Carbon Monitor Volume 16 Issue 3 – April 2011

April 10, 2011

GA Group and EITG in 250Mw China Biomass CDM Project

 

The global financial services organisation held by GA GROUP (ASIA) Limited in the Isle of Man – has been appointed lead manager to China’s Shenzhen based Hanyuan Green Energy Co. for a major capital raising for a China-based biomass energy enterprise venture. GA Group will collaborate with EITG.

 

With the aim of raising USD30-100 million, GA GROUP will be responsible for exploring all market options – whether public or private – for raising the target capital and EITG will manage the associated carbon credit business surrounding the venture with the subsequent value integrated into the deal. EITG has commenced the steps necessary to register the project under the Clean Development Mechanism of the United Nations Kyoto Protocol, selling the resulting Certified Emissions Reductions to its European Clients.

 

“This is an incredibly dynamic project for GA GROUP and is a total vote of confidence in New Zealand’s ability to lead the global pathway in the challenging field of renewable energy and UN compliant carbon credits,” said Tim Munro-Keene, Executive Chair, GA GROUP.

 

“We set a mandate at launch that we would actively pursue socially responsible finance for climate change as part of our business ethos and strategy.  It is rewarding to partner with fellow New Zealanders, EITG, to guide this innovative project to market and pave the way for new models of renewable energy financial services across the Asia Pacific.”

 

Based in China, the biomass energy enterprise venture is a scalable project designed to utilize waste agriculture biomass to produce electricity in the Shandong Province. Five power stations each producing 50 megawatts are to be built. The project has a social responsibility perspective as local farmers will be able to increase their earnings from the sale of otherwise discarded material.

Field Measurement Approach Creates Substantial Risks for Forest Owners

The New Zealand Ministry for Agriculture and Forestry (MAF) Sustainable forestry bulletin issue 25 confirms Cabinet has approved the drafting of the regulations for the Field Measurement Approach (FMA). First mentioned in the Carbon Monitor in November 2010 volume 15 issue 10 these regulations cover post 1989 forest of 100ha or more.

 

The 100ha threshold relates to the total forest holding of one participant. Participant includes all associated parties as defined in the Act. The Act definition of Associated Parties is wide ranging so those with small forests can unwittingly be dragged into the FMA regime due to the aggregation of smaller holdings to exceed 100ha.

 

Of significant concern is the requirement for the final emission return for the First Commitment Period 2008-2012. This must be carried out using participant specific look up tables that are created from MAF specified sample plot locations on the participant’s forest(s).

 

Meantime, that is at least from 2008-2011 participants are required to use the standard regional look up tables.

 

The tables are acknowledged to in ‘some’ cases specify more the issue of more NZU units than there is C02 removed from the atmosphere by a given forest. Simplistically, some forest owners may have received more NZU than they should have for their forest in each of the last 3 years 2008-2010.

 

Changing to participant specific look up tables in 2011/2012 those forest owners may find that they receive significantly less NZU with these tables than the standard tables they used in the first 3 years.

 

In the emissions return for 2008-2012 foresters may have to surrender the over allocation in 2008-2010 using NZU issued in 2011 and 2012. For those with patchy forest or lower than expected site indexes there may be a surprise in store and a reduction in NZU income due to the change in tables to forest specific tables. Add the costs of the field measurements for the FMA and some forest owners may be in for significant cost.

Japan Crisis Drives European Market Upwards

Recent developments with the disaster in Japan placed focus on the future of low carbon nuclear energy sources in Europe.

Germany reportedly placed under review decisions on a number of its reactors in response to the devastation in Japan.

A corresponding jump in prices of emissions units resulted in EUA up to 17.22 up 2.23 and CER units up to 13.12 up 1.62. CER were reported as trading above the $25NZD the cap for the NZETS.

Since CER dominated the NZETS market in late 2010 there has been a scramble for those emitters who purchased units to sell at a substantial profit. The flow on effect is reported NZU sales over $21NZD up 1.90 this in March

Are Forest Owners ‘Silly Fools’ a CM Reader Posses the Question?

Peter Ann, a Carbon Monitor reader sent us his thoughts on selling forest based NZU for post 1989 forests. He writes:

So…… we sell our NZU’s and they are taxed in the year of income.

Lets assume a 400ha forest of 10 years age, 10,000 units at $20… could be around $60,000 tax. $140,000 to invest someplace else, say a 2.5 million dollar building in the city, complete with 20 year mortgage leveraged against rental and the income from more sales of NZU’s…..

