By Antonio Fonseca dos Santos and Julien Dominic Publio Dias
Brascan Energética has received about 5.3 million euros (US$7.5 million) for the sale of carbon emission reductions from ten small hydro facilities in Brazil. The company shares its experiences and lessons learned in applying for and receiving certification to sell carbon credits under the Clean Development Mechanism of the Kyoto Protocol.
Brascan Energética, a wholly-owned subsidiary of Brookfield Asset Management, focuses on developing, owning, and operating small hydroelectric plants in Brazil. Small hydro power plants (SHPP) in Brazil are defined as: from more than 1 mw to 30 mw in capacity and impounding reservoirs with less than 3 square kilometers of surface area. Clean energy produced from Brascan Energética’s 26 SHPPs, with a total capacity of 295 mw, is displacing fossil fuel-based power generation in Brazil.
The Kyoto Protocol provides an opportunity for financing the development of energy projects that reduce greenhouse gas emissions. (For details, see box at right.) From the Clean Development Mechanism (CDM) perspective, this new source of revenue can make the difference in whether a project is financially feasible to develop. For example, if a project must provide a 12 percent return on investment but calculations indicate it will only return 11 percent, we cannot justify the project as financially viable. However, adding revenue from the sale of the carbon credits can make this same project feasible by boosting the return on investment to an acceptable level.
When Brascan Energética began this process in 2002, the Kyoto Protocol was not yet in effect. However, Brascan Energética personnel were confident that this was a valuable process and were willing to be pioneers.
Initially, Brascan Energética started the process of selling carbon credits with three facilities:
- 30-mw Passo do Meio;
- 16-mw Pedrinho; and
- 15-mw Salto Natal.
During the four-year process, the company added eight other hydro projects that were under development:
- 22.7-mw Cachoeira Encoberta;
- 15.8-mw Granada;
- 9-mw Nova Sinceridade;
- 12.2-mw Palestina;
- 24.4-mw Ponte;
- 13.4-mw Riachão;
- 27-mw Salto Corgão; and
- 24.4-mw Triunfo.
All of these projects are now operating. Although Brascan Energética owns other hydro projects in Brazil, they were in operation before 2001 and are not eligible under the Kyoto Protocol.
Certifying the projects and selling the credits
In 2002, Brascan Energética decided to move forward with the work needed to sell certified emission reductions (CERs) for its proposed small hydro projects. To foster this process, the company solicited bids from firms that could support the carbon credit negotiation work. In late 2002, Brascan Energética selected EcoInvest. The company is located in Brazil and so has knowledge of the country’s laws and has contacts at the local agencies. This was important because EcoInvest understood the unique situation regarding hydro development in Brazil.
The work of selling the CERs would be contingent on Brascan Energética securing certification from the Clean Development Mechanism (CDM). This flexible trading mechanism refers to investments in emission reduction projects in non-Annex I countries. These investments must result in CERs, which can be credited toward national emissions reduction targets. Developers applying for credits under the CDM must be certified by the CDM executive board. This board is charged with review of the project for compliance with criteria specified in the Kyoto Protocol.
To ensure the process moved forward without unnecessary delays, Brascan Energética worked simultaneously to receive certification and to establish the emissions reduction purchase agreement. Admittedly, working on these two aspects simultaneously could lead to some renegotiation in one or both of the processes. For example, this might involve renegotiating the volume of CERs or the delivery date. However, having the purchase agreement in place saves valuable time once the CERs are issued.
The steps used in this simultaneous process of certification and selling carbon credits include:
- Developing the project idea note;
- Establishing the methodology for calculating the amount of carbon that would be avoided by developing the project;
- Signing a letter of intent;
- Preparing the project design document;
- Issuance of the letter of approval;
- Registering the project with the CDM executive board;
- Verification of the CERs;
- Buyer appraisal of the seller; and
- Signing the emission reduction purchase agreement.
Project idea note
The first step in the four-year process was to develop a project idea note for each proposed project. This simple document summarizes key project data, including:
- Location of the projects;
- Description of the technology used for hydro projects;
- Information about the baseline scenario (carbon being emitted that development of the projects would eliminate);
- The credit period (ten or 21 years) and calculations for each;
- Financial information; and
- Environmental data (operating license, environmental assessment).
