrollo and Ministerio del Ambiente and Corporacion Interamericana de Inversiones Unidad de Cambio Climático (2002) ‘Estudio de apoyo a la aplicación del Mecanismo para el Desarrollo Limpio del Protocolo de Kioto en Uruguay’, Ministerio de Vivienda, Ordenamiento Territorial y Medio Ambiente, May. Iturregui, P. (2007) Interview with P. Iturregui, Former DNA of Peru, 11 November, Lima, Peru Oficina de Desarrollo Limpio de Bolivia, CORDELIM de Ecuador, FONAM de Peru, and Ministerio del Medio Ambiente de Colombia (2008) Andean Carbon Hub, available from www.andeancarbon.com/ Días, F. (2007) Interview with F. Días, Comisión de Política Energética, Ministerio de Economía y Finanzas, 5 October, Panama City, Panama United Nations Economic Commission for Latin America & the Caribbean (2006) Study for the Fourth Meeting of the Economic and Society Working Group of Forum for East Asia–Latin America Cooperation’, 7–8 June, Tokyo, Japan Camara, A. (2007) Interview with A. Camara, Ecoinvest Carbon Consultant, 22 November, Buenos Aires, Argentina Gonzalez, M. (2007) Interview with M. Gonzalez, Carbon Consultant for MGM International, 19 October, Medellín, Colombia Cornejo, J. (2007) Interview with J. Cornejo, DNA of Ecuador in the Unidad del Cambio Climático de la Comisión Nacional del Medio Ambiente, 25 October, Quito, Ecuador Gieseke, R. (2007) Interview with R. Gieseke, CONAM Designated National Authority Office, 6 November, Lima, Peru Zeller, R. (2007) Interview with R. Zeller, President of Alquimiatec, 24 October, Quito, Ecuador Trujillo, R. (2008) Interview with R. Trujillo, DNA of Bolivia, 16 April Garcia, D. (2007) Interview with D. Garcia, FONAM Energy and CDM Specialist, 5 November, Lima, Peru Black, T. (2007) Interview with T. Black, Executive Director of CAEMA, 9 October, Bogota, Colombia Baker & McKenzie, CDM Rulebook: Clean Development Mechanism Rules, Practice, and Procedures, http://cdmrulebook.org/, accessed 28 March 2008 Kline, D.M., Vimmerstedt, L. and Benioff, R. (2003) ‘Clean energy technology transfer: A review of programs under the UNFCCC’, Mitigation and Adaptation Strategies for Global Change, vol 9, no 1, March 2004 Inter-American Development Bank (2008) ‘SECCI at a glance’, available from www.iadb.org/secci/secciAtGlance.cfm?language=English World Bank (2008) Proposed Climate Investment Funds, 22 April, available from www.worldbank.org/cif Azurdia, I. (2007) Interview with I. Azurdia, Executive Director, Foundación Solar, 7 September, Guatemala City, Guatemala Barco-Roda, J. (2007) Interview with J. Barco-Roda, NorWind Project Developer, 7 November, Lima, Peru Global Village Energy Partnership International (2008) Latin America, available from www.gvepinternational.org/where_we_are_working/latin_america Ley, D. (2008) Interview with D. Ley, Former United Nations ECLAC Consultant, 30 April

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30 US Department of Energy, Office of Policy and International Affairs (2002) ‘Increased use of renewable resources program for Central America’, from series Energy and Water for Sustainable Living, paper prepared for the World Summit on Sustainable Development, Johannesburg, South Africa, 26 August to 4 September 2002, available at www.pi.energy.gov/documents/EWSLcentralamerica.pdf 31 CEPAL and GTZ (2004) ‘Fuentes renovables de energía en America Latina y el Caribe: Situación y propuestas de política’, 19 May 32 Coviello, M. F. (2007) Renewable Energy Sources in Latin America and the Caribbean: Two Years After the Bonn Conference, United Nations Economic Commission for Latin America and the Caribbean, Santiago 33 Coviello, M. F. (2003) Etorno internacional y oportunidades para el desarrollo de fuentes renovables de energía en los países de America Latina y el Caribe, CEPAL, Division of Natural Resources and Infrastructure, Santiago 34 Uribe, C. (2007) Interview with C. Uribe, PDD Author of Curva de Rodas, 17 October, Medellín, Colombia 35 Márquez, F. (2007) Interview with F. Márquez, Estudios y Técnicas Especializadas en Ingeniera, 29 August, Mexico City, Mexico 36 CDM Pipeline (2009) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 February 37 Streck, C. (2007) ‘A new contracting model for ERPAs: Equity and efficiency in legal and contractual issues’, presentation at CDM Tech Workshop, 21 March Cartagena, Colombia 38 UNEP Risø Centre (2007) ‘CDM Bazaar’, December, available from www.cdmbazaar.net/ 39 Lee International and Climate Focus (2007) Certified Emission Reduction Sales and Purchase Agreement (CERSPA), available at www.cerspa.com/sponsors.html

6 Host Country Institutional Barriers

Institutional support for the Clean Development Mechanism (CDM) and renewable energy in general within host countries varies. Point Carbon prioritizes the ease with which CDM projects can be implemented in a variety of developing countries for prospective investors [1]. This grading procedure is determined by the country’s climate institutions, project status and potential, and investment climate. The German Office of Foreign Trade does a similar analysis for Latin America and shows Chile, Mexico and Brazil as being the most desirable countries because of solid economic indicators, low corruption and well-run Designated National Authority (DNA) offices that are open and accessible [2].1 Table 6.1 Point Carbon’s international CDM host country rating Country China India Chile Mexico Brazil South Africa Malaysia Korea Peru Morocco Indonesia Argentina Vietnam Philippines Egypt Thailand

Rating AABBB BBB BB+ BB+ BB+ BB+ BB BBBBB B B CCC CCC

Source: Point Carbon (2007) ‘CDM host country rating’, December, available from www.pointcarbon.com

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Table 6.2 Latin America’s top rated countries for CDM investment rated by the German Office of Foreign Trade Country

Rating

Chile Mexico Brazil Peru

91.8 88.8 85.0 79.3

Source: Umann, U. (2007) ‘CDM Investment Climate Index: Regional comparison’, German Office for Foreign Trade and Deutsche Investitions, August

This chapter addresses why some countries have more favourable institutional support networks than others by analysing trends and specific examples of the energy policy creation process and its support for renewables. Political division of energy tasks complicates the process of providing support for renewables and the timely processing of requests. Abrupt changes in administrations that do not provide continuity between the programmes of one government and those of the next can also jeopardize long-term energy policy planning and support. How and if the government has set up a market that is open also has a huge bearing on the successful implementation of CDM projects. The DNA offices’ role in promoting or inhibiting CDM is a key factor that can be an institutional barrier. This topic is discussed in full detail in Chapter 5, ‘Informational Barriers’.

Lack of a long-term vision for energy policy For many of these countries, creating energy legislation is a new phenomenon that did not occur until these countries privatized the energy sector. Suddenly, newly formed policy-making groups were responsible for creating laws and a marketplace that instigated enough capacity additions to fulfil the demand of the nation. Therefore, creating renewable energy legislation, like all energy policies, has been a game of trial and error that has led to revisions and second versions of laws in short succession. It has also created a piecemeal approach to most energy legislation. The lack of comprehensive energy legislation means that most laws are poorly coordinated with existing legislation. Sometimes an overlap of responsibilities or neglect of tasks occurs. Each country has structured the energy market completely differently. Honduras, Nicaragua and Costa Rica have arrangements where the state company pays for generation but not capacity and no wholesale market exists. In Guatemala and Panama, traditional Power Purchase Agreements (PPAs) can be signed that provide both capacity and generation payments [3]. A detailed description of the renewable energy policy for each country can be found in the country-specific section. In this chapter and section, the author highlights just a few countries to illustrate the lack of longterm policy thinking and the guessing game of structuring renewable policies. The laws promoting renewable energy development in each country in the region differ, but the trend in most countries is to provide exemption from

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income taxes for first ten years of operation and exemption from import taxes on generation equipment. However, each country tends to have its own method of promoting renewable energy. And, since the recent rise in fossil fuel prices, a flurry of new and revised laws have come into place to more actively support the sector. However, frequent changes to the laws have provided an unsure environment for investors as they try to navigate legislation that has not been tested. For example, the tariff formula for private generators in Costa Rica has changed three times since 1992 [4]. During the autumn of 2007, Mexico, Honduras, Guatemala, Panama and Costa Rica were all in the process of changing legislation to provide more aggressive incentives for renewable energy. Chile and Argentina have new renewable energy legislation, and Peru’s lawmakers are considering stronger renewable energy laws and passed a decree for renewable energy promotion in May of 2008 [5]. Countries like Uruguay have begun to promote renewables in a quest for new capacity additions. However, the 2007 elicitations for 20MW of biomass, 20MW of small hydro and 20MW of wind energy are hardly a long-term or significant step towards promoting these technologies [6]. No hydro bids for this call were made because the elicitation was not published in enough time for the long process of initiating a new hydro installation to be completed. A new call for 26.2MW of renewable energy was initiated by the governmental monopoly, UTE, in early 2008 [7]. Brazil also elicited 3300MW capacity elicitations for biomass, small hydro and wind in an Incentives Programme for Alternative Sources of Electric Energy (PROINFA). Policy makers found that there was a lack of biomass bids because the prices offered for these generators were better outside of the special bid process. Brazil then had to revise the amount of biomass it expected from the elicitation. In comparison with Uruguay’s tender, Brazil did have the foresight to have two phases of its renewables programme. While the rules for the second phase of PROINFA have not been finalized, the general notion is that the required amounts of renewable energy will be more stringent [8]. This second wave of renewables legislation provides interested developers and investors with legislative certainty that there will be a market for these technologies in the future. Both Brazil and Uruguay’s renewable energy legislation does more than just provide MW targets; it creates a local marketplace for the components by requiring that a certain percentage be sourced locally. Beyond just promoting renewable energy and investment from foreign companies, Brazil’s PROINFA legislation requires that 60 per cent of the project components be locally sourced [9]. The next phase of this legislation will most likely require a 90 per cent local requirement [8]. Uruguay has a similar regulation to promote local industry by giving locally produced technologies a 10 per cent advantage over foreign firms with regard to winning renewable energy bids [7]. The trial-and-error method of energy policy is also evident in Chile. As of March 2008, it requires its generators to source at least 10 per cent of their energy from new renewable sources, excluding large hydro, for residential sales

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by 2024 [10]. The goal of this mandate is to help Chile promote capacity additions that will ease its reliance on the natural gas supply from Argentina that was recently cut. The 10 per cent mandate was made after two previous laws (Short Law I and II), which lowered transmission and distribution tariffs and other incentives for renewable generators, failed to promote development [11]. Penalties for non-compliance with the mandate may help increase the price that renewable generators are able to command. The complicated nature of each country’s electrical sector and the changing renewable energy legislation in the region are a challenge for project developers who hope to operate in multiple countries. The table at the end of the countryspecific section provides a brief description of the laws currently in place in each of the countries. In general, countries with a strong regulatory framework for renewable energy, like Brazil and Chile, will be better able to promote nonhydro renewables [12].

Political division of tasks Other political barriers exist in the way in which the energy sector is organized in the country’s government. Some countries like Panama have up to five different governmental organizations which create tariffs, allocate environmental and generation permits, provide CDM national approval and administer the energy market. Most of the institutional bodies that are in charge of managing the country’s market, regulating electricity tariffs, creating new energy policy and handling rural energy development are new since the restructuring of the market. These entities, therefore, may not know exactly how coordination between entities should be handled on issues related to CDM and renewable energy development. Division of these tasks can sometimes lead to confusion as to who should address a particular issue. For example, in Costa Rica, law makers recently realized that Law 7200, which privatized the electricity sector, did not provide clear guidance on who issues water permits. This ambiguity has stopped new investment in hydro resources and closed about 30MW of generation from various plants that cannot renew their water rights. A law to define who should give this permit has been debated in the national assembly for two years [4]. In Guatemala, no one owns the right to use water resources. Generators simply ask permission for their use. Whether or not this permission is granted is a process that is highly political and not based on a set of given criteria [13].

Abrupt and frequent administrative changes An overarching political barrier facing countries today is the abrupt change of administration in each country, which can paralyse efforts to realize a long-term cohesive energy policy and renewable energy development. Often one set of elected leaders cannot fulfil promises they made to their constituents who voted them into office. Then these leaders are voted out of office in the next election


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when their platform goals are not achieved or their administration is proven corrupt.2 The population then chooses to vote for the opposite party candidate with the hope that he or she will be an improvement. These radical changes from one party to another cause governmental programmes to be dropped if they are not consistent with the new party’s platform. Also, the change brings about an evacuation of governmental employees and replacement with new ones that are sometimes not qualified to be in the position, but were appointed to the position because they have connections with the leading party [14]. The change of administration every four or six (in the case of Mexico) years entails a one year lull while new staff members become acquainted with policies, and the last year of the term is dedicated to campaigning for the next election. Also, investors are hesitant to become involved in new projects in the last year of a term since there is little certainty for regulatory measures and the political/economic stability of the country [15]. This upheaval wreaks havoc on the governmental offices where the DNA resides and decides on individual projects’ fulfilment of the sustainable development criteria. These offices are also meant to provide promotion of the CDM in the form of information for the population and capacity building seminars. When members of this office are replaced, all institutional memory is lost and the new members start anew with no knowledge of the complex CDM process. Honduras has suffered from this upheaval in 2005 and had the entire DNA office replaced after the change in administration in 2005 [14].

Market openness to independent power producers Even though there are new laws to promote renewable energy technologies, a well-coordinated fleet of people handling energy policy, and political continuity, are needed for CDM success; other political indicators must also be well aligned in order to have successful project implementation. Costa Rica, as well as Mexico, opened the market partially and now allows only limited private sector participation. Private generators in Costa Rica comprised only 8.3 per cent of the country’s generation in 1999 and by law can make up only 30 per cent of the market [16]. Also, they have to wait until new capacity is solicited. Then they can offer a bid, but it must be accepted by the state-run Instituto Costarricense de Electricidad (ICE) before they can be assured that their generation will be bought. If the bid is accepted, the generator is then in a situation of a monopoly where ICE is the only buyer; the generator must accept whatever price ICE offers. Generators in Costa Rica cannot earn better sale prices because they, by law, are not allowed to sell directly to large consumers or the Central American grid (SIEPAC). These barriers explain why Costa Rica, a place with political stability that has attracted much foreign investment in other sectors like tourism, had only five registered CDM projects as of November 2007. A similar situation occurs in Honduras where generators can only sell to the Empresa Nacional de Energía Eléctrica and must accept the payment this

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state-run company offers [14]. In Nicaragua, independent power producers (IPP)s are limited to creating PPAs with the national utility [17]. In Belize, the electrical sector is still completely controlled by the government and consists mainly of hydroelectricity, which has shown no movement to utilize CDM. In fact, the country has not yet even set up a CDM office. Therefore, those interested in renewable energy generation projects will usually choose to invest in countries with a more open market, the presence of financial incentives and a higher emission factor. On the other hand, Chile and Guatemala have very open markets that have succeeded in attracting many foreign and domestic independent power producers. In Chile the private sector controls 90 per cent of generation, and in Guatemala it controls 50 per cent [18] and [19]. Obviously, more than just the open electrical market lured investors and developers to these countries, but having a marketplace that has few barriers to entry and allows for free market competition does factor into the decision to develop. These experiences from closed markets, as in Costa Rica, Belize and Honduras, and completely privatized ones, as in Guatemala and Chile, show that open markets with few barriers to entry for private generators are best positioned to take advantage of CDM revenues. Entrepreneurs in the private sector are more apt to attempt to navigate the complex CDM approval process in a country that has straightforward permit processes and welcomes development. When the private sector does not get involved in CDM projects, there are few prospects for project success. State-run generation companies have little incentive to fumble through the CDM project cycle when they will be able to recuperate costs from taxpayers regardless of the project costs. If these agencies had to apply for revenues to reduce customer costs, then there would be more state-initiated CDM projects. However, regulatory agencies, who oversee the operations of state companies to make sure that they do not overcharge customers with unnecessarily high rates because of poor energy investments, currently do not mandate that state entities take advantage of CDM revenues to reduce customer rates [20]. In some cases there is even a disincentive to applying for CDM revenues; the Public Utility of Medellín (Empresas Públicas de Medellín) was audited by the city committee that oversees how public money is spent for trying to use the CDM because of the long delays it caused in project development [21]. It is also difficult for state-run generation facilities and municipalities that control landfills to develop projects because the process must be public. This requirement can slow negotiations as various stakeholders and members of the public present their opinion. State-run entities like ICE of Costa Rica may be bound to certain financial rules that force them to accept the least-cost bid for generation [20 and 22]. This requirement almost entirely excludes the participation of CDM projects since they, by definition, have to rely on carbon credit revenues to exist and be considered additional. These state-run entities also cannot freely invest in projects because, as a state entity, they must gain permission from the commission that oversees their activities and provide justification


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for the investment [23]. Therefore, there is little incentive for state employees to pursue the CDM except in rare instances. (A more elaborate discussion of financial and regulatory additionality problems stemming from institutional barriers can be found in Chapter 7, ‘UNFCCC Procedural and Methodological Barriers’.) Other state-run generators have not pursued CDM because it goes against the culture of the organization. Operators are used to serving the goal of providing reliable electricity and aim to maintain the status quo. Navigating complex international carbon markets and rules falls outside their jurisdiction and interest. One notable exception is within the Empresa Nacional de Electricidad (ENEL) in Nicaragua where Mario Torres is spearheading a directive to earn Certified Emission Reductions (CERs) for four hydro projects. Torres, however, is an anomaly within ENEL and other state entities because he previously worked for the CDM national approval office located within the Ministerio del Ambiente y Recursos Naturales [24].