The rough guide for returns of commercial property is equal to inflation over a long period (60 years to 1989)….

Onwards 20 years and the forest now has a liability of surrendering the units sold by that “silly fool” who sold them all, against all advice from every forest person he talked to ever.

The question is will his building now be worth the balance between surrender value of his units plus his log harvest less the residue units or “free units” as in forestry jargon.

Historically forestry had a 3% above inflation compared to -3% for dry stock farming return for the 60 years (share market in NZ was 7% for the curious) preceding the 1989 article the writer read and made the decision to invest in forestry when he could.

At harvest the logs should return more dollars than the NZU that have to be surrendered. If not the prudent forest owner will leave the trees growing…. until they are. Just look at the turnaround in the last 3 years from doom and gloom to the highest log prices since the 1991 spike. Trees don’t mind being 33 years old!

However the building is now freehold and available for sale at capital gain….

The large surrender value of 20 years of sales of NZU is fully tax deductible expense, just as the harvest cost is deductible. 260,000 * 30% residue – =182,000 units to be surrendered at say $70 $1,274,000 remember the tax deduction against income

Who among you followers of forestry are prepared to do the numbers and stop suggesting and advising forest owners with one age class to plant more forest to offset liability. how many eggs do you put in one basket?

Commentary

 

Peter raises some very good points. In a past issue of the CM we shared the use of Land Expectation Value put forward by the University of Canterbury school of Forestry as a way of modelling the potential income and liability of participation in the NZETS.

 

Interestingly a 5% increase in the price of an NZU over each of 10 years showed little impact on the LEV as a metric.

 

However if as Peter says an NZU is $70 who would bother to harvest? Income of over $2000 per ha would be hard to beat with money in the bank from harvest yielding less than 5% in interest.

 

The problem is that no one knows the price of an NZU 10 or 20 years out and not managing this risk is as Peter puts it creates a ‘silly fool’

 

The next emerging issue appears to be the Banks have realised the sale of the NZU units potentially creates a liability that ranks ahead of a mortgage security. When a forest is sold any buyer would factor in the cost of surrendering NZU units when calculating a purchase price.

Forest Carbon Insurance Update

For an update on the New Zealand insurance scene for carbon forestry insurance, we asked Geoff Manks, managing director NZ Carbon Insurance (a division of Sage Partners Ltd). NZ Carbon Insurance has been active in the area of carbon credit insurance and lead the market offering specialist solutions for forest owners. Geoff claims to be the only insurer in Australasia actually having written policies for this type of cover. He reports:

 

In the last 4 weeks we have had a noticeable lift in enquiries from forest owners, large & small, from around NZ seeking advice on insuring their forests. Presumably this is a direct result from carbon credit returns being filed with MAF and growers then considering trading options, or trades having already being recently concluded.

 

However there clearly remains a lack of appreciation by some growers as to their contingent liabilities, and therefore what insurable value to attach to their forest. What is apparent, from the insurance programmes we have reviewed, is those who have traded their credits and are already insured under a traditional forest model, likely have an insurance programme which does not reflect their position. In particular post 1 April 2011 where the contingent liability values accrue. One area we spend most time with clients on is helping them understand how to establish an appropriate insurance value for their forest. This generally differs between each forest but is based around our unique model from which clients then select the option they feel comfortable with.

 

Insurance capacity in NZ remains limited with insurers still shy about providing limits in some regions for wind, earthquake, landslip etc. However premium rates remain competitive with carbon forest insurance programmes generally priced at similar levels to traditional timber insurance. We are likely to see the entry of another insurer into the NZ market in the near future capable of accepting carbon forest business. The incumbent, NZI, still have a stated position of not insuring carbon. What this exactly means is not entirely clear, however without further definition or a more flexible model for covering perils or establishing insured values, we still have concerns about their suitability for carbon forestry.

 

Whether for Silviculture, ETS registration, Filing returns, Measurement or Trading credits, getting sound advice is critical forest owners. Insurance is not the sole answer to growers as not all events are insured against. However forest owners must understand the manageable and non-negotiable consequences, of a loss to an ETS/PFSI entered forest and are prepared to accept these or take steps to mitigate the risk.

United Nations Publishes Radio Broadcasts on the CDM

The Clean Development Mechanism of the Kyoto Protocol allows the creation of projects in developing countries that would not otherwise go ahead  (business as usual)  to receive credits called Certified Emissions Reductions or CER.

