World Bank ERPA Features
and
Risk Profile of JI Projects
Jari Vayrynen
Operations Team Leader
Carbon Finance Unit
World Bank
March 2007
World Bank ERPAs
- purpose
-key features
Generation of CERs & ERPA
ERUs
$$
Issuance of ERUs by the Host
Country
Verification by an
independent auditor
(Independent Accredited
Entity)
Generation of Emission Reductions
ERPA
Purpose of ERPA

Record agreement

Identify responsibilities

Establish rights

Manage risk
Basics of World Bank ERPAs


Goals: consistency, flexibility,
reducing transaction costs
Two parts
• General Conditions - standard
terms, conditions, rights/
obligations
• Negotiated agreement - purchase
amount, price, payment terms,
preconditions, representations
and warranties
WB ERPA Features

Sale and Purchase agreement
• Object is the “commodity” of ERs
• Amount, Price and Delivery/Payment Schedule

Defines who does what with regard to:
•
•
•
•

Validation
Registration
Monitoring
Verification & Certification
Provisions on payment for ERs and preparation/supervision
cost recovery (if any):
• Payment generally upon delivery, some advance payments
possible
• Recovery of cost, if any, capped and defined

Events of Defaults and Remedies
• E.g. under delivery of ERs
• Other than for willful breach, no tough penalties, preferred
option to amend ER delivery schedule
• WB ERPAs typically do not include “delivery guarantee” from
seller
Risk Profile of JI Projects
- principle of risk allocation
- key elements of risk
- impact on pricing
- some practical considerations
Risk Allocation between
Buyer and Seller


Risk is allocated to the party best able
to bear it
Three key risk categories:
• Underlying project risks
• Kyoto Protocol risks
• ERPA structuring/terms risk

Rules of thumb:
• Project risks borne by seller
• Kyoto Protocol risk primarily borne by either the seller
(ERU) or buyer (VER)
• ERPA structuring/terms risk relatively less important and
matter of negotiation
Kyoto Protocol Risks (1)

Risk may be allocated either to seller
or buyer:
• VER: buyer takes Kyoto risk >> lower price
• ERU: Project owner takes Kyoto (including host
country compliance) risk >> higher price

Important price determinant because
if the project does not meet Kyoto
requirements, it generates no asset
for Kyoto compliance needs
Kyoto Protocol Risks (2)

Main component is risk of project
determination
• methodology, additionality
• Letter of Approval

Other component ERU issuance risks
• Risks related to proper monitoring and
verification
• Risks related to host country actually issuing
and transferring the ERUs to buyer
Project Risks

Risk of the underlying project
• Construction, operation, delays,
licensing/permits
• Reliability and level of complexity of the
technology used

Generally borne by Project Entity but can
be limited by e.g.
• conservative ER estimates

Also a very important price determinant as
has direct impact on likelihood and timing
of the physical ERs being generated
Risks related to ERPA Structure (1)

ERU delivery guarantees required by buyer or
not:
• 3rd important price determinant
• If guarantees provided by seller, can get 10%-30%
higher price but a big risk to take
• Large variation on how delivery guarantee defined
• WB ERPAs typically do not include “delivery guarantee”
from seller

Advance Payments:
• Risk to buyer that the project is not completed and does
not deliver the emission reductions
• The price may be discounted to reflect this risk taken by
buyer
• Can be mitigated by the seller providing a guarantee for
the advanced amount
Risk Related to ERPA Structure (2)

Preparation costs:
• If buyer pays for them, may discount
the price to reflect this

Structure of delivery:
• If buyer has rights to all/first ERUs
generated, likely to pay a higher price
Some practical
considerations/lessons
learned
Other practical considerations
that can manage risk and expedite process (1)


Prepare technical and financial (pre-)Feasibility study
Ensure clear commitment from company management (and
not just operational staff):
• E.g. included in the business plan



Establish clear institutional set up between project owner,
advisers, and technology provider/sub-contractor important
Advanced stage of negotiations with equity and debt
financiers is helpful
Compliance with environmental regulations, including
transparent stakeholder consultations
Other practical considerations
that can manage risk and expedite process (2)

Application of an already approved CDM methodology
makes a big difference:
• Cuts down JI preparation time and reduces risk of nonDetermination

Typically point source reductions or clearly defined systems
are easier:
• e.g. landfill gas flaring, N20 catalyzer, utilization of coal mine
methane
• e.g. wind power project displacing coal in the national grid

Dispersed or multi-component/measure projects tend to be
more challenging:
• expect a longer preparation time
• e.g. transportation, household level energy efficiency
• e.g. complicated industrial energy efficiency improvement
programs or complex district heating system upgrades
Other practical considerations
that can manage risk and expedite process (3)

Consider your commercial strategy for ER
sales carefully:
• Sell all ERs or part of the ERs, save some for
sale at the spot market?
• Sell all ERs to one buyer or to several buyers?
• What is the delivery schedule of the ERs to the
buyer(s)

E.g. deliver all of them in the first 2 year of the
project OR, for example, deliver 400,000 ERs/year
over five years?
Thank you
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