Conclusion The institutional barriers of a lack of a long-term vision for energy policy that incorporates renewables, closed electricity markets, disorganized political divisions that complicate tasks essential for CDM project development, and frequent and abrupt political upheaval may seem like insurmountable challenges to project development. In general, laws created to promote renewable energy tend to be experiments, which have to be revised to produce the desired results. Although renewable energy policies in many Latin American countries have gone through a period of trial and error, they ultimately have helped promote renewables, CDM development and, in the case of Uruguay and Brazil, local industries.

Notes 1 This German study contradicts the experience of other energy professionals who have encountered high levels of corruption in Mexico [15]. 2 Some countries do not even allow for re-election.

References 1 2 3

4 5

Point Carbon (2007) ‘CDM host country rating’, December, available from www.pointcarbon.com Umann, U. (2007) ‘CDM Investment Climate Index: Regional comparison’, German Office for Foreign Trade and Deutsche Investitions, August Matute, L. J. (2006) ‘Incentivos a las energías renovables en Centroamérica’, presentation at Forum ‘European Union Meets Latin America on Renewable Energy’, Panama, 9–11 October Villa, G. (2007) Interview with G. Villa, Director of Energy within Ministerio de Ambiente y Energy, Costa Rica, 27 September, San José, Costa Rica Business News Americas (2008) ‘President inks renewables promotion decree’, Electric Sector, 5 May, www.bnamericas.com/news/electricpower/ President_inks_renewables_promotion_decree

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6

7 8

9 10 11

12 13

14

15 16

17

18.

19

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Kasprzyk, M. (2007) Interview with M. Kasprzyk, Designated National Authority in the Ministerio de Vivienda, Ordenamiento, Territorial, y Medio Ambiente, Division de Cambio Climático, 27 November, Montevideo, Uruguay Tasende, D. (2007) Interview with D. Tasende, Director of Renewables, UTE, 27 November, Montevideo, Uruguay do Valle, C. (n.d.) ‘Renewable Energy Policy: Brazil’, Centro Clima: Center for Integrated Studies on Climate Change and the Environment, available through Renewable Energy Policy Network for the 21st Century at www.ren21.net/ pdf/WorkShop_Presentations/do-Valle_Renewable%20Energy%20Policy% 5B1%5D.ppt World Wind Energy Association (2007) World Wind Energy Award 2007 goes to Government of Brazil for Proinfa Programme, 4 October Reuters UK (2008) ‘Chile’s Congress approves renewable energy law’, 6 March Ministerio de Economía Fomento y Reconstrucción (2004) ‘Ley Corto I: Regla Sistemas de Transporte de Energía Eléctrica, Establece un Nuevo Regimen de Tarifas para Sistemas Eléctricos Medianos, y Introduce Adecuaciones que Indica a la Ley General de Servicios Eléctricos’, Diario Oficial de la República de Chile, 13 March Woods, R. (2008) ‘Renewable energy is booming in Latin America’, Business News Americas, 6 May Ruiz, O. (2007) Interview with O. Ruiz, Head of the Centre of Information and Promotion of Renewable Energy, Ministerio de Energía y Minas, 7 September, Guatemala City, Guatemala Salgado, G. (2007) Interview with G. Salgado, CDM Consultant, former Designated National Authority of Honduras, 11 September, Tegucigalpa, Honduras Ley, D. (2008) Interview with D. Ley, Former United Nations ECLAC Consultant, 30 April Millán, J. (1999) ‘The power sector in Costa Rica’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC Millán, J. (1999) ‘The power sector in Nicaragua’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC Millán, J. (1999) ‘The electrical sector in Guatemala’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC Millán, J. (1999) ‘The electrical sector in Chile’, in Profiles of Power Sector Reform in Selected Latin American and Caribbean Countries, Inter-American Development Bank, Washington, DC Cordero, F. and Mayorga, G. (2007) Interviews with F. Cordero and G. Mayorga, Strategic Business Unit of Instituto Costarricense de Electricidad (ICE), 25 September, San José, Costa Rica Vélez, O. L. (2007) Interview with O. L. Vélez, Empresas Públicas de Medellín, Subdirección Medio Ambiente, 18 October, Medellín, Colombia Barnes de Castro, F. (2007) Interview with F. Barnes de Castro, Commissioner of Comision Regulatoria de Energía, 30 August Delgado, W. (2007) Interview with W. Delgado, Project Developer for Companía Nacional de Fuerza y Luz, 27 September, San José, Costa Rica Torres, M. (2007) Interview with M. Torres, Project Planner for Empresa Nacional de Electricidad of Nicaragua 19 September

7 UNFCCC Procedural and Methodological Barriers

United Nations Framework Convention on Climate Change (UNFCCC) procedural and methodology barriers for renewable energy Clean Development Mechanism (CDM) projects fall into a variety of categories including the following: an unstable CDM market; complications that arise from countries having low emission factors and high levels of imported generation; misunderstanding of CDM methodology; adjustments made to build and operating margins and methodologies that do not promote the economic viability of projects; changing CDM methodologies; conflicts with the regulatory and financial additionality of projects; and the availability of carbon brokers and Designated Operational Entities (DOEs) in each country. The barriers for small-scale projects to earn Certified Emission Reductions (CERs) are many, and discussed thoroughly in Chapter 8, ‘Small-Scale Barriers’.

Instability of the CDM market The CDM market is unstable for several reasons. Firstly, it is a part of the emerging carbon market that suffers from price fluctuations as the cost of reducing carbon domestically is somewhat unknown. Also, the number of allowances CO2 throughout the European Union (EU) has a huge bearing on the price of CERs. However, the number of allowances that are excess or not needed is unknown until the end of each trading period, 2007 and 2012. At that point, the price of carbon can either skyrocket or plummet as it did in the spring of 2006 when regulated entities realized there was a glut of allowances on the market [1]. The number of CERs that will be generated from the developed projects is also highly speculative since their generation hinges on the proper functioning of the system. In July of 2007, Christiana Figueres and Ken Newcombe made estimates for a paper published by the World Bank. The paper shows the total CERs needed from the EU in the second trading scheme to be 1.25 billion by 2012 (1.25 gigatonnes of reductions). If other Annex I countries like Canada

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(but not the US and Australia) are included, the CERs needed would total 2.7 billion. In this second scenario with a need of 2.7 billion CERs, current pipeline supply with no additional projects would approximately meet the need [2]. Another World Bank report by Karen Copoor and Philippe Ambrosi, written in May of 2007, predicts that EU buyers (who make up the bulk of the CER market), have fulfilled only 45 per cent of their demand for CERs and Emission Reduction Units from Joint Implementation. Excluding potential Australian, Canadian and US demand, they conclude that there is a remaining demand of about one billion CERs and Emission Reduction Units from Joint Implementation activities for the 2012 target, which is close to the Figueres/Newcombe prediction of 1.25 billion CERs [3]. These estimates for future CER demand are difficult to predict for a variety of reasons. Assumed project failure rate has a large bearing on the number of CERs that will be available. The Figueres/Newcombe report which estimates that demand, including all Annex I countries, would be met by current pipeline projects does incorporate a failure rate [2]. The US Electric Power Research Institute estimates that about half of the CERs that are expected to be generated will fail because projects are delayed, malfunction or experience other problems, while other carbon market analysts assume project failure rates of 15–20 per cent [4 and 5]. Given the huge expected increase in CERs because of projects in the pipeline, the level of success of these prospective projects will have a large bearing on the number of CERs available. Figure 7.1 below shows the total CERs that will be generated from already registered and pipeline projects worldwide. This graph assumes that industrial gases will not be included in the future supply. 45 Pipeline projects 40

Registered projects

35

Gtons of CO2

30 25 20 15 10 5 0

2017

2024

Source: Figueres, C. and Newcombe, K. (2007) Evolution of the CDM: Toward 2012 and Beyond, World Bank, Washington, DC

Figure 7.1 CERs predicted without industrial gas inclusion

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CER estimates must make assumptions about the supplementary clause or how much each country can use project-based CERs or Joint Implementation Emission Reduction Units to fulfil its reduction targets [3]. Canada has set its clause at 10 per cent of total reductions necessary while the clauses within EU countries average 13.5 per cent, but vary from 8 per cent in the UK to 20 per cent in Spain [4]. Each estimate could have used different average supplementary clauses. These estimates of a flooded CER market or having a shortage of CERs must be considered carefully because they assume that the US, Australia and Canada will not have a significant demand for CERs. These predictions were made before Australia’s recent move to ratify the Kyoto Protocol in December of 2007 [6]. Also, with the domestic movement on both the east and west coasts of the US to control greenhouse gas emissions, the US could have a demand for CERs before 2012. Beyond these complications of project failure rate, the supplementary clause, and future country participation with CER forecasting, there are regulatory and other uncertainties that make it difficult to predict post-2012 CERs generated. Many negotiators think that the industrial gas emissions will not be allowed as valid reductions in the post-2012 regime since these projects have raised several questions of whether or not they fulfil the goal of sustainable development. Which sectors will be regulated also places uncertainty in these estimates. Aviation, shipping and vehicles are being discussed as potential sectors for regulation in the EU. Inclusion of these sectors could greatly increase demand for CERs [3]. Predictions about future CER demand have to make assumptions about renewal periods after seven years and the success of projects’ ability to register in these future periods. Also, estimates do not include new projects that are not currently in the pipeline. Finally, these estimates mean little without knowledge about what the reduction targets for each country will be and whether or not the market will be flooded. Another market uncertainty results from the unclear post-2012 Kyoto obligations. Since most renewable energy projects require several years to initiate and have long-term payback periods, developers are hesitant to take on new projects that will generate CERs for 7 to 21 years, well into a time when CERs may have no value. There are few post-2012 CER buyers. Offers from the few buyers that exist tend to be low because of the uncertainty of reduction targets and CER market saturation [7]. Until the rules are finalized, the CERs that can be forward-purchased from projects in the pipeline will suffer from low prices. Therefore, the market for CDM projects may decline significantly in the coming years. The instability of the carbon market causes confusion for project developers and investors. Having the value of and ability to obtain CERs being uncertain prevents these entities from depending on their existence. This situation undermines the additionality of projects, as those that would occur in a business-as-usual situation are the ones that are able to exist. When this occurs,

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CDM revenues act as additional profits for already financially viable projects, but do nothing to promote marginally profitable projects.

Methodology confusion As project owners, DNAs and carbon brokers have learned the CDM project cycle through practice and some mistakes have been made. In Peru, one of these mistakes caused the Paramonga Sugarmill to be denied registration. In 2002, the country’s Consejo Nacional del Ambiente (CONAM) or national environmental office did an initial assessment that showed the project to be small-scale based on its generation of less than 15MW. Then, the Andean Center for Environmental Economics (CAEMA) wrote a Project Design Document (PDD) based on this assessment, and the Det Norske Veritas (DNV) validated the project. However, the CDM Executive Board rejected it because the project had 85,000 annual emission reductions rather than the required 60,000 for small-scale status. Confusion about this project arose because the project was both a fuel switching and renewable energy project. Fuel was switched from petroleum to biomass in a 15MW power plant. In the early assessment of the project, the CONAM, CAEMA and DNV had all incorrectly assessed the project size [8]. Undaunted by this experience, Paramonga is now considering bundling a new project with this older project into one PDD [8]. However, this expectation may not be realistic, and based on incorrect CDM information. The biomass plant of 2002 that Paramonga hopes to earn CERs for is already operating. After 31 March 2007, projects that had already begun operations were not eligible for registration [9].

Low emission factors There is a bureaucratic barrier that results from CDM projects in countries that have low emission factors. The CDM project displaces generation that occurs within the country, and the amount of CERs produced is typically a product of the megawatt-hour (MWh) generated times the carbon intensity of the fuel used to produce the energy for the country in a business-as-usual scenario. For countries like Costa Rica that have low national emission factors (or CO2 produced per MWh generated) because 70 per cent of the country’s generation is from hydro, fewer CERs are generated from a project that is the same size as a project in a country with a higher national emission factor. However, since Costa Rica’s main hydro sites have already been utilized, their future electrical production to fulfil demand growth will most likely be fossil fuel-based from imported fuels [10]. For countries with a generation portfolio and future fuel mix like Costa Rica’s, perhaps baseline calculations should not be based on historical emissions, but instead on predicted future emissions. Structuring the baseline calculation on historical emissions punishes countries that currently have large


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sources of clean energy and rewards countries that have developed with a strong dependency on fossil fuels [11].

Imported energy Imported energy can also cause a country to have an artificially low emission factor since it counts as zero for the country’s emission factor [12]. It is essential to count this generation as zero because it would be difficult to track frequent energy transactions across borders and then trace the source of generation for each unit. Counting generation from other countries would also mean that it would have to be subtracted from the host country’s emission factor when calculating reductions made domestically. These calculations would add complexity to the already complicated process of determining emission reductions. Because there is no easy way to deal with this problem, countries with high energy importation rates, such as Uruguay at 35 per cent and Ecuador at 10–14 per cent, suffer from earning fewer emission reductions [13 and 14]. Therefore, CDM projects in these countries are not as desirable.

Adjusting the build and operating margin Sometimes carbon brokers try to earn more emission reductions for their projects by adjusting the build and operating margin of their projects in the baseline calculation. The operating margin refers to the emission factor of the power plants on the grid, while the build margin refers to the emission factor of the most recent capacity additions to the system. Typically, these two factors are averaged together equally to create the baseline emission factor in tonnes of CO2 per MWh of electricity produced. Renewable energy CERs are calculated by multiplying the MWh of electricity the project produces by the emission factor. For solar and wind projects, an operating margin of 75 per cent and build margin of 25 per cent are used since these projects tend to correspond with peak loads.1 All other projects use a 50/50 ratio for the build/operating margin. Deviations from these standards must be justified as an exception to the preferred method [15]. Whatever ratio of operating and build margin is selected in the PDD remains for the life of the project, which is either seven or ten years. Carbon brokers and project developers will sometimes adjust these ratios slightly to produce what they think will generate more CERs. However, an adjustment that may yield more CERs in the current year may yield less in future years. Since the emissions reductions are calculated each year to incorporate the most up-to-date and accurate numbers, changing the numbers can produce an unexpected result. For example, in Colombia, La Niña years tend to have more precipitation, allowing dams to run at full capacity. El Niño years are drier and the country must rely on more thermal generation.2 Therefore, arguing for a higher or lower percentage will not always give a project more

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CERs since the operating margin changes depending on the availability of water in Colombia [16]. The operating and build margins can also differ depending on changes in fossil fuel availability. Chile’s operating margin has changed in recent years as the natural gas supply line was cut off from Argentina. Chile has had to retrofit many of its plants that accepted natural gas to take fuel oil now. This change has increased the carbon intensity of its operating margin fuel mix. Therefore, weighting the build margin more heavily in Chile prior to this change would have yielded fewer CERs [17]. Beyond fuel shortages, countries also may not be able to procure fossil fuel resources because of ideological or political differences with their neighbours. Chile refuses to grant Bolivia access to a Pacific port between the northern border of Chile and southern border of Peru. Because of this conflict, Bolivia refuses to sell natural gas to Chile [17]. Given the uncertainties in the build margin because of the price of fuels, political climate of the country, and availability of water resources, most carbon brokers choose to keep the recommended ratio.