CER can be used in the main emissions trading schemes and are permitted in the NZETS and EUETS.

The UNFCCC secretariat has produced five ‘broadcast-ready’ radio stories for dissemination to radio stations in Africa. These stories are meant to make the Clean Development Mechanism of the Kyoto Protocol understandable and accessible to a broad audience, including community stakeholders, potential project participants and policy makers

They are available at http://bit.ly/cdmstories

 

Technological Solutions for Coal Fired Stations move Closer to Reality

Two new patented sorbents used for carbon dioxide (CO2) capture from coal-based power plants have moved closer to commercialization as a result of a licensing agreement between the Office of Fossil Energy’s (FE) National Energy Technology Laboratory (NETL) and ADA Environmental Solutions (ADA-ES).

The nonexclusive agreement facilitates negotiations on intellectual property rights, protects proprietary information, and grants non-exclusive licensing of the new technology. Under federal regulations, NETL is authorized to obtain, maintain, and own patent protection for its inventions, including those funded through collaborative agreements. By granting a commercial license for these sorbents, NETL can now convey and control the right to make, use, and sell the products and services claimed in the patent, thereby assuring strategic commercialization throughout the coal-fired power plant industry.

CO2 capture is an important component of carbon capture and storage (CCS) technology, viewed by many experts as an integral part of a portfolio strategy (including increased use of renewable and nuclear energy, and greater efficiencies) for confronting increasing atmospheric carbon dioxide emissions and potential climate change. Coal-based power and industrial plants are essential to U.S. energy production and are projected in many forecasts to remain so for the foreseeable future. But they are also among the most carbon-intensive energy sources.

FE’s comprehensive CCS research includes developing new materials that can capture and release CO2 at reasonable energy and operating costs. Traditional solvent-based systems consume too much energy, either in operation or during regeneration of the solvents. So FE is developing and testing a wide range of approaches.

A promising solution for affordable CO2 capture is “dry scrubbing” or chemical absorption of CO2 using a solid regenerable sorbent. The most important advantage of solid sorbents is the potential to significantly reduce the amount of energy required to capture and release CO2. These range from alkaline earth metal oxides or hydroxides that can absorb CO2 at temperatures that typically range from about 100—300 °C to impregnating a porous substrate with one of the liquid solvents. In all of these, the sorbent can be regenerated in a subsequent step, after the CO2 is removed. The efficiencies of these processes are highly dependent on the optimum temperature and pressure conditions at which absorption and regeneration are performed. In the case of high-performance sorbents, both of these mechanistic steps occur with the lowest possible energetic and operational costs.

http://www.fossil.energy.gov

 


Carbon Monitor Volume 16 Issue 2 – March 2011

April 10, 2011

 

NZETS Firms as Allocations and CER Affect Price

 

In the recent month we have seen the NZETS dominated by CER credits from off shore projects change into a market more driven by free allocations from the forestry sector and industries at risk.

 

The firming of CER prices and the weakening of the NZ dollar have removed, at least at this time the CER price from driving the NZETS price. CER are now $22NZD. Some brokers have advocated selling CER for a quick profit and purchasing NZU units to cover obligations. This is exactly what we anticipated when we wrote the article in the Reuters carbon market Australia New Zealand January edition.

 

As a result and despite allocations of NZU being sold the market has firmed with sales reportedly in the mid $19 range.

 

Contact Energy reported recently its purchases of carbon credit averaged $21.22 NZD. Some $19.5m was spent in purchases over a six month period. This is significantly higher than the reported average price of NZU units which ranged from $18.40 to $20.50 during the same period. The volume purchased approached 2m units.

Sustainable Long Term Carbon Forestry – an Alternate to the NZETS?

 

While most foresters are now familiar with the NZ ETS few understand the lesser known Permanent Forest Sink Initiative (PFSI). Under the PFSI landowners undertake to maintain a forest sink on their land for at least 50 years with restrictions against clear-felling.

 

The PFSI works well with indigenous forestry because many native tree species are slow growing and can take hundreds of years to mature. However, the PFSI is also an option for exotic forests managed to maximize carbon sequestration in combination with conservation objectives or sustainable harvesting.  Around 60% of registered PFSI forests are comprised of radiata, Douglas fir, eucalypt and cypress plantings.