The project idea note is sent to the potential buyer.
Establishing the methodology
The work to establish the methodology was completed in 2003, in parallel with the development of the project idea note. The methodology to be used to calculate the amount of carbon that would be avoided by development of a hydro plant was not established in Brazil when Brascan Energética began this process. To establish the methodology, the CDM developed an open website where any person with expertise in this area could assess the assumptions in the project application and propose changes in the methodology. Because of the open nature of this process, the methodology changes from time to time.
Letter of intent
In early 2003, Brascan Energética signed a letter of intent with an organization that represents the Netherlands to buy CERs for ten years from six projects. These projects are Granada, Passo do Meio, Pedrinho, Ponte, Salto Corgão, and Salto Natal. This letter was intended to pave the way for initial negotiations and to secure initial commercial terms of the sale. The letter of intent contains all the data in the project idea note, as well as provisions related to: exclusivity, termination of the deal, conflicts of interest, indemnity, governing law and arbitration, and liability, both joint (i.e., where all parties are liable for the full amount) and several (i.e., where each party is liable only for its respective obligations).
Brascan Energética later signed letters of intent for four other projects to be covered under 21-year agreements — Cachoeira Encoberta, Nova Sinceridade, Palestina, and Triunfo. Riachão is still under negotiation.
Project design document
The next step was to prepare a project design document for each proposed project. This document contains information on the methodology for calculating the amount of carbon emissions the project would avoid, the methodology and plan for monitoring whether the projects provided the carbon credits promised, complete environmental impact, and stakeholder comments.
The project design document is the final document that the CDM executive board analyzes in the process of registering the projects at the CDM executive board. It also is the legal document that needs to be validated by a designated operational entity. One entity is required by CDM to verify that the information contained in the project design document is correct, as well as whether the project is in compliance with the regulations of the Kyoto Protocol. A second entity is needed to determine whether the project is in compliance with the regulations of the Kyoto Protocol during the verification of the monitoring plan. This redundancy avoids any conflicts of interest. The designated operational entities for Brascan Energética were Det Norske Veritas (DNV) and Bureau Veritas Quality International.
Once the designated operational entity reviews the document, the section on the methodology for calculating the emission reductions is used in discussions with the CDM executive board and the CDM methodology panel.
A final project design document was prepared and sent to the Brazilian government as part of a complete package of data needed to receive a letter of approval. Such a letter, from a designated national authority, is required for CDM registration.
The project design document also had to go through a 30-day public examination period.
Letter of approval
As already mentioned, the project design document was the key document the government of Brazil analyzed to issue its letter of approval. To approve and issue this letter for any projects seeking certification in Brazil, the government formed a commission — Comissão Interministerial de Mudança Global do Clima, or CIMGC — comprised of representatives from 11 Brazilian ministries and led by the Science and Technology Minister. This letter of approval is the final document needed in order to submit the complete set of documents to the executive board of the CDM and secure registration of the projects at the CDM. Brascan Energética received this letter in June 2006.
Registering with the CDM
Next, the project must be submitted to the executive board of the CDM for registration. This registration is a prerequisite for the monitoring, verification/certification, and issuance of the CERs. In October 2006, Brascan Energética registered its ten projects with the CDM. The company registered Riachão in April 2007.
Brascan Energética is responsible for monitoring all generation that results in CERs. This monitoring, performed once a year, includes collecting and storing data regarding generation from the projects. To provide the necessary data, Brascan Energética monitors generation every five minutes for 24 hours. This data is used to calculate the reduction in greenhouse gases, in accordance with the baseline established in the project design document. For this agreement, each megawatt-hour of electricity generated by the projects corresponds to a certain amount of carbon emissions avoided.
In addition, the agreement must undergo a periodic verification/certification process to review the calculations concerning the greenhouse gas reductions. This process, performed once a year by the second designated operational entity, is intended to verify the quantity of emissions reductions achieved. Brascan Energética’s projects have undergone two annual verifications.