Proposing new methodologies Adjusting existing methodologies or proposing new ones to yield more CERs can also produce unexpected results. The CDM was designed to be flexible since new types of carbon reductions are being devised every day. This flexibility allows new methodologies to be proposed. In Chile, the project developers of Chacabuquito hydro facility decided to propose a new methodology called New Methodology 0076, which was eventually accepted in a slightly different form as Approved Methodology (AM) 0026. The logic behind proposing this methodology was that it would allow more reductions to be earned from renewable energy CDM projects in the country. Chile’s special method of valuing water in dams means that non-run-of-river hydro facilities with a reservoir only release water for generation when the least-cost bid process shows that the ‘value of water’ or ‘shadow’ price given to the water is lower than other forms of generation. The ‘value of water’ can be thought of as the opportunity cost of using the water at that moment instead of saving it to be used at a later time. This price is based on the price that electricity commands at any given time. This use of dams is different from countries that use them simply as a baseload where the cost of operation and/or capital cost are the only factors considered for the least-cost bid [17]. After severe droughts in 1998, the value of water in dams increased in Chile. Chacabuquito developers, which included the World Bank’s Prototype Carbon Fund and Hidroelectrica Guardia Vieja representatives, realized that under the preferred baseline calculation for the operating margin, which takes into account the last 10 per cent dispatched on the grid to calculate CERs under Approved Consolidated Methodology (ACM) 0002, few reductions would be calculated. The last 10 per cent dispatched on the Chilean grid was


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almost always hydro since this resource was considered most expensive and all cheaper options are selected by the merit order dispatch grid which employs an independent entity for optimal system performance based on the lowest marginal cost of generation. So, developers decided that a new methodology for countries like Chile with merit order dispatch systems should be created. New Methodology 0076 proposed that only the first thermal generation in the dispatch order for calculating the operating margin emission factor should be considered for calculation of CERs from displaced generation. The rationale for this proposal was that the CDM project would only displace thermal generation because the generation would always be of less value than the ‘value of water’. Also, the limited storage capacity of some CDM projects ensures that they must be immediately dispatched and do not have the ability to load follow, which places them below the ‘value of water’ in terms of cost of generation and the dispatch order. Therefore, they concluded, the CDM project would always be replacing a thermal resource and never water [18]. The UNFCCC accepted the methodology, but changed it in a significant way that left the methodology authors with significantly fewer CERs than they had predicted for the Chacabuquito project [19]. The proposed methodology took into account the fact that the CDM project would almost always replace thermal generation and specified that ‘hydro resources should be excluded from the definition of marginal plants if thermal power units are dispatched below those hydro resources on economic merit. If no thermal power plants are needed to meet the demand without the CDM projects, then the hydro resources are at the margin and therefore the emission factor is zero.’ However, the actual methodology omitted the first sentence above and only included ‘If no thermal power plants are needed to meet the demand without the CDM projects, then the emission factor is zero.’ In this way, Chilean developers used many resources on the creation of a new methodology only to have it changed by the CDM Executive Board to be very similar to the AM0002, which does not take into account the nuances of merit order dispatch grids [18]. (More details about this methodology can be found in the countryspecific section on Chile.) Even though Chacabuquito project developers were disappointed that their methodology was not selected as written, the methodology may be necessary for today’s electricity market in Chile. Chile’s fuel supply crisis since 2002 when the natural gas supply from Argentina began to be cut has dramatically changed the shadow price of water in comparison to fossil fuels. So, in the spring of 2007 when fossil fuels commanded a price of $250/MWh, the price of fossil fuels was most likely considered more expensive than the ‘value of water’, and dispatched last [17]. Therefore, the CDM project would, according to AM0026, be displacing fossil fuel generation and yielding maximum CERs even without the provisions of New Methodology 0076 [18].

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Changing existing methodologies An alteration in UNFCCC methodology for the destruction of methane has changed the economics of methane capture projects significantly. Prior to November 2006, the UNFCCC methodology allowed developers to assume that 100 per cent of the methane was destroyed by these open flares. However, the UNFCCC’s new, revised destruction of methane methodology sets a maximum amount of methane destroyed from these open flares of 50 per cent. In order to prove that more than 50 per cent of the methane is destroyed, farm owners have to have a closed flare with a temperature gauge. The heat of the gas flared determines how efficiently the flare is working and the quantity of gas destroyed [20]. The temperature gauge only costs about $1200, but the cost of the flares varies widely. Open flares cost only $27,000–$150,000 while closed flares range between $105,000 and $195,000. The price range reflects the capacity of the flare, and in general, a closed flare costs 1.5 to 2 times more than its open counterpart [21]. A Mexican company called Geosistemas has created a less expensive closed flare that is comparable in price to the open flare. However, this flare is not yet available for purchase [22]. Projects that started under the assumption that they could buy and use open flares, but did not register the project before the change in methodology, have had to revise their budgets to incorporate the cost of the closed flares and in some cases have had to return open flares already purchased. Fear that the methodology could change again prompts projects in the CDM cycle to finish in a rush and discourages new project development from one company who had to change 29 digester plans in Mexico after the methodology was revised.3 This methane destruction from animal wastes methodology (ACM 0010) is just one example of a methodology that has changed three times. As of March 2008, the methodology for grid-connected renewable energy (ACM 0002) had seven revisions. Project developers have had difficulty timing the start of their projects with CDM registration because of all of the complicated steps and unforeseen delays that can occur in the process. If a project begins producing energy before it is registered, it cannot qualify for CDM [23]. Prior to March of 2007, projects that had begun operations could retroactively register and backdate credits. This provision was put in place to allow the projects that had begun operations between 2001 and 2005 (after the Marrakesh Accords of 2001 established CDM and before the Kyoto Protocol was ratified in 2005) to achieve registration [9]. Having uncertainty about the methodology one is using and the timing of when the project will be registered adds a layer of complexity to the CDM process that has discouraged project developers.


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Regulatory and financial additionality State-run electric power companies Another problematic aspect of the CDM rules is the question of regulatory and financial additionality. Regulatory additionality exists only if a project has not been mandated by the government where it is located. Problems with regulatory additionality arise in markets that are still highly regulated, as in Costa Rica and Mexico. In these countries, if an energy application is not in the national expansion plan, by law it usually cannot be considered for development [24]. If a project is named in the plan, then it is considered to be development that would occur in a business-as-usual situation and is not additional [25]. This barrier prevented the Costa Rican state-run utility, Instituto Costaricense de Electricidad (ICE), from successfully registering Peñas Blancas hydro project [25]. Financial additionality requires that the project depend on CDM revenues for its existence. This requirement is another huge barrier for state-run electrical utilities. ICE of Costa Rica is obligated to pursue the generation that is least cost for the sake of providing the cheapest rates for their customers. If renewable energy is found to be the cheapest option, it will be pursued in a business-asusual situation, making it nearly impossible to demonstrate financial additionality for the CDM. CDM revenues are not allowed to be factored into ICE’s financial analysis to make renewable energy cost-competitive with other sources of generation because these revenues are considered uncertain. Therefore, it is almost impossible for ICE to initiate CDM projects. However, ICE was able to structure one successful CDM wind project by negotiating a unique arrangement that involved a private company called Norteco owning 75 per cent of a wind farm called La Tejona. ICE had the option of buying the installation over five years. This arrangement and the upfront money for CERs from the Dutch Certified Emissions Reductions Procurement Tender (CERUPT) fund allowed ICE to avoid having to ask permission to make an investment, which may have been denied, and ultimately led to the development of La Tejona wind farm. This project was able to prove financial additionality because an experienced carbon consultant called Climate Focus developed the PDD and showed that the CERs were essential to the project’s financial success and factored into the project’s pro forma from the onset of project planning. However, this rare purchase agreement has not been replicated because of the complexity of structuring the ownership [25]. ICE was also able to sidestep the problematic demonstration of regulatory additionality, for example, the Tejona wind farm. This farm, at just 20MW, was small enough to be left out of ICE’s future expansion plan because it did not have a major impact on the grid’s functioning. Therefore, it was not considered business-as-usual as it would be if it were mentioned in this plan [25]. Mexico’s Comisión Federal de Electricidad (CFE) also faces huge barriers to implementing CDM projects. Not only does CFE face the same regulatory and additionality problems that ICE does, but CFE’s structure is such that it

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does not have protocols as to how to handle CER revenues. By law, CFE could not keep these extra revenues. They would most likely go into a separate fund held by the Mexican government instead of directly to CFE. Therefore, CFE has little incentive to be involved in the process. If CFE tried to lobby for the incorporation of CERs in the least-cost planning process for projects, then the Mexican government would be at risk of allowing a project that depends on these revenues. If the project failed to be registered or CERs were worthless in the post-2012 rules, the Mexican government would be forced to pay the CER value in order to prevent the project from going into debt. If CFE wants to enjoy the value of the CERs, then it must be very creative in how it structures its energy purchases. For the 102MW wind farm called La Ventosa in Oaxaca, CFE elicited a bid for construction that was accepted by Iberdrola of Spain. Iberdrola then built the wind farm and will operate it for 25 years. Iberdrola is selling the electricity to CFE in a Power Purchase Agreement (PPA) and will transfer the installation to CFE after 25 years. The energy price negotiated in the PPA probably incorporates the cost of construction and the value of the CERs. Iberdrola is then able to earn the CERs as any other independent power producer (IPP) would, with a financial additionality and/or barriers analysis [26]. CFE was also able to earn CERs for the country’s first commercial wind farm, known as La Venta II. It is unclear from the PDD for this project how the financial and regulatory additionality argument complications were overcome as the Mexican least-cost planning process and expansion plan were not mentioned [27]. When directly questioned about this issue, CFE representatives were unresponsive. In summary, regulatory and financial additionality is complicated when a country has a state-run energy sector that has strict rules about the inclusion of energy projects in planning documents or laws that mandate the creation of the CDM project. Experienced, adept PDD authors, however, can sometimes navigate these pitfalls and prove additionality even as the Executive Board tightens its controls on registration.

A perverse incentive? The regulatory and financial additionality barriers can also complicate the process of promoting domestic action to slow climate change. Up until 2005, countries were hesitant to take policy steps towards mitigating greenhouse gas emissions. Their concern was that the policies that reduced emissions or mandated renewable energy development would prevent new CDM projects from proving regulatory additionality. Also, if incentives were in place, like a feed-in tariff, and renewable energy became competitive with fossil fuel-based alternatives, then financial additionality would be impossible to prove. Furthermore, if a policy was put in place after a CDM project began operating, it could change the baseline of that project in subsequent crediting periods, causing it to earn fewer CERs than the investors initially predicted at the start of the project [2].


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This concern was justified as some countries prevented projects that complied with a mandate from earning Executive Board approval. Costa Rica has a renewable energy mandate of 20 per cent. Projects that fulfilled this mandate were not allowed by the CDM Methodological Panel to earn CERs in 2004 [28]. Also, a 1995 requirement that privately generated electricity in Costa Rica be derived from renewable sources that had the goal of decarbonizing the country’s energy portfolio and reducing reliance on imported fossil fuels has recently caused the CDM Methodology Panel to question the additionality of private hydroelectric plants. Also, countries worried that energy efficiency standards would negate the additionality of projects that improved performance efficiency. As a result, Colombia chose not to officially incorporate energy efficiency standards into its energy laws in 2003 and 2004 following a country-wide assessment of CDM potential. Therefore, ironically, the Kyoto Protocol had created a perverse incentive for developing countries to do nothing domestically to reduce greenhouse gas emissions. Although the Executive Board (EB) was silent mandate on whether or not mandates and incentives for greenhouse gas-mitigating activities would compromise the additionality of projects, it was aware of the issue. The EB initially struggled internally with the treatment of various types of legally binding mandates (L- and L+) and voluntary incentives (E- and E+) [29]. Then, in November of 2005 at its 22nd meeting, the EB abolished the idea of treating mandatory and voluntary programmes differently and differentiated these programmes by those that promoted more and fewer emissions-intensive fuels and practices. To ensure that countries did not implement programmes that intentionally raised emissions in order to capture the revenue from CERs, the EB stated that policies implemented after the December 1997 ratification of the Kyoto Protocol would not be considered when calculating project emission reductions. Reductions would be calculated based on ‘a hypothetical situation without the national and/or sector policies or regulations’. For policies that reduce emissions, ‘the baseline scenario need not take these policies into account if the policy was implemented since the adoption of the CDM Modalities and Procedures in November, 2001’. [29] Now, PDD authors were able to use the hypothetical situation that would reflect a business-as-usual case without laws passed after 2001 that reduce emissions in order to estimate predicted reductions. In this way, project owners can be ensured that their projects will still earn an acceptable number of CERs in a country with strong renewable energy legislation [30]. This ruling implicitly penalizes countries that took early-action steps prior to 2001 to address climate change. However, to create a hypothetical scenario of emissions for a baseline calculation that took into account policies that were implemented over nine years ago would greatly complicate an already confusing calculation and most likely not result in an accurate baseline [31]. While this 2005 ruling addresses CDM developers’ concerns about emission reductions that can be earned in a country with strong incentives for greenhouse gas-mitigating activities like renewable energy incentives, it does

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not speak to complications of regulatory and financial additionality. Since this statement was put in an Annex entitled ‘Further Guidance for the Treatment of National or Sectoral Policies in the Baseline’, the author of this book and CDM experts from Baker & McKenzie’s Brazilian Environmental and Climate Change Practice Group interpret this ruling to apply only to baseline calculations [29 and 31]. Problems with the perverse incentive still arise because a renewable energy mandate could compromise regulatory additionality as the project could be shown to have occurred in a business-as-usual situation. And a production tax credit that provides a fixed premium per kWh rate for renewable energy must be taken into account in the financial additionality argument for projects. These complications have led carbon brokers like Ecosecurities to pursue projects in countries without incentives or mandates for renewable energy [32].

Country-specific complications Since the EB proclamation about baselines in 2005, countries have begun to implement policies that promote greenhouse gas reduction. In July of 2007, Costa Rica boldly set a goal of becoming carbon neutral in its transport and electricity sectors by the year 2021 with its Law of Peace with Nature (Ley de Paz con Naturaleza) [33]. This bold resolution is an important step towards mitigating climate change that few other developing nations have followed [34]. Panama also has new renewable energy laws that provide aggressive incentives that cover up to 25 per cent of the initial project costs for renewable energy generation [35]. Currently, however, Panamanian law prevents CDM projects from earning both this domestic financial incentive and CERs. Other countries, such as Brazil, Uruguay and Chile, have renewable energy mandates, while Argentina has a production tax credit and Ecuador a feed-in tariff. A host of incentives for renewable energy have swept through almost all of the countries in the region (which will be described in detail in the country-specific chapters), but it is not yet clear if these renewable energy mandates and incentives will conflict with the demonstration of additionality. Questions of regulatory additionality also exist for methane capture projects. In Mexico, Regulation 083 provides comprehensive guidance for the collection, utilization and flaring of landfill gas. Also, new hog farms are, by Mexican law, required to build biodigesters [36]. Given the existence of these rules, any landfill gas capture project or new hog farm biodigester in the country would not be additional. However, this regulation for landfills is systematically not followed because it is a part of a Federal Law and municipalities handle local municipal waste. Also, it is routinely not enforced [37]. The new hog farm biodigester ruling has yet to be tested. The CDM rules state that if a regulation that would mandate the existence of a CDM project is systematically not enforced, then additionality can still be proven [38]. The burden of proving that the law is not followed, however, falls on the PDD author.