 

The Permanent Forest Sink Initiative will not be appropriate for commercial timber forests destined for early harvesting however it may be a good fit for those forests that are inaccessible and remote, uneconomic in terms of timber returns and are best managed for carbon. It is also a logical fit for conservation and amenity plantings where management for the long term delivers the best environmental outcomes.

 

Christchurch company Permanent Forests International Ltd have been involved in over 95% of all carbon transactions involving PFSI carbon credits. Permanent Forests say there are a number of carbon markets and buyers who recognize the added value of high quality carbon forestry projects and as a result are willing to pay premium for credits generated by these forests.

 

Pre-2008 ‘non-Kyoto’ carbon is also able to be sold from PFSI forests. Permanent Forests have created and sold more than 350,000 tonnes of pre-2008 carbon to voluntary carbon buyers in NZ, Europe, and North America. This means carbon generated back to 1990 from forests registered under the PFSI can be sold.

 

For those interested in the PFSI contact Ollie Belton at obelton@permanentforests.com

 

CDC Climat Report on Agriculture and Forestry in the NZETS

 

Mark Belton of Permanent Forests International has co-authored a paper[1] with CDC Climat about New Zealand’s climate change policies relating to agriculture and forestry.

CDC Climat, a subsidiary of French financial institute Caisse De Depots, is a major player in the carbon world. It provides carbon market services such as the BlueNext carbon exchange, invests directly in carbon reduction projects, and carries out research and provides policy advice for both the private and public sector.

The report describes New Zealand’s experience to date with its ETS in relation to the land use sector and includes a comparative analysis of NZ’s forestry mechanisms. The NZ ETS designs for inclusion of forestry and agriculture sectors are highly innovative and of great interest for other jurisdictions. France and other northern European countries are increasingly supportive of more effective inclusion of forestry in efforts to reduce GHG emissions. This support is important given EU ETS excludes forestry.

The report is available for download from the CDC Climat publications webpage (link here).

CDC Climat also hosts a carbon forest and wood club (Club Carbone Foret-Bois) for forest sector participants. Mark Belton is an expert advisor to the club.

 

VCS Projects Underway

EITG consortium partner Equitech is working on VCS carbon credit projects involving forest conservation and reforestation in Asia with EITG mentoring assistance and input.

 

Currently VCS credits are reportedly receiving 8-9 USD per credit in the voluntary market.

 

The projects involve in one case a rubber plantation and follow the VCS approved project for a rubber plantation in Guatemala. The additionality case in that project was that rubber plantations are not common practice in the region due to fungal problems with the trees. The plantations are characterised also by the need to fell the rubber trees and replant.

 

This raises the question if the carbon credit income reduces the risk of a project to what extent are these risks also risks to the carbon income. It would appear in the case of the Guatemala example the carbon income could be directly affected by the key risk the fungal problems.

 

So does the carbon income really reduce the risk – probably not.

 

The other approved VCS project a forest regeneration on slash and burn land in Kenya is modelled on another methodology. The volume of credits per hectare is modest in comparison to plantation forestry and the risks such as fire from drought are potentially quite high.

 

The VCS addresses this by encouraging a 20% buffer of credits to be withheld as part of the project.

 

Interestingly the methodologies for both projects have their roots in CDM Afforestation Reforestation approved methodologies.

 

The market for forest based CDM credits, so called temporary cers or Tcers or long term cers of Lcers is minimal, the latter are banned in the NZETS.

 

As you can see from elsewhere in this months CM the Europeans in particular are warming to the idea of forest credits in the EUETS in the future.

Strong Demand for CER from Europe

EITG has recently concluded a deal that involves sale of CDM credits or CER units to a major European purchaser of these credits. A large number of bidders were invited to resubmit offers post closing a week after the term sheet was issued in the market.

The contract is a long term off take agreement which covers 7 years of credits from a biomass power facility.

Currently EITG is in negotiation with buyers for 8 more similar projects located in Africa and China.

The aggregated volume of CER involved run into the millions of tonnes.

Deal structures that are achievable at present include up front payment for project development funding and long term either fixed or indexed price agreements.

Most bids did not require that the EUETS continue to permit CER units into the scheme.

The main factor project developers should be aware of is the reticence of buyers to look at projects registered post 31/12/2012.

 


[1] CDC Climat, ‘Good Shepherd or Black Sheep? Tackling Forestry & Agriculture Emissions In New Zealand’s New Carbon Market’ Climate Report (No 26, Nov 2010)