As soon as the first annual verification has been completed, the developer can finally request issuance of the verified CERs with the CDM. For Brascan Energética, this happened in December 2006 for all ten projects registered by the executive board of the CDM. (Issuance of the first CERs from Riachão is expected to occur in January 2008.) Once issuance is complete, the final step is to transfer the CERs to the buyer.
Buyer appraisal of the seller
To verify its agreement to purchase the CERs, the organization that represents the Netherlands conducted an exhaustive appraisal of all of Brascan Energética’s policies and procedures. This appraisal included site inspections, documentation analysis, and interviews with technical, financial, and operations personnel, focusing on:
- Construction methods, including blueprint reviews;
- Operational practices, including preventive and corrective maintenance policies and procedures, tracking systems, and contingency plans;
- Environmental monitoring and action plans;
- Legal aspects pertaining to ownership, including property and all operating licenses; and
- Financial health of the project and company.
The purpose of this appraisal is to verify the information contained in all of the documents prepared in the process. In addition, during the appraisal, the buyer interviews the personnel at the projects to confirm that they believe in what they are doing and that they are making a difference in reducing greenhouse gases.
Emission reduction purchase agreement
Brascan Energética signed a ten-year emission reduction purchase agreement for six projects with the Netherlands organization in June 2005. The agreement covers CERs from 2001 through 2012 from six hydro plants. In December 2006, Brascan Energética signed four individual emission reduction purchase agreements with buyers from Japan and the Netherlands.
The entire process, from development of the project idea note to the invoice to the purchaser of the carbon credits, took almost four years. Brascan Energética received the funds for ten of the projects in April 2007. Brascan Energética currently is negotiating with the buyers of the CERs from Riachão.
Sale of CERs is a fundamental part of Brascan Energética’s business plan for hydro projects because of the rising cost of materials and the need to reach a rate of return that is attractive to investors. We are very close to signing another contract with a European company that would sell CERs from other small hydro projects Brascan Energética is developing in Brazil.
Lessons learned, advice
Brascan Energética learned several valuable lessons during this process.
When Brascan Energética began pursuing sale of carbon credits, there was no methodology available for obtaining carbon credits for small hydro plants in Brazil. Brascan Energética worked with EcoInvest to develop what was known as the Passo do Meio Methodology. Since that time, the methodology has been modified several times, as new information was received from stakeholders. With each modification, it was necessary to incorporate every new change into the project design document, emission reduction purchase agreement, and other documents. This lengthened the time needed for the entire process. Sometimes, this resulted in abandoning the fruits of months of discussion. This was a learning process for Brascan Energética.
Brascan Energética was the first company in Brazil to submit itself to validation by the designated operational entity. Most of the designated operational entity personnel were from outside Brazil and thus were not familiar with the power sector rules and regulatory agencies. As a result, most of the queries raised were not related to the project but instead were related to laws in Brazil. Companies submitting themselves to validation must be very sure about how all the regulatory aspects of the projects affect them. They must be prepared to answer many questions and explain many issues. It is important to be very well-informed about updates and modifications to power sector regulations. In addition, it is also valuable to hire a designated operational entity with local experience.
The most important step in the process was building the rationale for the additionality in the project activity. In essence, the emission reductions from implementation of a project must be “additional” to those that would have occurred in the absence of the certified project activity. Without additionality, the projects were not eligible for certification under the CDM. To prove additionality of the 11 hydro projects, Brascan Energética worked with EcoInvest to create a database incorporating all information regarding energy demand and the energy source, divided between clean or carbon-intensive. This database helped to show the location of carbon-intensive facilities.
Finally, we recommend being tenacious. Stick with the project. Do not be discouraged by setbacks. Realize there are risks at every stage. For example, the methodology proposed in the project design document could be rejected, the designated operational entity could fail to validate the project, or the designated national authority could deny approval of the proposal. However, if you believe in the project and are sure it is eligible, you must not be afraid to explain and convince these authorities over and over again.