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Programme of activities Another question of additionality is raised by a new CDM methodology, as of July 2007, that is meant to provide a clear incentive for greenhouse gas reduction policies for certain projects. The Programme of Activities (PoA) promotes activities in specific industrial sectors, allowing multiple projects implemented at different times, that comply with a governmental regulation or private sector initiative, to be registered together. This PoA, therefore, provides an incentive for developing countries to devise policies that promote greenhouse gas reductions [2]. The policy itself cannot qualify for CDM, but programmes implemented under or as a result of the policy can. However, the rules of the programmatic CDM are not clear with regard to whether or not the CDM project would be able to demonstrate regulatory additionality [31]. If the project helped fulfil a national mandate or other regulatory requirement, would its additionality not be in question as the project would have had to exist to meet the standard anyway? Another barrier to the implementation of programmatic CDM projects is the fact that the Designated Operational Entity (DOE) is liable for any CERs that are issued in error. If the DOE approves a project that the CDM Executive Board later rejects, according to PoA rules, that DOE must pay for any CERs that were issued between the time of issuance and rejection. The DOE will often create a clause in their contract with the project developer that makes the developer responsible for this liability. Since DOEs are in high demand and have plenty of work, PoA projects are low on their priority list [39]. There has been not one programmatic project registered in the ten months since the methodology was passed because of uncertainties in how the process would work. Only one grouping of programmatic solar home systems in Bangladesh and one methane capture project from swine farms in Brazil were in the validation process as of April 2008 [40]. Countries may also be hesitant to implement laws that promote development because they are still concerned that they could negate the additionality of CDM projects or cause complications in the national approval process. In March of 2008, Estonia’s DNA declared that it would not approve renewable energy projects for Joint Implementation Emission Reduction Units because they do not need carbon finance with all of the domestic support they currently receive [41].

Increasing stringency on additionality arguments The challenges to proving both regulatory and financial additionality have been heightened in recent months. Since 2005, the Executive Board’s average rejection rate for registering projects was 7 per cent; during the time period September to November of 2007, the rejection rate was 30 per cent. Young, eager consultants who have begun to carefully scrutinize PDDs and validation reports have been recently hired by the Board. They report that 40 per cent of PDDs make a poor additionality argument and 20 per cent use an incorrect methodology. This experience highlights the importance of having an experienced person or firm complete the PDD and hiring a thorough DOE with a

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good reputation to complete validation [42]. Some DOEs have begun to get a reputation for allowing non-additional projects to pass validation [43].

Availability of DOEs and carbon brokers As explained in Chapter 5, ‘Informational Barriers’, and each country-specific chapter, the existence of local carbon brokers can have a large bearing on whether or not a project becomes successful. Without these folks to help instigate and support projects, informational and logistical barriers can prevent their implementation. If a carbon broker does not have an office in the country, it can be prohibitively expensive for the project developer to hire a foreign carbon broker and pay to fly him or her to the site of the project multiple times. The availability of DOEs, who validate a project by ensuring the PDD matches the actual project’s operations and verify the reported emission reductions each year, is also key to project implementation. During 2007, the wait times for hiring a DOE averaged six months per project. The shortage of certified DOEs added to the lengthy process of registration; validation by the DOE and registration, even without the wait time, can take up to six months [5]. Another problem with DOEs and carbon brokers is that hiring them can be very costly. Hiring local DOEs like Instituto Colombiano de Normas Técnicas y Certificación (ICONTEC) of Colombia tends to be more economical since the cost of wages is cheaper and the DOE’s travel expenses are minimal. However, because the DOEs have to receive a $15,000 certification from the CDM Executive Board before they can validate or verify a project, most of these entities are based in Europe [44]. A ‘chicken and egg’ problem is created as countries with few CDM opportunities may not entice many local firms to get UNFCCC accredited; on the other hand, too few DOEs in a given country may discourage the development of CDM projects since there will be no cheap, local DOEs available to verify projects. The most well-known of the DOEs are companies like Det Norske Veritas (DNV) which have a background of auditing companies to ensure that they comply with standards, and began validating and verifying projects as an extension of their core business. Developers of Zambizá landfill gas capture in Ecuador found that to do routine maintenance, like changing the battery on the gas meter, they had to have the DOE who was based in Brazil fly to the site in Quito in order to verify that the operators of Zambizá did not tamper with the meter to yield more emission reductions [45]. Countries or projects that do not attract the attention of carbon brokers are at an additional disadvantage when it comes to hiring a DOE. Large carbon brokerages have relationships with DOEs that allow them to get preferential prices. Some carbon consultants advertise in their proposals to project owners that they can secure up to a 40 per cent discount with well-known CDM auditors if the project owner contracts their services. Without utilizing a carbon broker, project owners would be forced to pay the full price for an auditor’s services.4


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Conclusion Significant CDM-specific procedural and methodological barriers have discouraged the development of some projects. However, each complex procedure in the CDM project cycle has a purpose that attempts to filter out the non-additional projects. As the process of CDM rule refinement continues and new versions of methodologies are released, the process gets more complicated. Sometimes these changes further discourage development, but they can also stimulate it as is the case with the PoA methodology. The flexible nature of the CDM process allows project developers and consultants to propose changes to the operating and build margin ratios and existing methodologies, but sometimes these changes can have unexpected consequences that do not generate more CERs. Future adjustments to CDM renewable energy methodologies to account for countries with low emission factors and high levels of imported energy could help level the playing field for all countries. As the CDM develops, issues of regulatory additionality will continue to be clarified and hopefully will be modified to clearly allow state-run utilities to register CDM projects even if they are planned capacity additions. Also, the EB will hopefully make a ruling to clarify issues of financial and regulatory additionality for host countries that have legislation that mitigates greenhouse gases so as to prevent these countries from having a perverse incentive to do nothing about climate change. The necessity for more, local carbon consultants and DOEs is obvious as the cost of hiring foreign firms is often prohibitively expensive for developers. These consultants and DOEs need to be more careful in their evaluation of projects to pass the Executive Board’s new stringent requirements.

Notes 1 The author assumes that the logic in this 75 per cent (operating) / 25 per cent (build) split is that the build margin consists mainly of plants being brought online to fulfil off-peak demand, which would not be appropriately replaced by wind and solar plants. 2 El Niño Southern Oscillation (ENSO) and La Niña are caused by ocean surface water fluctuations in the Pacific Ocean, occurring at irregular intervals between two and seven years, that cause weather changes [46]. 3 This information is not cited to protect the author and parties involved. 4 This special relationship between the carbon consultant and DOE also draws into question the possibility of allowing non-additional projects to be recommended for registration since it is in the interest of both of these entities to register as many projects as possible and continue their practice of referrals. (The source of this material has been kept confidential to protect the author and parties involved.)

References 1 2

Point Carbon (2007) ‘Historical EUA prices’, 1 March Figueres, C. and Newcombe, K. (2007) Evolution of the CDM: Toward 2012 and Beyond, World Bank, Washington, DC

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Capoor, K. and Ambrosi, P. (2007) State and Trends of the Carbon Market 2007, World Bank, Washington, DC Diamont, A. (2008) ‘The key role of greenhouse gas emissions offsets in evolving GHG cap and trade programs’, presentation at RMEL Conference, Carbon Issues and Strategies, 17 April, Denver, Colorado Capoor, K. and Ambroisi, P. (2008) State and Trends of the Carbon Market 2008, World Bank, Washington, DC Australian Associated Press (2007) ‘Australia ratifies Kyoto Protocol’, Sydney Morning Herald, 3 December, Sydney, Australia Haites, E. (2004) Estimating the Market Potential for the Clean Development Mechanism: Review of Models and Lessons Learned, World Bank, International Energy Agency and International Emissions Trading Association Ayon, H. (2007) Interview with H. Ayon, Gerente de Finanzas de Paramonga, 7 November, Lima, Peru Salgado, C. (2007) Interview with C. Salgado, Carbon Broker, Ecoinvest, 20 March, Cartagena, Colombia Centro Nacional de Planificación Eléctrica Proceso Expansión Integrada de Instituto Costarricense de Electricidad (2006) Plan de Expansión de la Generación Eléctrica Periodo 2006–2025, Instituto Costarricense de Electricidad Salazar, M. (2007) Interview with M. Salazar, Latin American Division Head, Ecosecurities, 12 March UNFCCC (2007) ‘Methodological tool: Tool to calculate the emission factor for an electricity system’ version 01.1, CDM Executive Board Report 35, Annex 12 Administracion Nacional de Usinas y Trasmisones Electricas (2006) Cifras, Organizacion y Estudios Empresarioales Relaciones Publicas Administracion Nacional de Usinas y Transmisones Electricas, Montevideo Castillo, D. (2007) Interview with D. Castillo, President of ERD Consultants, 1 November, Guayaquil, Ecuador UNFCCC (2007) ‘Approved consolidated baseline and monitoring methodology ACM0002: Consolidated baseline methodology for grid-connected electricity generation from renewable sources’, CDM Executive Board Report 36, 30 November Fernandez, O. (2007) Interview with O. Fernandez, Departamento de Generacion de Empresas Publicas de Medellin, 18 October, Medellin, Colombia Frias, C. A. (2007) Interview with C. A. Frias, Especialista Area Ingenieria, 18 November, Santiago, Chile Synex: Ingenieros Consultores (2006) ‘Determination of the operating margin when a CDM project displaces a reservoir hydro power plant’, 25 July Manuel, J. (2007) Interview with J. Manuel, Hydromaule Project Developer, 16 November, Santiago, Chile UNFCCC (2006) ‘Methane recovery in agricultural and agro industry activities’, Methodology AMS III-D, version 13, November, p2 Caine, M. (2000) ‘Biogas flares: State of the art and market review’, Topic report of the IEA Bioenergy Agreement Task 24: Biological conversion of municipal solid waste, December, p11 Velario, L. (2007) Interview with L. Velario, Granjas Carroll Mexico Project Engineer for Geosistemas, 22 August, Perote, Mexico Gomez, J. C. (2007) Interview with J. C. Gomez, Plant Manager for Ecoelectric at Valdez Sugarmill, 28 October, El Milagro, Ecuador Barnes de Castro, F. (2007) Interview with F. Barnes de Castro, Commissioner of Comision Regulatoria de Energía, 30 August


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25 Cordero, F. and Mayorga, G. (2007) Interviews with F. Cordero and G. Mayorga, Strategic Business Unit of Instituto Costarricense de Electricidad (ICE), 25 September, San José, Costa Rica 26 Iberdrola (2007) Iberdrola, La Ventosa Project Design Document, UNFCCC, 14 June 27 The Spanish Carbon Fund (2006) Project Design Document for La Venta II, UNFCCC, 30 August 28 Figueres, C. (2004) Institutional Capacity to Integrate Economic Development and Climate Change Considerations: An Assessment of DNAs in Latin America and the Caribbean, Inter-American Development Bank, Washington DC 29 Figueres, C. and Haites, E. (2006) Policies and Programs in the CDM, International Institute for Sustainable Development (IISD) in the context of the Development Dividend Project, Winnipeg 30 UNFCCC (2005) ‘Clarifications on the consideration of national and/or sectoral policies and circumstances in baseline scenarios’, CDM Executive Board Report 22, Annex 3, 23–25 November 31 Sales, R. and Sabbag, B. K. (2006) Legal Compliance with Environmental Requirements Impacting Assessment and Demonstration of Additionality in Clean Development Mechanisms: A Legal Review under the UNFCCC, the Kyoto Protocol and the Brazilian Legal Framework on Climate Change, Baker & McKenzie’s Brazilian Environmental and Climate Change Practice Group 32 Sarria, P. (2007) Interview with P. Sarria, Project Developer for Ecosecurities, 27 February 33 Ponchner, D. and Vargas A. (2007) Interviews with D. Ponchner and A. Vargas, Gobierno lanzará iniciativa ‘Paz con la Naturaleza’, in La Nacion, 4 July, San Jose, Costa Rica 34 Estrada, M. (2007) Interview with M. Estrada, CDM Consultant for Terracarbon, 18 August, Mexico City, Mexico 35 Ministerio de Economia y Financas de Comision de Politica Energetica de Panama (2004) Legislative Assembly Law 45, 4 August 36 Ochoa, V. (2007) Interview with V. Ochoa, General Manager of Granjas Carroll México, 22 August, Perote, Mexico 37 Hasars (2007) Hasars Project Design Document, UNFCCC, 11 April, p10 38 UNFCCC (2007) ‘Methodological tool: Tool for the demonstration and assessment of additionality’, version 04, CDM Executive Board Report 36, Annex 13, p4 39 Point Carbon (2008) ‘Programmatic CDM stalls on “liability” concerns’, CDM/JI Monitor, 14 May 40 CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, April 41 Point Carbon (2008) ‘Renewable energy support halts Estonia’s JI approval process’, 3 March 42 Newcombe, K. (2007) Interview with K. Newcombe, Goldman Sachs Carbon Division, in CORFO Chile Invest, 14 November, Santiago, Chile 43 Michaelowa, A. (2007) ‘Fundamentals of programmatic CDM’, presentation at CDM Tech Workshop, Cartagena, Colombia, 21 March 44 UNFCCC CDM (2007) Application for Accreditation, 24 February 45 Zeller, R. (2007) Interview with R. Zeller, President of Alquimiatec, 24 October, Quito, Ecuador 46 Intergovernmental Panel on Climate Change (2001) ‘Interannual variability: ENSO’, ch 9 of Climate Change 2001: Working Group I: The Scientific Basis, IPCC, Paris

8 Small-Scale Barriers

Introduction Small-scale renewable energy projects under 15MW can be broken down into two categories: (1) those funded by for-profit entities for the purpose of feeding electricity into the grid or to sustain a factory’s operations; and (2) those sponsored by donations or grants that provide off-grid energy for rural communities. The latter of these projects rarely earn Clean Development Mechanism (CDM) credit because of their size, even though they almost always promote sustainable development. In fact, in Latin America there are no off-grid CDM projects. Also, if a non-profit entity provides a grant for a project, that grant usually precludes the project from being proven financially additional. It is for these reasons that it is particularly important to investigate the barriers to small-scale projects. Carbon brokers are usually not interested in developing projects under 15MW for CDM credit because their size is too small to generate enough Certified Emission Reductions (CERs) to cover consultant costs. Therefore, only 6.4 per cent of the CERs of registered projects by March 2008 are derived from small-scale projects [1]. Small-project developers are further discouraged by the fact that 80 per cent of all projects do not make it to the registration stage of the project cycle because of all the barriers that face projects [2]. However, there are some instances where these projects, especially microhydro ones, are profitable and undertaken by developers, financers and carbon brokers. Most of the smallscale projects in Spanish-speaking Latin America thus far have been undertaken by for-profit entities, and consist of microhydro projects and methane capture from hog farms for flare or use in a microturbine [3].

The current status of small-scale projects in Latin America The microhydro projects were profitable before CDM revenues were available, and undertaken by foreign firms like Italy’s Enel. Now CDM revenues add additional profit to these projects. Many of the CDM hydro projects under 15MW are in the Central American countries because that size of capacity addition is appropriate for the needs of these smaller grids.

