Africa CDM finance suffers without EUA price support: broker

CDM/JI/AAU

Africa CDM finance suffers without EUA price support: broker

23 Apr 2012 04:28 AM
www.pointcarbon.com

Africa will miss out on clean energy investment unless the EU supports European CO2 prices and repeals a 2008 law that stops many countries from supplying credits to the bloc’s carbon market, according to a leading African CO2 broker.

Moves by the U.N. to encourage more investment in African cleaner energy projects will flounder unless the EU, the main demand centre for credits, cuts supply of permits, said Fabrice Le Sache, CEO of Mauritius-based brokerage and leading African project originator ecosur afrique.

“It’s crucial that prices don’t go any lower and recover. So we need a strong decision by EU institutions on withdrawing allowances so investors get a strong price signal for offsets,” he added, warning that many projects could fail to meet U.N. criteria.

“If we see CER prices fall much further to one or two euros for example, then it becomes almost impossible for developers of projects to make a strong case that revenue from the CDM has been the deciding factor in projects,” Le Sache added.

Under U.N. criteria for CDM projects, developers have to show that there are barriers to cleaner energy schemes going ahead or that the revenue from offset sales is enough to make the project more financially feasible.

But a further slump in the price of CDM credits would mean that revenue from offsets would be too low to show that the internal rate of return has altered from a business-as-usual.

That would mean initiatives aimed at replacing incandescent lightbulbs with energy efficient ones, or new cookstoves that use wood more sparingly, could struggle to take root in African countries, the ecosur afrique chief executive said.

Prices for CERs currently trade around 4 euros, and for the last six months have been languishing below the widely-assumed 6-7 euro cost of generating the credits, curbing investment in new projects.

The slump in prices means that many European buyers now want floating price deals, forcing project originators to share some of the price risk or lose investment altogether.

But even if EU institutions were to support prices, CDM in Africa could be hamstrung by European Commission rules that put poor countries such as the Ivory Coast in the same category as advanced developing countries such as China and Brazil.

EU rules mean credits from newly registered projects will not be eligible for use in the bloc’s carbon market unless they are located in countries classified as least developed.

Non-LDCs

Although almost two-thirds of Africa’s countries are LDCs, EU rules will mean that richer countries such as South Africa and Nigeria won’t be able to supply the ETS from projects registered after 2012.

“African Non-LDC countries are being treated like China. I don’t get it. In our market this is a really big issue,” Le Sache said.

Of the 88 projects in Africa at validation stage, half are located in least development countries, which compares to 4,403 projects registered for the CDM as a whole, but in recent years EU rules have managed to funnel some investment into the continent, Le Sache said.

“We benefit from the current market situation that puts value to areas where we invested in and pioneered and so on. All in all in a context of market turmoil we are expanding faster because demand side focuses in our African/LDCs specific market,” he added.

In addition, the company was seeing increased demand from Australian companies in advance of emissions trading starting in the country in 2015.

But Le Sache said demand for African CERs from China, which is a major consumer of the continent’s natural resources, is unlikely.

“China is likely to focus on credits generated domestically before looking abroad for offsets,” he added.

By John McGarrity – john.mcgarrity

London

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