Mr. dos Santos may be reached at Instituto de Pesquisas Ambientais e Sociais Aplicadas, Rua Carlos Gelinski #71 casa 19, Curitiba PR 82030-590 Brazil; (55) 41-33315525; E-mail: afs@ brascanbrasil.com.br. Mr. Dias may be reached at Brascan Energética S.A., Rua Padre Anchieta, 1856, 4 Andar, Bigorrilho, Curitiba 80730-000 Brazil; (55) 41-33315468; E-mail: jd@ brascanenergy.com.br.
Antonio Fonseca dos Santos, environmental and sustainability manager with Brascan Brasil Corporation, was the impetus behind seeking carbon credits for the projects and provided support for the environmental aspects of the work. Brascan Energética, represented by Julien Dominic Publio Dias, finance manager, performed all the steps needed to certify and sell the certified emission reductions.
© Background on the Kyoto Protocol
In essence, the Kyoto Protocol establishes conditions for implementing the United Nations Framework Convention on Climate Change (UNFCCC). The UNFCCC was approved in June 1992.
The Kyoto Protocol represents a potentially binding international treaty that stipulates actions to be taken by the signatory nations to combat global climate change. The protocol, an addendum to the UNFCCC, entered into full force in February 2005. Its main goal, to be achieved in 2012, is to reduce greenhouse gas emissions by an average of 5.2 percent of the values recorded in 1990 for industrialized countries (called Annex I countries). Greenhouse gases defined by the Kyoto Protocol are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6).
The protocol defines three flexible mechanisms to achieve these emission reduction targets. These are:
- Joint Implementation (JI), to be used by Annex I countries with emission caps, to assist other Annex I parties with emission caps to implement project activities to reduce greenhouse gas emissions. This mechanism involves a transfer of emission reduction units between the parties and will take effect after 2008.
- Emissions Trading, to be used to trade a part of an emission cap between Annex I countries, without changing the total amount of the countries’ emission caps.
- Clean Development Mechanism (CDM), to be used by Annex I countries with emission caps, to assist non-Annex I countries without emission caps to implement project activities to reduce greenhouse gas emissions. Under this mechanism, credits are issued based on certified emission reductions (CERs) achieved by project activities.
The CDM allows hydro plants to receive CERs. These reductions are based on the amount of greenhouse gas emissions the projects being developed will prevent from being released. Once the plant receives the CERs, these can be bought by countries and used to meet their emission reduction targets.
In the end, the mechanism is intended to result in emission reductions additional to the ones that would occur had the certified projects not been built. This would then provide long-term, real, measurable mitigation of the effects of global climate change.
© Hydro Developers Seek Carbon Credits In Latin America
Many hydro project developers in Latin America in addition to Brascan Energética are working to sell carbon credits from their facilities. At this time, HRW is following more than 20 companies involved in the development of more than 40 hydro projects that are pursuing the certification and sale of credits.
Three examples of the type of activity under way with regard to carbon credits are:
- 155-mw La Higuera on the Tinguiririca River in Chile. In July 2007, developers Pacific Hydro Ltd. of Australia and Statkraft Norfund Power Invest of Norway announced they had registered the project with VROM, the Dutch designated national authority. This step clears the way for sale of certified emission reductions (CERs) from the project in the European Union. In April 2006, the project was registered with the executive board of the United Nations’ Clean Development Mechanism (CDM). La Higuera is expected to displace carbon emissions of 470,000 tons per year when it goes on line in 2008.
- 13-mw Montecristo on the Samala River in Guatemala. In June 2007, owner Generadora Montecristo (a subsidiary of ENEL Latin America) applied for approval from the executive board of the CDM to generate and sell CERs from the project. Construction of the project began in 2005. Montecristo is expected to displace carbon emissions of 35,189 tons per year.
- 8-mw Trojes on the Barreras River in Mexico. In March 2007, the executive board of the CDM registered the project to sell CERs. Developers Impulsora Nacional de Electricidad S. de R.L. de C.V. (INELEC) and Hidroelectricidad del Pacifico S. de R.L. de C.V. are building the project at an existing irrigation dam. Trojes is expected to displace carbon emissions of 20,550 tons per year.
— By Elizabeth Ingram, Associate Editor