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By May of 2007, 54 small-scale projects in the region existed and 94 per cent of these projects were methane capture or microhydro [3]. Methane capture and use for electrical generation or flare were some of the first projects developed because they generate a large number of reductions for relatively small capital costs when compared with other renewable energy projects. The high warming potential of methane yields many reductions even if it is not sent through a turbogenerator to displace fossil fuel-intensive electricity from the grid. Therefore, the basic requirements for the creation of one of these projects are just a plastic tarp to cover the manure, a suction system to pull the methane to a flare, a gas meter and a flare. For connection to the grid, transmission lines and a turbogenerator are required. While this system may seem simple, poor performance of these projects proves that for maximum CER production, a more refined system with more components is necessary. (More details about these types of systems can be found in Chapter 2, ‘Technical Barriers’.) The carbon consultant involved in the CDM project cycle for 29 of these methane capture projects also claims that this type of project enjoyed early success with small-scale registration because all 29 of the methane projects are actually for one owner, who unbundled an umbrella of projects owned by the same farm operations in order to be able to use the streamlined methodology for small-scale projects. Unbundling projects in this way is not allowed by the CDM Executive Board. Given this situation, the total number of projects should not be impressive since most of these methane capture projects are really just one larger project.1 Twenty-one more projects involve the creation or upgrading of small hydro facilities. Critics suggest that most microhydro CDM projects were planned before developers knew of CDM revenues and would have existed without CDM revenues since the revenues only add 1–2 per cent to the overall project revenues [4 and 5]. A representative of the Guatemalan Centre for Cleaner Production (Centro Guatemalteco de Producción Más Limpia) explains that there are several hydro projects because of subsidies that reduce the import tax for hydroelectric equipment in Guatemala. Also, once project developers are familiar with the methodology for hydro development in the region, it is easy for the same or other developers to replicate it [6]. The possible improper use of small-scale methodologies for the methane projects and non-additional nature of the microhydro projects suggests that the barriers to quality additional small-scale project development in this region are too cumbersome to overcome [7]. A streamlined small-scale methodology sought to address this flaw by putting small projects on a level playing field with large ones. Recently, a Programme of Activities (PoA) methodology has furthered this effort. More details about both of these methodologies are described in detail later in this chapter. Next in this chapter, the financial viability of small-scale projects based on current carbon prices is assessed. Finally, country and region-specific measures to promote or discourage small-scale projects are discussed.

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Existing small-scale methodology Currently there is one streamlined methodology for small-scale CDM projects under 15MW. This methodology is still quite involved and complicated and, like large-scale CDM projects, small-scale projects must still usually hire carbon brokers to facilitate the project cycle. The current small-scale methodology for renewable energy projects differs from the comprehensive methodology in a few important ways. There is a simplified baseline emission calculation that allows project developers to compare the emissions resulting from the project to the emissions that would occur in a typical business-as-usual scenario (baseline emissions), using a grid emission factor that is an average of tonnes of CO2/MWh from old and new facilities and those under construction. These two factors are known as the operating and build margins.2 Developers of larger CDM projects typically have to determine the exact emissions that are being replaced by calculating the carbon intensity of the emissions from power plants that produce the last 10 per cent of generation in the transmission grid of the project for every hour of the year. Although this baseline simplification is a step in the right direction, it is still difficult for project developers in rural areas to find an average emission rate [8]. This emission rate can be difficult to pin down because villagers use a mix of fuel wood, car batteries, diesel generators and kerosene from a variety of sources, which each have different energy intensities. Also, the amounts of firewood fuel used are described in terms of local measurements that differ from person to person as they relate to the amount one can carry [9]. Secondly, the small-scale CDM methodology allows project developers to fulfil only one of the five additionality requirements. The current requirements mandate that large-scale CDM projects break technological, financial and firstof-a-kind barriers to establish that they would not occur in a business-as-usual case [10]. Allowing the fulfilment of only one additionality criterion greatly simplifies this step. However, the one additionality criterion that the smallscale project fulfils must be a prohibitive barrier that is significant enough to prevent the project from being developed without CDM revenues [11]. The third important way in which small-scale projects differ from largescale ones is that small projects can be bundled together for the purpose of validation [12]. This rule allows small projects to share a Project Design Document (PDD) and cut transaction costs since the PDD would only have to be written and approved once. This bundling mechanism works best for projects of the same type since writing one PDD for a wind and solar project with different baseline calculations and additionality requirements would be almost the same amount of work as writing two PDDs [13]. Lastly, there are two other small benefits available for small-scale project cycle participants. As of 2007, small-scale projects are now able to waive registration costs, which are about $6000 for small-scale projects [14]. These projects also have simplified PDDs and the same Designated Operational Entity (DOE) can validate and verify a project [10].

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Although the special small-scale methodology is meant to make it easier for small projects to pass through the project cycle, it does not always achieve its goal. The advantage of having small-scale projects bundled together to benefit from only having to write only one PDD proves difficult to take advantage of in reality. The Public Utility of Medellín (Empresas Públicas de Medellín (EPM)) had difficulty bundling microhydro projects since there are not always land and water rights available for purchase, or transmission networks that can serve prime microhydro sites [15]. Since no solar projects in the region exist, the simplified methodology is clearly not streamlined enough to stimulate development in this sector. As a result, IT Power partially funded a study that considered a methodology, specifically for solar home systems, that would allow for the use of a simplified baseline calculation of an average global emission factor of kerosene, which is usually used for lighting before these systems are installed [16]. This methodology ended up never being utilized.

Programme of activities This streamlined methodology has also failed for very small-scale, renewable energy projects under 1MW in rural populations. Often, these renewable energy projects will involve the use of solar panels for light and electricity. In the absence of the photovoltaic cells, some CO2emissions are released from the fuel wood, diesel generator sets, car batteries, or kerosene that villagers once used, but these emissions are usually quite small since the electrical demand of rural villages is usually low compared with the demand of city residents. Therefore, few CERs can be earned from these types of projects and the typical rural population cannot pay for the upfront costs and operation and maintenance of the system with CDM revenues. If CDM revenues were combined with grants from international organizations or domestic programmes to assist with the electrification of rural populations, then they could be economically feasible. However, as previously mentioned, current CDM rules to establish additionality discourage the use of grants and subsidies for these types of projects. Subsidies make the projects more financially feasible, but, at the same time, they make it difficult to establish that the project would not have occurred in a business-as-usual case [9]. Because of this conflict between aid organizations’ donations and the acquisition of CDM revenues, a type of programmatic CDM or PoA was created in July 2007 [17 and 18]. In the programmatic CDM rule-making, parties decided that a programme of activities (PoA) is a voluntary coordinated action by a private or public entity which coordinates and implements any policy/measure or stated goal (i.e. incentive schemes and voluntary programmes), which leads to anthropogenic GHG emission reductions or net anthropogenic greenhouse gas


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removals by sinks that are additional to any that would occur in the absence of the PoA. [19] In other words, a programme that a country puts in place to promote a certain behaviour that lowers greenhouse gas emissions, such as installing compact fluorescent lights or buying a hybrid vehicle, can qualify as a CDM project. This methodology differs from the current small-scale bundling mechanism (where projects are grouped together until they make up the maximum number of emissions for a small-scale project definition) in that projects can be grouped to exceed the size limit of a small-scale project. Also, projects do not have to be registered at the same time, allowing projects that begin generation years after the PDD was written to qualify. Finally, PoAs can cross country borders. They do, however, have to go through the registration process and must have real and measurable emission reductions that may be calculated and verified through a sampling and extrapolation technique [20]. A country that has a policy that promotes emission reduction projects does not automatically qualify for a PoA, however, individual projects or activities that comply with a policy that promotes greenhouse gas mitigation activities can supposedly be registered as a PoA. [21]. For a more detailed discussion of the nuances of the PoA and project eligibility, see Chapter 7. Part of the impetus for the PoA was to allow under-represented populations to benefit from CDM revenues, making the distribution of funds more equitable [21]. It has the potential to do just this and eliminate the huge barrier of small-scale transaction costs by allowing individual households and small industries to participate [22]. With regard to renewable energy, the potential for PoA CDM projects is huge in rural electrification programmes that may include provisions for photovoltaics, biomass, and small hydro and wind systems. Most people, however, envision PoA to apply to energy efficiency and transport projects before renewable energy projects. An energy efficiency programme that encouraged homeowners to buy more efficient refrigerators, stoves or cars could theoretically create activities that would be eligible for registration under the PoA CDM, provided the project is still deemed additional [23]. Despite the enormous potential for programmatic CDM, it has not yet been implemented anywhere worldwide. As of March 2008, Brazil and Bangladesh are undergoing validations with this methodology [24]. Mexico hopes to register a programmatic forestry project in the near future as well [25]. The untested rules for validation and verification are so different from other methodologies that countries’ governments may be hesitant to expend time and energy on the process of formulating a policy that would allow for project registration under it. Also, most governments tend to have little education about CDM and few direct incentives to promote it. Policies for programmatic CDM could emanate from a variety of governmental departments, some of which may or may not be aware of this possibility. During the author’s interview process with the DNAs and Ministries of Energy of 12 Latin

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American countries, no governmental officials had a clear idea of how the PoA would impact their country or knew how to create policies that would be consistent with it. Furthermore, the PoA could be stalled because the process of policy making often takes years as aspects of the legislation are contentious. (For more information about the PoA, see Chapter 7, ‘UNFCCC Procedural and Methodological Barriers’.)

Transaction costs Despite the efforts to reduce transaction costs for small-scale projects through the streamlined methodology and PoA, critics from the Pembina Institute of Canada, IT Power India and the Centre for Clean Air Policy claim that ‘the UNFCCC simplified procedures for small-scale CDM projects do not sufficiently reduce transaction costs to make these projects attractive for investors’. Also, the overwhelming response that project owners and carbon brokers give as to why more small-scale projects have not been developed is ‘transaction costs’. The transaction costs to certify a small-scale project can be almost as high as certifying a large-scale one [8]. CDM project cycle costs can be up to $500,000 for the complete document creation, registration, validation and annual verification [26]. IT Power and IT India in 2001 predicted that the average small-scale project costs would be ~$58,400 [27] and the World Bank estimated that the current streamlined methodology can reduce project transaction costs by $155,000 per project [28]. When measured on a per tonne of CO2 equivalent basis, the CDM transaction costs range from €0.1 for a very large industrial gas projects to €10 for a small hydro project and €1000 for a photovoltaic project [29].

An example of project viability To consider if a project is viable or not for CDM revenues, one must just compare these per tonne of CO2 mitigation costs with the price that can be attained per CER, which was between €10 and €25 in February of 2008 [30]. Other estimates show the minimum project size for project viability. The Pembina Institute of Canada estimates that the CDM is not worthwhile at carbon prices below $8/tonne of CO2 and projects must be at least 1.5MW to be economical [8]. A report by the Organisation for Economic Co-operation and Development (OECD) estimated in a 2001 report that the minimum renewable energy project size for the transaction costs to be covered by the CERs generated is 1MW at a price of $5/tonne of CO2 or 10 per cent of the overall project costs [31]. These estimates of minimum project size are at the low end of current carbon brokers’ requirements; brokers like Ecoinvest will not consider projects that generate less than 30,000 CERs per year or have a minimum capacity of about 16MW, just above the size requirement for small-scale projects [32]. A wind energy project with a capacity factor of 30 per cent in Ecuador, where there are relatively high regional emission factors because of a heavy reliance


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on fossil fuels, can provide the requisite number of CERs for Ecoinvest to participate as a project developer or carbon broker. However, the same size wind project with the same capacity factor would not produce sufficient CERs in Costa Rica because of the low regional emission factors due to the large number of hydro applications in the country. In Costa Rica, a wind project with a 30 per cent capacity factor would have to have a rated capacity of 63MW to stimulate the interest of Ecoinvest. The extra revenue generated per kWh from each of these applications would also vary from $0.18/kWh in Costa Rica to $0.713/kWh in Ecuador if a CER price of $10/tonne of CO2 is assumed.3 These CERs represent about 3 per cent additional revenue in Costa Rica (if renewable generators receive an estimated $0.06/kWh) and 7.4 per cent additional revenue in Ecuador (assuming generators receive the feed-in tariff price of $0.0939/kWh for their wind generation) [33]. See Appendix A for the calculations related to this analysis. CDM revenues for projects like solar energy that cost more per kWh to implement will contribute less to the overall project costs. For projects like methane capture and use in a microturbine, which will have a higher capacity factor of about 85 per cent, a smaller nameplate capacity that generates the requisite number of CERs could be of interest to a carbon broker. For example, a biomass project in Costa Rica with an assumed capacity factor of 85 per cent could be economical at 22MW instead of the wind project, which would have to be 63MW. The extra revenue generated per kWh for this type of project would be $0.18/kWh or 19 per cent additional revenues. Although most carbon brokers are not interested in purchasing CERs from small-scale projects, there are some customers who are willing to pay a premium for them since they usually promote community development. South Pole Carbon of Switzerland and FC2E of Spain act as carbon brokers for smallscale projects and sell these CERs to customers, such as the Swiss Climate Cent Foundation and Kommunalkredit, who buy CERs on behalf of the Swiss and Austrian governments. These carbon brokers also buy the emissions reductions as Voluntary or Verified Emissions Reductions (VERs), which also each represent a tonne of CO2 sequestered or mitigated and often undergo a similar, but less rigorous process than the CDM project cycle and are sold on the voluntary offset market in the US and elsewhere [34].

VER market as an alternative to the CDM VERs are typically not project developers’ first choice since they almost always command a lower price of about 30 per cent less than CERs. This decreased value is a result of the lack of standardization of these credits and a reflection of purchasers’ inability to use them for compliance purposes. The rigour that voluntary projects face with regard to ensuring that the emission reductions are additional to a business-as-usual situation, and are annually verified, varies. Generating VERs is an option for projects that are stuck in the CDM registration process and have not yet begun generating CERs. After a project achieves CDM registration and begins generating CERs, it cannot

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continue to create VERs as that would constitute double-counting. These pre-compliance VERs allow project developers to capture some of the carbon revenues they may have relied on for the project’s existance. Since a VER is not for compliance purposes, no certification is necessary unless demanded by the customer. A few certification bodies have recently been created for this market to ensure that these reductions are measurable, real, additional and verifiable. The highest level of VER certification comes from the Gold Standard, which only recognizes energy efficiency and renewable energy projects and requires that a strict set of guidelines be followed for projects for high-quality VERs that produce sustainable development and can earn high prices. However, this process of certification through the Gold Standard involves the entire CDM process (with the Gold Standard representatives instead of the United Nations Framework Convention on Climate Change (UNFCCC) acting as the registration body) plus a few additional steps to ensure the project promotes sustainable development [35]. When facing this level of complexity for certification, project owners usually opt to undergo the CDM process where they can typically earn a higher price for their CERs. Another well-known voluntary certification is called the Voluntary Carbon Standard (VCS), which accepts all types of projects and uses the methodologies, DOEs and procedures of the UNFCCC. VCS was developed by the International Emissions Trading Association and has the reputation of being a reliable certification, but not as strict as the Gold Standard [36]. VER Plus is another voluntary protocol, which was created by Designated Operational Entity TÜV SÜD, but is not as widely recognized or used [37]. The Chicago Climate Exchange has created its own methodologies for VER offsets for its voluntary but legally binding market in the US. The Climate Action Registry, originally created for offsets utilized in the emerging Californian compliance market, but available for use anywhere in the US, is yet another voluntary standard that is gaining traction [38]. Only in rare instances can VERs earn more than CERs; one of these examples occurred in sub-Saharan Africa where a VER from an off-grid solar project commanded a price of €30 per tonne [39]. Another transaction resulted in a VER sale of $78 per tonne of CO2 [40]. While the Gold Standard represents the highest level of certification complexity, no certification procedures at all comprise the other end of the spectrum. In Nicaragua, the author met with the president of a local solar installation company that was receiving some VER revenues. The VER provider, who will remain unnamed, approached this solar company after it was an established business with many clients and offered to pay a dollar value for each subsequent MW of solar panels they installed. The extra revenue that the solar company now receives comes from a portion of the VER sales that the offset provider completes. The VERs that the offset providers’ customers purchase from this project are not additional since they do not directly promote the installation of these projects. The solar company was installing systems before the offset provider gave it VER revenues and


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would still install systems in the absence of these revenues. It is true that a vibrant local solar installation business is not a typical trademark of Nicaragua. Therefore, the offset provider’s VER revenues are providing a donation that helps promote an underdeveloped industry in this country. However, if the offset provider’s customers believe they are making quantifiable and real carbon reductions with each VER purchase, as the product is marketed, they are being deceived. Customers in this market may not yet be savvy enough to realize that they need to select a VER that has been certified. And, even if it has been certified, the standards for certification are so diverse that the customer may still not know if he or she is helping make carbon reductions that are additional.4 US businesses have begun buying VERs not only to promote a positive public image of the company, but also because they hope that these credits will be fungible in future markets or that they will receive early-mover recognition and benefits in a future domestic carbon market. However, given the lack of standardization in certification of VERs and the questionable nature of some of them that are sold, it is unlikely that these businesses will be able to transfer these purchases into this market [41]. Typically, VERs are sought by project owners when the project fails to achieve CDM registration. These reductions are seen as a backup mechanism and way to provide a bit of extra profit for the already financially viable project. Also, some developers choose to pursue VERs if the transaction costs of completing the CDM project cycle are too high. Fundación Solar is working on a project to assess the potential that VERs have to contribute to the project finances of isolated, off-grid solar systems in Guatemala [42]. VERs are also sought as pre-compliance CERs. Pre-compliance VERs could be generated before the 31 March 2006 deadline that the UNFCCC set for utilization of the credits that had been generated since 2001 after the Marrakesh Accords. Now, they are only generated when a project has submitted its paperwork to the UNFCCC Registration and Issuance Team and is awaiting its decision. Technically, the project should not begin operations until it is formally registered, but bottlenecks in the UNFCCC process have allowed some projects to earn carbon revenues for VERs in the form of pre-compliance CERs [43].

The size of industries as a barrier The size of most of the industries in the Central American countries is not large enough to support the CDM transaction costs. The renewable energy sector suffers since capacity additions tend to be small and incremental. Also, other industries, like the agro-industry sector, that can benefit from methane capture and electrical generation, have not benefited as industries have in Mexico because the area does not have large farms with a critical mass of animals to make the operation profitable. AgCert, the world’s leader in methane capture projects for CDM revenues, will not develop a biodigester for a farm with less than 5000 hogs in full cycle (sows, gilts, boars, weaners and finishers) or 3500

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large finisher hogs. Most farms in Central America have fewer hogs than this critical number [44]. Bundling farms to reach the requisite number of animals tends to be complicated since the project developer has to work with multiple project owners, farm veterinarians and staff. Coordinating many farms increases project risk as more variables could influence project performance. Also, in some of the countries like Costa Rica, farms are operated separately and, like the hog farms, do not lend themselves to grouping [45].5 Despite critics’ complaints that the current methodologies do not provide sufficient incentives for small-scale development because of high transaction costs, making the certification process too simple could compromise the goals of the Kyoto Protocol by allowing projects that would have occurred in a business-as-usual scenario to qualify and be counted as an Annex I country’s mitigated emissions. Or, if the monitoring of mitigated emissions is not strict enough, then less carbon than expected could be removed from the atmosphere. However, an OECD report predicts that the maximum amount of ‘free-riding’ or non-additional projects that would be allowed if the small-scale methodologies were made less stringent and all renewable energy projects in the region applied for CDM revenues is 3 per cent of the required emission reductions from Annex I countries [31]. Chandra Sinha, a carbon financer for the World Bank, contends that until there is a sufficient ‘ridership’, it does not make sense to worry about ‘freeriders’. A host of other solutions to promote small-scale project activity have been proposed. Some of them include allocating more CERs to small-scale projects since they are typically more additional, letting the small-scale project be exempt from the 2 per cent adaptation to climate change fund tax on CERs, and making an even more streamlined methodology for projects under 5MW [46 and 47]. A more comprehensive list of recommendations can be found in Chapter 29, ‘Stimulating Investment and Overcoming CDM Barriers’.

Country-specific measures to support or discourage small scale Some countries have rules that either support or block small-scale project development. Most of these rules are country-specific, but one rule of the European Union (EU) for the European Trading Scheme (ETS) II has had a dramatic impact on all CDM countries. Hydro projects that are over 30MW must now pass an extra approval process from the World Commission on Dams in order to be used within the EU. This procedure entails a study of the impacts on the environment and community near the dam and adds time to the process of approval [48]. A few countries, such as Ecuador [49], El Salvador [50] and Colombia [51], have created average baselines of their electrical sector’s operating and build margins that small-scale project owners can use to calculate emission reductions. Usually the country’s DNA office is in charge of this task. Before embarking upon a small-scale project, developers should check to see if the country of interest has completed a study such as this.


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El Salvador has a new Fiscal Incentives Law for the Promotion of Renewable Energy as of November of 2007 that provides an exoneration of taxes on renewable energy projects below 10MW for ten years and allows projects of 10–20MW to be exempt from taxes for five years. Also, projects do not have to pay taxes on CER revenues [52]. Costa Rica has a National Off-Grid Electrification Programme based on Renewable Energy Sources, developed by the United Nations Development Programme, the Global Environment Facility and Instituto Costarricense de Electricidad. The goals of the programme are to both electrify off-grid sites and reduce carbon emissions. Two million dollars have been given to the initial phase, and Phase II will dedicate $19 million. This programme will most certainly open doors to small-scale, off-grid projects in the country. Whether or not these small projects earn CDM revenues will depend on if the project will generate enough CERs to cover the transaction costs and if they are found to be financially additional with these grants [53]. In Guatemala, a series of laws support small systems. Renewable Energy Law 52 of 2003 requires distributors and retailers to allow renewable generators above 5MW to sell to both entities and receive the best price for their electricity [54]. Having the option to sell to both of these entities allows the generator to get a more competitive price for the electricity [55]. A new law in October 2007 allows generation below 5MW to connect to the grid and requires distributors to purchase their generation [42]. Hydro projects under 5MW have a simplified permit process for using the water and only have to register for the water usage with the ministry [56]. Similarly, in Peru, no concession for geothermal or hydro under 10MW is needed from the Peruvian government [57]. Honduras promotes systems under 3MW by not requiring them to have a generating licence and being exempt from doing a full Environmental Impact Statement (EIS) [58]. In Chile, the Short Law I of 2004 provided exemption from transmission and distribution charges for projects under 9MW and rates that scale with the size of the project for those between 9 and 20MW. Short Law I also gave generators under 20MW guaranteed access to the grid and the ability to sell within the spot market [59]. Also, only hydro under 20MW qualifies for the country’s 10 per cent by 2024 renewable energy mandate [60]. Chile also has an opportunity for generators under 20MW which allows them to receive up to $60,000 for feasibility studies and up to $12,500 to cover 50 per cent of the PDD costs [61 and 62]. The Dominican Republic has laws that allow houses or industries that selfproduce from renewable energy to use up to 75 per cent of the investment in the equipment as an income tax credit and provides a favourable interest rate for 75 per cent of the cost of equipment for communities that install small-scale renewable energy and cogeneration projects below 5MW [63]. Despite these incentives, some countries have policies that discourage small-scale development. In Colombia, generators over 20MW get dispatched centrally, receive offers and bids in the energy market, and can choose to sell in

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the spot or contract market. Plants between 10 and 20MW can only choose to be dispatched during periods of rationing; at other times, they are not necessarily dispatched on the system. Plants under 10MW are at the greatest disadvantage in that they only have the option to sell directly to the distributor, but this distributor is not obligated to buy their electricity. In this system, small generators can earn only a maximum of the spot price, and the distributor can go as low as possible for the price in the negotiations. This system makes dispatch less complicated for the dispatch commission, but is a huge disincentive for small generators [64]. The Ecuadorian DNA office takes a portion of the CERs from projects to cover the costs of visiting the project to determine if it fulfils the sustainable development goals of the country. This cost is 20 per cent of the former UNFCCC registration cost calculation. The percentage of CERs deducted turns out to be between 3 and 6 per cent. The percentage of CERs taken is based on the number of CERs generated. The smallest projects are taxed at 6 per cent and the largest at 3 per cent. The reasoning behind this system of taxation is that visiting small projects requires the same amount of effort on the part of the DNA, but fewer revenues would be collected if a set percentage of CERs were deducted [65]. But, taking up to 6 per cent of CER profits acts as an additional challenge for small-scale project development.

Conclusion Efforts to make small-scale projects more viable through the creation of the streamlined small-scale methodology and the recent PoA methodology show that the CDM Executive Board is concerned with promoting these types of projects in order to allow for a more equitable distribution of projects. Critics of these methodologies claim that transaction costs and project cycle complexity will still deter development. Some countries have recognized the barriers that face small projects and created policies that support their promotion. Other countries, however, still allow policies that discourage their promotion.

Appendix A: Calculations for sample CDM revenues Capacity Factor CERs generated

⫻

Emission Factor

⫻

MW of Installation

⫻

hours in a year =

CER revenues / (capacity of plant ⫻ hours in a year ⫻ capacity factor of plant) = $ of CDM revenue/kWh Capacity factor for sample wind farm = 30 per cent 30,000 CERs (tonnes of CO2 equivalence) must be generated for the typical carbon broker to be involved. Emission factor = average of operating margin + build margin Operating margin = the weighted average of emissions of all generating sources in the region where the installation is being built


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Build margin = the weighted average of emissions of recent capacity additions Ecuador For Ecuador, with an emission factor of 0.707 tonnes of CO2/MWh X ⫻ 8760 hours ⫻ .3 (site-dependent capacity factor) CO2/MWh= 30,000

⫻

.707 tonnes of

(X = 16MW = minimum size of CDM wind project) CDM Revenues = 30,000 CERs ⫻ $10/tonne of CO2 = $300,000 (assuming a CER market price of $10/tonne of CO2) $300,000 / (16MW ⫻ 8760 hours ⫻ 0.3) = $7.13/MWh or $0.00713/kWh Percentage of Extra Revenue due to CERs = (0.7¢/kWh) / (9.39¢/kWh) = 7.4 per cent (Price of electricity (9.39 ¢/kWh) is based on Ecuador’s most recent feed-in tariff prices for wind energy) [33] Costa Rica For Costa Rica, with an emission factor of 0.18 tonnes of CO2/MWh [66] X ⫻ 8760 hours ⫻ 0.3 (site-dependent capacity factor) CO2/MWh = 30,000

⫻

0.18 tonnes of

(X= 63MW = minimum size of CDM wind project) (It is unlikely that two sites would have the same capacity factor, but the author used 30 per cent in this example for both the Ecuadorian and Costa Rican wind sites to emphasize the importance of the country’s emission factor.) CDM Revenues = 30,000 CERs ⫻ $10/tonne of CO2 = $300,000 (assuming a CER market price of $10/tonne of CO2) $300,000 / (63MW ⫻ 8760 hours ⫻ 0.3) = $1.8/MWh or $0.0018/kWh Percentage of Extra Revenues due to CERs = (0.18¢/kWh)/(6¢/kWh) = 3 per cent (6¢/kWh = assumed average wholesale price of electricity in Ecuador.)

Notes 1 This information was not cited to protect the author and parties involved. 2 The actual baseline calculation that is used depends on the type of technology being replaced, but renewable energy small-scale project developers have their choice of a few baseline calculations, including the aforementioned one that uses ‘business-asusual’ emissions data. 3 This analysis shows a conservative estimate of the requisite sizes of these wind farms in order to account for possible future price fluctuations in the CER and European Union Allowance (EUA). This analysis used a price of $10/CER, which was the average price of CER in 2006 [67]. 4 This information is not cited in order to protect the author and parties involved. 5 There are two agro-industries that are large enough to consider CDM revenues for their operations in Central America. Empacadora Toledo has had positive

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experiences with small methane capture systems on its farms and is now in negotiations with Ecoinvest to develop digesters in Guatemala. INDESA palm producers will be attempting a methane avoidance methodology to create fertilizer with residue processing water and the unused part of the palm fruit in Guatemala.

References 1 2 3 4

5 6

7

8 9

10

11

12

13

14 15 16

CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April Black-Arbeláez, T. (2007) ‘The creation of value in emission reduction projects’ in CDM Tech, 21 March, Cartagena, Colombia CDM UNFCCC Project Search, 1 May 2008, available from http://cdm.unfccc.int/Projects/projsearch.html Gastelumendi, J. (2007) Interview with J. Gastelumendi, Kennedy School of Government at Harvard University, Master’s of Public Policy student. Former Head of Environmental Division at Estudio Grau, 4 March McCully, P. and Haya, B. (2007) ‘Failed Mechanism: Hundreds of hydros expose serious flaws in the CDM’, International Rivers Press Release, 2 December Porta, M. A. (2007) Interview with M. A. Porta, Executive Director of El Centro de Producción Mas Limpia de Guatemala, 3 September, Guatemala City, Guatemala FEALAC (2006) ‘Analysis of the present situation and future prospects of the Clean Development Mechanism (CDM) in the FEALAC member countries’, Study for the Fourth Meeting of the Economic and Society Working Group of Forum for East Asia–Latin America Cooperation (FEALAC), Tokyo, 8 June Peters, R. and Brunt, C. (2004) ‘Small-scale CDM project development: Key issues and solutions’, paper for Pembina Institute for Appropriate Development, January Ley, D. (2007) Interview with D. Ley, United Nations Consultant, Economic Commission for Latin America and the Caribbean, Mexico Subregional office, Energy and Natural Resources Unit, 21 April UNDP (2003) ‘Simplified procedures for small-scale projects’, ch 4, The Clean Development Mechanism: A User’s Guide, Energy and Environment Group and Bureau for Development Policy of UNDP, New York Michaelowa, A. (2005) ‘Determination of baselines and additionality for the CDM: A crucial element of credibility of the climate regime’, in F. Yamin (ed) Climate Change and Carbon Markets: A Handbook of Emissions Reductions Mechanisms, Earthscan Publications, Sterling, VA, pp289–304 UNFCCC (2001) ‘Simplified modalities and procedures for small-scale clean development mechanism project activities’, Annex II, in UNFCCC COP-7, Marrakesh, Morocco Michaelowa, A. (2007) Interview with A. Michaelowa, Head of the International Climate Policy Research Programme, Hamburg Institute of International Economics, 23 February Bloomgarden, E. (2007) Interview with E. Bloomgarden, US Country Director, Ecosecurities, 15 March Carmona, C. E. G. (2007) Interview with C. E. G. Carmona, Environmental Team Leader, Public Utility of Medellín, 20 March, Cartagena, Colombia Martens, J. W., Kaufman, S. L., Green, J. and Nieuwenhout, F. D. J. (2000) ‘Towards a streamlined CDM process for solar home systems: A review of issues and options’, Energy Innovation, Sunrise Technologies Consulting, and IT Power


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17 Trujillo, R. (2007) Interview with R. Trujillo, Sustainable Development Project Coordinator, Oficina de Mecanismo de Desarrollo Limpio, Bolivia, 18 April 18 CDM Executive Board (2007) ‘Guidance on the registration of project activities under a programme of activities as a single CDM project activity’, Report 28, version 02, UNFCCC 19 CDM Executive Board (2007) ‘Guidance on the registration of project activities under a programme of activities as a single CDM project activity’, Report 32, version 02, in Annex 38, UNFCCC 20 CDM Executive Board (2007) ‘Procedures for registration of a programme of activities as a single CDM project activity and issuance of CERs for a PoA’, Report 35, UNFCCC 21 Ellis, J. (2006) ‘Issues related to implementing “programmatic CDM”’, OECD/IEA Project for Annex I Expert Group, UNFCCC, 27 March 22 Figueres, C. and Newcombe, K. ‘Evolution of the CDM: Toward 2012 and beyond’, paper prepared for World Bank, Washington, DC 23 Hinostroza, M. , Cheng, C., Zhu, X. and Fenhann, J. (2007) ‘Potential and barriers for end-use efficiency under programmatic CDM’, paper prepared for Capacity Development for the Clean Development Mechanism (CD4CDM) 24 Point Carbon (2008) ‘Brazil aims to host first approved programmatic CDM project’, Carbon Market News, 16 April 25 Estrada, M. (2008) Interview with M. Estrada, CDM Consultant, 24 April 26 Bosi, M. (2001) ‘Fast-tracking small scale CDM projects: Implications for the electricity sector’, Information paper, OECD Environment Directorate and International Energy Agency 27 Bhardwaj, N., Parthan, B., de Coninck, H. C., Roos, D., van der Linden, N. H., Green, J. and Mariyappan, J. (2004) Realising the Potential of Small-Scale CDM Projects in India, IT Power and IT Power India 28 World Bank Carbon Finance Unit (2003) ‘Small scale CDM projects: An overview’, 14 May 29 Michaelowa, A. and Jotzo, F. (2005) ‘Transaction costs, institutional rigidities and the size of the clean development mechanism’, Energy Policy, vol 33, pp511–523 30 Carbon Positive (2008) ‘CER prices fall in world markets turmoil’, newsbrief, 4 February 31 Bosi, M. (2001) ‘Fast-tracking small CDM projects: Implications for the electricity sector’, Information paper, OECD Environment Directorate and International Energy Agency 32 Salgado, C. (2007) Interview with C. Salgado, Carbon Broker, Ecoinvest, 20 March, Cartagena, Colombia 33 Neira, D., Van Den Berg, B. and De la Torre, F. (2006) ‘El Mecanismo de Desarrollo Limpio en Ecuador: Un diagnostico rapido de los retos y oportunidades en el Mercado de Carbono’, report for Banco Interamericano de Desarrollo and Ministerio del Ambiente and Corporación Interamericana de Inversiones 34 Bürgi, P. (2007) Interview with P. Bürgi, Managing Director, South Pole Carbon Asset Management, 30 March, Cartagena, Colombia 35 The Gold Standard (2006) Manual for CDM Project Developers, Version 3, May 2006, www.cdmgoldstandard.org/uploads/file/DeveloperManual_GS-CER.pdf 36 Voluntary Carbon Standard Association (2008) ‘About the VCS’, available from www.v-c-s.org/ 37 VER Plus (2008) ‘Overview’, April, available from www.global-greenhousewarming.com/VER-plus.html

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38 California Climate Action Registry (2008) ‘About’, June, available from www.climateregistry.org 39 Bongiovanni, Z. (2008) Interview with Z. Bongiovanni, SolFocus Project Developer, 19 March, Palo Alto, California 40 Bellassen, V. and Leguet, B. (2007) ‘Voluntary carbon offsets: The awakening’, Research Report #11, Caisse des Dépôts Climate Taskforce 41 Dayal, P. (2007) Standardization of Verified Emission Reductions, UtiliPoint, IssueAlert, 31 August, available at www.ctrade.org/VERsAugust_31_2007.pdf 42 Azurdia, I. (2007) Interview with I. Azurdia, Executive Director, Fundación Solar, 7 September, Guatemala City, Guatemala 43 Purshouse, C. (2008) Interview with C. Purshouse, Senior Consultant for Camco International Group, 26 August 44 Gavaldon, H. (2007) Interview with H. Gavaldon, AgCert Field Engineer, Mexico, 20 August, Veracruz, Mexico 45 Porta, M. (2007) Interview with M. Porta, Executive Director, Centro Guatemalteco de Producción más Limpia, 12 March 46 Sutter, C. (2001) Oral Presentation, C. Sutter, Factor Consulting + Management Ltd, in UNFCCC COP-7, 6 November, Marrakesh, Morocco 47 Ecosecurities (2002) ‘Clean Development Mechanism: Simplified modalities and procedures for small-scale projects’, Final Report for the Department for International Development 48 Brown, M. (2007) Interview with M. Brown, Project Development Manager for Pacific Hydro, at CORFO Invest, 15 November, Santiago, Chile 49 Núñez, A. M. (2007) Interview with A. M. Núñez, CDM Coordinator in CORDELIM, 23 October, Quito, Ecuador 50 Synergy de la Comunidad Europea (2005) ‘Metodologías para la implementación de los mecanismos flexibles de Kioto: Mecanismo de Desarrollo Limpio (MDL) – Guía Latinoamericana del MDL’, Guidebook, available at www.cordelim.net/extra/html/pdf/library/olade.pdf 51 Zapata, H. J. (2007) Interview with H. J. Zapata, Renewable Energy Coordinator UPME, 10 October, Bogota, Colombia 52 Coviello, M. F. (2007) ‘Renewable energy sources in Latin America and the Caribbean: Two years after the Bonn Conference’, report for United Nations Economic Commission for Latin America and the Caribbean, April 53 Global Environment Facility (2002) ‘Cover note: Costa Rica: National off-grid electrification programme based on renewable energy sources’, Project Number 1322, 8 March, http://gefweb.org/Documents/Council_Documents/ GEF_C20/CC_-_Costa_Rica_-_National_Off-grid_Electrification.pdf 54 Congreso de la República de Guatemala (2003) Decreto Numero 52-2003, 10 November, p3 55 Ruiz, O. (2007) Interview with O. Ruiz, Head of the Centre of Information and Promotion of Renewable Energy, Ministerio de Energía y Minas, 7 September, Guatemala City, Guatemala 56 Ley, D. (2007) Interview with D. Ley, United Nations Consultant for Economic Commission for Latin America and the Caribbean, 16 August, Mexico City, Mexico 57 Netherlands CDM Facility (2005) Netherlands CDM Facility, Poechos I Project Design Document, UNFCCC, 14 November 58 Comisión Nacional de Energía (2007) Decreto 70-2007, in La Gaceta: Diario Oficial de La Republica de Honduras, 2 October, Tegucigalpa, Honduras 59 Ministerio de Economía Fomento y Reconstrucción (2004) Ley Corto I: Regla Sistemas de Transporte de Energía Eléctrica, Establece un Nuevo Regimen de


60

61

62 63 64 65 66 67

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Tarifas para Sistemas Eléctricos Medianos, y Introduce Adecuaciones que Indica a la Ley General de Servicios Eléctricos, 13 March, Diario Oficial de la Republica de Chile Ministerio de Economía Fomento y Reconstrucción (2005) Ley Corto II: Modifica el Marco Regulatorio del Sector Eléctrico, 19 May, Diario Oficial de la Republica de Chile CORFO and Todochile (2007) ‘Apruba Bases de Llamado a Postulación para Otorgamiento de Subsidios a Estudios de Preinversión o asesorías especializadas en Etapa de Preinversión de Proyectos de Energía de Pequeño Tamaño a Partir de Fuentes Renovables’, report for CORFO Invest Conference, 16 November, Santiago, Chile Garcia, J. (2007) Interview with J. Garcia, CORFO Renewables Coordinator, 16 November, Santiago, Chile Congreso Nacional (2007) Ley No 5707 sobre Incentivo al Desarrollo de Fuentes Renovables de Energía y de sus Regímenes Especiales, May, Dominican Republic Soto, G. C. (2007) Interview with G. C. Soto, Administrator for Comisión Regulatoria de Energía y Gas, 10 October, Bogota, Colombia Cornejo, J. (2007) Interview with J. Cornejo, Unidad del Cambio Climático in Consejo Nacional del Medio Ambiente, 24 October, Quito, Ecuador Essent Energy Trading (2007) Tejona Wind Power Project Project Design Document, UNFCCC, 23 March Capoor, K. and Ambrosi, P. (2007) State and Trends of the Carbon Market 2007, World Bank, Washington, DC

Section 3 Country Market Intelligence for CDM Projects

9 Country-Specific Profiles Introduction

This section of the book will provide a brief overview of each country’s electrical grid in order to give the reader an idea of the climate for renewable energy investment. It is essential to analyse each country individually since the general trends of barriers in Section 2 do not take into account the unique historical, economic, geographic and institutional circumstances that have a huge bearing on a country’s suitability for Clean Development Mechanism (CDM) investment.

Vital statistics First, vital statistics for CDM development will be presented. These statistics, which include the portfolio mix of the grid, the country’s emission factor, the average price of electricity, whether or not the market is privatized, if the country has capacity payments and a spot market, and the names of the pertinent electricity-coordinating institutions, provide a first-order indicator of the country’s suitability for CDM projects. The portfolio mix and average grid emission factor of each country will provide a rough idea of the amount of emission reductions that could be expected. One can get a basic idea of how lucrative a CDM project would be based on the average residential, and in some cases, industrial prices of electricity since these prices are what project developers will be competing against. Whether or not a country’s electrical sector has been privatized will determine how easily independent power producers (IPPs) can enter into the market. The presence or absence of a rural electrification programme will be noted since many off-grid systems run on renewable energy since fossil fuels may be difficult and expensive to import to remote areas. Also, some systems like photovoltaic arrays are better suited for rural areas since they have no moving parts and require little maintenance and few replacement parts. Then, in each country-specific chapter, there follows discussion of how privatized the country’s electrical market is. Considering this factor is key

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since, as Chapter 7, ‘UNFCCC Procedural and Methodological Barriers’, describes, closed, state-run energy markets offer fewer opportunities for private investment in power generation and rarely take advantage of CDM. All Latin American countries went through the process of privatizing markets at different points in the past 20 years. Now they are in varying stages of privatization; Chile, Guatemala and Panama are fully privatized and have a strong set of incentives to promote development while Costa Rica, Mexico and Uruguay are still primarily served by the state generation, transmission and distribution company and have limits on the amount of private generation that can be developed.

Background and privatization The impetus for privatizing the industry was a result of a lack of governmental capacity to develop new generation. When each country reached a state of near emergency for new capacity additions, laws opened up the sector to development. However, in most cases these laws did not provide adequate stimulus for private market involvement and led to the current situation where fossil fuelburning generation facilities are rented or elicited for development in order to fulfil short-term demand in the quickest way possible. The grave situation that these countries found themselves in for meeting demand occasionally caused distributors to sign Power Purchase Agreements (PPAs) with these entities for much higher prices than other generation plants provide. In many parts of Central America, prices per kWh have surged as a result of recent high oil prices and now range from about 19 to 30 cents [1]. Even with these new applications, capacity is just barely meeting demand and there are frequent grid interruptions. Honduras and Nicaragua have daily outages during peak demand from 5.00pm to 7.00pm. Even Costa Rica, where Instituto Costarricense de Electricidad (ICE) has an excellent reputation for reliability, experienced blackouts in April and May 2007 [2]. Unless otherwise indicated, the reader should assume the following about the privatized markets: 1

2 3 4

Through privatization, the country set up a spot market that is based on a least-cost dispatch of resources. Generation that can fulfil demand the cheapest is dispatched first (unless special laws provide exceptions for renewable energy). The last generator to fulfil the demand sets the spot market price that all generators get for a given period of time. Large energy customers are able to negotiate with either generators or distributors to create PPAs. When moving from state to private ownership, each country set up a market manager, regulator and tariff-setting committee. Some countries transferred their state-run utilities to private ownership and others have maintained ownership of these facilities, while allowing new market entrants. This difference will be specified.

COUNTRY-SPECIFIC PROFILES INTRODUCTION

5

149

In most cases, transmission remained a governmentally owned enterprise, while generation and distribution were for private operators.

Renewable energy laws Because open electricity markets have not always promoted sufficient development and recent high fossil fuel prices make thermal generation undesirable, most of these countries have new laws that provide additional incentives for renewable energy generation that will be discussed in a later section of this paper. A combination of these laws and high national grid emission factors in countries that rely on fossil fuels for the bulk of their generation provide exceptional opportunities for renewable energy CDM project development.

CDM portfolio This section will be followed by an analysis of the country’s current CDM portfolio in table format and prose. The table in each section shows the projects that are registered or have submitted Project Design Documents (PDDs) and are in the process of validation. It is important to note that not all of these projects are registered yet, but most are in the final stages of being so. The information in these charts is current as of 1 April 2008 and derived from the Capacity Development for CDM Pipeline. When the information is available, projects in the pipeline for CDM will be mentioned. It is important to know that almost every renewable energy project in the region is now considering CDM revenues. So, when looking at the CDM pipeline and projects, the reader is getting a sense for almost all of the renewable energy projects that have been implemented since 2001, when the CDM started, and are planned for the future.

Special challenges and opportunities In the next section of each country chapter, the author will discuss special challenges for the country in question. These challenges may also have been mentioned in the section on individual types of barriers. They will either be mentioned only briefly again or elaborated upon. The point of having these barriers located in both places is to allow readers to use this book topically to understand barriers in general or as a country-specific guide. These challenges and opportunities are broken down into sections that address the country’s Designated National Authority (DNA) office and other domestic institutional support. The degree to which the DNA office is developed can have a large bearing on the success of projects. For example, Venezuela has ratified the Kyoto Protocol, but has not yet even set up a DNA office and therefore cannot host any CDM projects. In most cases, the DNA office is a governmental office located within the country’s ministry that handles energy or environmental affairs. Some countries, such as Ecuador, Peru and Argentina, have separate promotion offices that are privately run on

150


donations and hope to sustain themselves on revenues from completing the CDM project cycle for prospective developers. Other institutional support can include research institutions, national laboratories dedicated to renewable energy, or non-governmental organizations that are taking steps to support the Mechanism. The presence or absence of carbon brokers is the next subsection that is addressed in this larger section of challenges and opportunities. The placement of carbon broker offices and the types of projects they specialize in can explain to a large degree the types of projects that have been successful in the country. Next, the country’s estimated renewable energy potential is presented, if studies to assess each resource have been completed. Unique experiences and situations that affect the success of CDM projects will then be mentioned.

Summary Finally, a short summary of the country’s potential for CDM project development will conclude each country-specific chapter.

References 1 2

Broide, A. (2007) Interview with A. Broide, Development Manager for Mesoamerica Energy, 26 September, San José, Costa Rica Cordero, F. and Mayorga, G. (2007) Interviews with F. Cordero and G. Mayorga, Strategic Business Unit of Instituto Costarricense de Electricidad (ICE), 25 September, San José, Costa Rica

10 Argentina

Vital statistics Portfolio mix: 51.7 per cent from conventional thermal sources (49 per cent combined cycle natural gas, 34 per cent turbo vapour, 17 per cent turbo gas); 43.1 per cent from hydroelectricity; 13 per cent imported; 5 per cent from nuclear power [1] Emission factor: 0.49 tonnes of CO2/MWh [2] Average price of electricity: 3.79¢/kWh (2004) residential; 3.86¢/kWh (2003) industrial [3] Privatized electricity market: yes Existence of spot market: yes Capacity payment: yes, $10/MWh for generators available during the peak demand ($5/MWh for base capacity and $5/MWh for reliability) [4] Market manager: Market administrator Compañía Administradora del Mercado Mayorista Electrico SA (CAMMESA) Policy maker: Secretaria de Energía, Consejo Federal de la Energía Eléctrica and Consejo Federal de la Energía Eléctrica (CFEE) Regulator: Ente Nacional Regulador de la Electricidad (ENRE) Environmental permits: Secretaría de Ambiente y Desarrollo Sustentable

Background and privatization The Argentine peso was devalued in 2001 by 30 per cent and had a profound impact on the electrical sector [5]. This economic crisis shaped the way the country shifted from a privatized market to a more regulated one, the fuel sources available for electrical generation, and the current laws promoting new renewable energy capacity additions. Argentina privatized its electric industry in 1993 as a reaction to mismanagement of the electrical system and sub-par performance by the energy companies. It followed the Chilean model, but instituted a few differences [6].

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Argentina has a least-cost bid auction process that is a bit different from the energy auctions of its neighbours; the least-cost auction is based on a biannual declaration of generation costs by generators [7]. Argentina’s auction has price caps that prevent generators from offering a cost that is too high [6]. Large consumers and distribution companies can buy energy at a stabilized spot price. The goal of averaging the spot price is to reduce the volatility for purchasers [7]. The experiment worked well until 1998 when a recession started. In 2002 Argentine President Eduardo Duhalde decided to devalue the peso by 20 per cent against the US dollar in an attempt to pull the country out of the four-year recession [5]. At this time, the government started setting energy prices so that people could pay their bills. The price for old generators serving residential customers is now fixed at close to $26/MWh from resolution 1281 of 2006 called Energía Plus [8]. Industrial and commercial generators have a hybrid fixed and non-fixed price; demand that exceeds 2001 amounts is not on a fixed price schedule. In order to stimulate new capacity additions, Energía Plus provides new generation with the real spot market price of close to $65/MWh. However, the government sets a price ceiling on the amount that generators can earn [9]. The government also fixed the price for natural gas, which has discouraged new exploration, and in 2004, with the help of Venezuela, created ENARSA (Energía Argentina Sociedad Anónima), a state-run gas and petroleum company meant to help the country recover from the crisis of 2001, by preventing supply and capacity shortages. In 2003, the economy began to recover with an 8.7 per cent growth in one year [10]. This fast growth, combined with a risky investment climate for new natural gas exploration, prompted natural gas shortages in 2004 that impacted 65 per cent of the industrial businesses in the province of Buenos Aires. Since then, Argentina has stopped exporting gas to Uruguay and Chile in order to use it domestically. Also, these international contracts were dropped because the peso was linked to the US dollar, and suddenly exporters were earning a third of what they had previously [11]. Argentina is now experiencing even more of a natural gas shortage as Bolivia has not had new investments in gas exploration since the nationalization of the oil and gas sector and has begun cutting export supplies to Argentina [12]. Because of this changing fuel mix, Argentina is a moving target for investors interested in CDM potential. The country’s emission factor was 0.3 tonnes of CO2/MWh in the 1990s since almost all generation was derived from hydro and gas. In 2004, it went up to 0.45 tonnes because natural gas generation began switching to diesel since there was no new natural gas exploration after the 2002 devaluation crisis. This trend continued until 2007 when the emission factor was close to 0.6 tonnes of CO2/MWh [13]. Since 2004 the economy has grown at about 7 per cent each year. It is now at the point where it was before the crisis. And now, since there was no investment in new capacity additions after the crisis, energy supply is currently just meeting demand. To stimulate more development, the government is consider-

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ing re-enacting a stable node price delivered at each interconnection point on the grid for energy [13].

Renewable energy laws Because of a lack of new generation capacity and a movement to protect the environment, in 1998 the government passed a law promoting solar and wind energy with a one cent (Argentine peso) per kWh production tax credit (PTC) and a 15-year exemption from paying income tax under Law 25,019 [14]. However, when the Argentine peso fell against the US dollar in 2001, this PTC was worth almost nothing and therefore did little to promote development. In 2006, with Law 26,190, the Parliament succeeded in passing a twice-failed bill that provides benefits to more renewable technologies and changed the PTC. The PTC was reset to 1.5 peso ¢/kWh for wind, hydro under 30MW, biomass and geothermal, and 0.9 peso ¢/kWh for solar. The hope is to have utilities source 8 per cent of their generation from renewable sources. This law also allocated about 1.25 per cent of the National Electrical Energy Fund to develop wind energy [15]. Some provinces offer additional PTCs that can be applied on top of the federally offered incentives; for example, Chubut offers an incentive of 0.5 peso ¢/kWh and Buenos Aires offers a one peso ¢/kWh PTC [9]. Because of the capacity shortage during the winter of 2006, several large companies are beginning to take advantage of this PTC by trying to generate their own energy in order to avoid having interruptions. Sugarcane companies in the north of the country have begun to buy more efficient boilers to burn the bagasse and supply themselves. Oil extraction companies like Panamerican Energy with a 40MW wind project in Patagonia have also begun to invest in autosupply resources [13].

CDM portfolio Argentina hosts the first wind farm to be registered for the CDM in the Latin American region; 15MW ‘Antonio Morán Wind Park’ was registered in December of 2005 and is operated by local cooperative Comodor Rivadavia. However, there are no other wind CDM projects in the pipeline or slated for immediate development.

Special challenges and opportunities Local DNA office Argentina has divided its DNA office into regulatory and promotion arms. The regulatory arm is located within the climate unit of the Secretary of Environment and Sustainable Development. The office has an Executive Committee, composed of governmental representatives in the Ministries of Energy, Transportation, Agriculture, Industry, Science and Technology, and Foreign Affairs, and an Advisory Committee, which is made up of private sector representatives, non-governmental organizations (NGOs), and acade-

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10 9

Number of projects

8 7 6 5 4 3 2 1 0

Hydro

Wind

Geothermal

Landfill methane capture

Non-landfill methane capture

Biomass

Source: CDM Pipeline (2008) Capacity Development for the Clean Development Mechanism, UNEP Risø CDM/JI Pipeline Analysis and Database, 1 April

Figure 10.1 Projects registered or in validation in Argentinaa mics [16]. The official website for the office provides some basic information, but the main source of CDM capacity building is done through the promotion arm. The promotion arm is the Argentine Carbon Fund which helps projects in the initial stages of CDM registration, and was established by a presidential decree in 2005. The fund has completed many Project Design Documents (PDDs) and receives as its payment 1 per cent of the CERs generated from projects. However, no projects that it has helped facilitate have achieved registration and earned CERs yet. Also, even though the title of the organization is ‘Fund’, it has no money to offer to projects. Donations sustain the office, and as of November 2007 it had enough donations to operate for about six more months. This fund also sponsored a study to assess the potential for methane capture from the agro-industry [8].

Other domestic institutional support There is institutional support for methane capture and renewable energy in the form of two national institutes: INTA (Instituto Nacional de Technología Agropequaria) and INTI (Instituto Nacional de Tecnología Industrial), which co-chair a methane-to-markets initiative, and support fisheries, agricultural industries and technological sectors through research and investigation. Argentina’s Secretary of Energy did a calculation of the national grid’s carbon emission factor. This data, which has been made public, could help small-scale project developers reduce CDM transaction costs as this average grid emission factor could be used as a baseline [17]. There is a wind research centre (El Centro Regional de Energía Eólica) that has been operating since 1985 in Chubut, a region in the southern part of the country in Patagonia. Work from this centre facilitated a wind energy potential map of the country [18].

ARGENTINA

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Other than these research institutes, there are some private and statefunded technology-creation initiatives. INVAP is a small, state-initiated research facility, and a local wind turbine manufacturer. NRG Patagonia is a new turbine manufacturer that has a 1.5MW turbine [9]. IMPSA, another local turbine manufacturer with competency in a variety of water and wind turbines, has a plant in Argentina and is building one in Brazil for a 300MW farm. IMPSA has designed a turbine to operate at high variable speeds without using gears to control the blade speed, which lower the turbine’s efficiency [19]. However, IMPSA’s launch of a test turbine in Argentina was a failure when in high winds it fell and injured three men [20].

Carbon brokers Carbon brokers have a strong presence in Argentina, which allows for local project support and knowledge about the Mechanism. These brokers develop new methodologies that can be used for projects that typically may not achieve registration. MGM International was started and is headquartered in Buenos Aires, and Ecoinvest has a large office there as well [13 and 21]. Ecosecurities and the French carbon broker Ecosur have plans to open offices in Buenos Aires [9].

Renewable energy potential Even though some biomass sugarcane producers have begun to take advantage of more efficiently burning their bagasse, there are still about 400MW of potential that could be tapped and connected to the national grid [22]. Four sites are being studied for their geothermal potential [22]. There are about 25GW of small hydro potential [23]. Solar and wind energy have not been studied extensively to give resource estimates.

Unique experiences and situations Argentina was once split between two grids, one in the northern part of the country and one in Patagonia. Now the two grids are connected, which allows developers to take advantage of the high wind speeds in Patagonia with large projects that serve the needs of the population in the north. However, there is some debate about how desirable the wind regime in Patagonia is since the winds tend to be very strong at 14–16 metres/second (m/s), or non-existent, which do not lend themselves well to the current most common large (1.5MW and above) turbine designs, which consist of large components that are not robust enough to endure rough winds and are optimized to capture steady wind speeds of about 9m/s [9]. Wind energy in Argentina must complete an Environmental Impact Statement (EIS) that follows the manual created for thermal generation. This manual is long and cumbersome. Therefore, it creates additional barriers for wind developers [9].

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Summary Argentina has tremendous potential for renewable energy CDM projects because of its current capacity shortage, excellent resource potential, revised production tax credit (PTC) and growing economy. However, the devaluation of the peso in 2002 may have scared investors away. If the economy continues to grow as it has and new natural gas exploration investments are not made, Argentina could be poised to have rapid growth in renewable energy projects as new capacity must be sourced, and PTC and CDM revenues can be earned with the construction of these projects.

References 1

2

3

4 5 6

7

8 9 10 11

12 13 14 15

Asociación Argentina de Energía Eólica (2006) ‘Matriz mensual de generación bruta (en GWh)’, Boletín electrónico, no 10, September, available at www.argentinaeolica.org.ar/, accessed 13 February 2008 Aceitera General Deheza (2007) Bio energy in General Deheza – Electricity generation based on peanut hull and sunflower husk Project Design Document, UNFCCC, 10 February World Bank (2003) Benchmarking data of the Electricity Distribution Sector in the Latin American and Caribbean Region 1995–2005, available from http://info.worldbank.org/etools/lacelectricity/, accessed 20 February 2008 Gülen, G. (2002) ‘Resource adequacy and capacity schemes’, paper prepared for Institute for Energy, Law & Enterprise at the University of Texas at Austin BBC (2002) ‘Cautious reaction to peso devaluation’, BBC News, Business, 7 January Arango, S., Dyner, I. and Larsen, E. (2006) ‘Lessons from deregulation: Understanding electricity markets in South America’, Utilities Policy, vol 14, no 3, September, pp196–207 Energy Sector Management Assistance Program (ESMAP) (2007) ‘Latin America and the Caribbean Region (LCR): Energy sector – retrospective review and challenges’, report, 15 June Galbusera, S. (2007) Interview with S. Galbusera, Fondo Argentino de Carbono, 20 November, Buenos Aires, Argentina Garcia, A. (2007) Interview with A. Garcia, Project Developer for ABO Wind, 22 November, Buenos Aires, Argentina Rohter, L. (2004) ‘Energy scarce as Argentina faces winter’, The New York Times, 31 March Warton, U.K. (2004) ‘Short circuits in Argentina’s energy crisis’, Knowledge@Wharton, Special Issue, 2 June, Wharton School of the University of Pennsylvania Thomas Financial News (2008) ‘Oil and utilities highlights’, briefing, Hemscott Group Limited, 28 January Piquero, E. (2007) Interview with E. Piquero, Carbon Consultant MGM International, 22 November, Buenos Aires, Argentina El Senado y Cámara de Diputados de la Nación Argentina (1998) Régimen Nacional de Energía Eólica y Solar: Ley 25,019, 7 December, Boletín Oficial El Senado y Cámara de Diputados de la Nación Argentina (2000) Régimen de Fomento Nacional para el Uso de Fuentes Renovables de Energía Destinada a la Producción de Energía Eléctrica: Ley 26,190, 5 July, Boletín Oficial

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16 Figueres, C. (2004) ‘Institutional capacity to integrate economic development and climate change considerations: An assessment of DNAs in Latin America and the Caribbean’, report for Inter-American Development Bank, 2 June 17 Secretary of Energy of Argentina (2006) ‘Cálculo del Factor de Emisión de CO2, de la Red Argentina de Energía Eléctrica’, available from http://energia3.mecon.gov.ar/contenidos/verpagina.php?idpagina=2311, accessed 25 February 2008 18 Coviello, M. F. (2007) ‘Renewable energy sources in Latin America and the Caribbean: Two years after the Bonn Conference’, report for United Nations Economic Commission for Latin America and the Caribbean, April 19 Guerra, E. (2007) Interview with E. Guerra, IMPSA Financial Manager, 22 November, Buenos Aires, Argentina 20 Diario CRONICA (2006) ‘Se desmoronó el primer molino eólico fabricado en el país: 3 heridos’, 18 July, Comodoro Rivadavia, Chubut 21 Camara, A. (2007) Interview with A. Camara, Ecoinvest Carbon Consultant, 22 November, Buenos Aires, Argentina 22 Servant, M. (2007) Interview with M. Servant, Director of Renewable Energy, Secretary of Energy, 22 November, Buenos Aires, Argentina 23 Secretaría de Energía de La Nación / Coordinación de Energías Renovables / Dirección Nacional de Promoción (2005) ‘El Potencial de los Pequeños Aprovechamientos Hidroeléctricos en la Republica Argentina’, proceedings of 20th Conferencia Latinoamericana de Electrificación Rural, Cuenca, Ecuador, 2 May

11 Belize

Vital statistics Portfolio mix: 33 per cent hydro; 33 per cent diesel; 33 per cent imported from Mexico [1] Emission factor: n/a Average price of electricity: 44¢/kWh residential [2]; industrial n/a Privatized electricity market: None, although permitted by law Existence of spot market: yes Capacity payment: n/a Market manager: Belize Electricity Limited (BEL) Policy maker: BEL and Public Utilities Commission (PUC) led National Energy Plan recommendations in 2003 Regulator: PUC Environmental permits: Department of the Environment (DOE) within the Ministry of Natural Resources and the Environment

Background and privatization The installed capacity in Belize in 2002 was approximately 75MW in total, with 25MW coming from hydro, 25MW from diesel and 25MW from imported Mexican generation. The lack of indigenous conventional energy resources such as petroleum, natural gas or coal in the country has led to this high rate of importation. Belize plans on satisfying its future demand with a series of hydroelectric plants and improving the efficiency of its diesel plants [1]. Belize’s state-run utility became privatized with the Electricity Act of 1992. However, instead of allowing for a competitive marketplace, in 1993 the government issued a licence that granted the state-run company, Belize Electricity Limited (BEL), the exclusive rights to generate, transmit and supply electricity for 15 years. Residential electrical rates in Belize tend to be very high at an average of 44¢/kWh. BEL is currently applying for a rate increase to 50¢/kWh. BEL sites the high costs of diesel fuel at 50¢/kWh, the Mexican rate

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of imported energy at 30¢/kWh, and the cost of domestic hydro at 18¢/kWh as the reason for this rate increase [3]. The Public Utilities Commission of Belize oversees the tariff-making structure in the country [4].

CDM portfolio None

Special challenges and opportunities The prospects for CDM in Belize are not optimistic given that the country has not yet set up a Designated National Authority (DNA) office and there are no renewable energy incentives for Belize. This slow movement, despite Belize’s ratification of the Kyoto Protocol in 2003, could be a result of the lack of opportunities for CDM project development because of the country’s small industrial sector and closed, state-run electricity market. The large amount of hydro and imported electricity, which are both counted as zero for emission factor calculation purposes, could cause Belize to have a low emission factor that would not make renewable energy development worthwhile. Since no CDM projects exist at this point, no one has calculated the country’s average emission factor.

Summary Belize shows potential for CDM opportunities because of its high prices of electricity, but the monopolistic nature of the state-run utility prevents development from occurring. The 15-year licence to allow BEL to operate the system should expire in 2008, allowing the marketplace to be open to private investment. Given the lack of CDM interest in the country, however, the prospects for CDM development are currently not very promising.

References 1

2

3 4

Synergy de la Comunidad Europea (2005) ‘Metodologías para la implementación de los mecanismos flexibles de Kioto: Mecanismo de Desarrollo Limpio (MDL) – Guía Latinoamericana del MDL’, Guidebook, available at www.cordelim.net/extra/html/pdf/library/olade.pdf World Bank (2003) ‘Benchmarking data of the Electricity Distribution Sector in the Latin American and Caribbean Region 1995–2005’, available from http://info.worldbank.org/etools/lacelectricity/, accessed 1 March 2008 Sampson, D (2008) ‘BEL applies to PUC for a 15 per cent average rate increase following Threshold Event’, press release, 14 March, Belize Electricity Limited Sampson, D. (2007) ‘Approved electricity tariff structure’, press release, 1 July, Belize Electricity Limited, available from www.bel.com.bz/press_releases/ 27062007-1.pdf, accessed 1 March 2008

12 Bolivia

Vital statistics Portfolio mix: 65 per cent thermal (natural gas, coal, petroleum); 35 per cent hydro;

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Remittances and Development: Lessons from Latin America (Latin American Development Forum) (Latin American Development Forum)

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Cogeneration: A User's Guide (Iet Renewable Energy)

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Forests to Climate Change Mitigation: Clean Development Mechanism in Bangladesh (Environmental Science and Engineering)

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