Carbon credit price fall upsets PEs' green push - Economic Times

http://articles.economictimes.indiatimes.com/2011-12-14/news/30516...

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Carbon credit price fall upsets PEs' green push

Shailesh Menon, ET Bureau Dec 14, 2011, 01.57am IST

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| Kyoto Protocol | emission cut | carbon emission reduction | Carbon credit

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MUMBAI: Falling prices of carbon credits have scuttled the best-laid plans of private equity investors to make a fortune by selling them. Europe's economic downturn coupled with low demand for emission compliance credits in the US and Asia and uncertainties over the continuation of Kyoto Protocol have resulted in a sharp fall in carbon credit prices over the past one year. Prices of carbon emission reduction (CER) receipts or carbon credits have fallen more than 60% since January this year. At current prices of 5 euro per CER unit, investors in pure carbon projects and carbonrelated clean technology projects are staring at huge losses as most of them had invested when carbon credits were trading at 1213 a piece. The November series CER contracts on Indian exchange MCX closed at Rs 464.50 per tonne, down 33% from contract value in January.
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"Investors will not make the kind of returns that they expected to make on CER because of the fall in unit prices," said Vishwajit Dahanukar, MD, Managing Emissions, a 'green' private equity fund which has tied up with SBI to spread out its micro rural household bio-gas programme. "The extent of shrinkage in profits will be dependent on the nature of investments made...investors in multiple revenue projects like renewable power plants will not be impacted much as revenues from CERs form only a small part of the overall revenue pie," Dahanukar said. Venture capitalists and private equity investors hoped to generate 25-30% returns by selling credits in the European market when they invested in clean development mechanism (CDM) and renewable energy projects 2009 and 2010. Apart from oil exploration and manufacturing companies, private equity funds such as Bessemer Venture Partners, IDFC Private Equity, DEG Germany, Goldman Sachs, Climate Change Capital, Managing Emissions, Olympus Capital and FE Clean Energy Group, among several other smaller players, have invested in several clean technology and renewable energy projects in the country. The business model of PE funds investing in CDM projects is simple. The private equity fund, along with a project consultant, spots a viable project that has potential to earn higher credits. Once the project is approved by UN-accredited CDM valuers, the PE fund releases money to start the project. Once the activity starts, UN-appointed CDM verifiers inspect the project (and its outcome) every year and hands out CERs, based on the core efficiencies of the project. The CERs are often sold at exchange rates or at a slight premium in times of demand. Most institutional investors have invested anywhere between Rs 50 lakh and Rs 5 crore in medium to large-sized projects. In case of funds that invest in mini-projects, selling carbon credits is the only source of revenue. Most PE funds do not charge the end beneficiary of the project. Experts said investors in pure carbon projects are most vulnerable to volatility in CER prices. Funds with exposure to projects that involve distribution of solar lamps and energy-saving CFL bulbs derive almost 100% of their revenues by selling CERs. In the case of renewable energy or bio-gas projects, the portion of earnings from CER trading could be as low as 20%. "Investors are worried about falling CER

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Carbon credit price fall upsets PEs' green push - Economic Times

http://articles.economictimes.indiatimes.com/2011-12-14/news/30516...

prices," said Ashutosh Pandey, CEO -carbon advisory business, Emergent Ventures. The basis of using carbon credits to mitigate pollution by companies was evolved in the Kyoto Protocol, the scope of which was supposed to end in 2012. Many developed countries expected the Durban Climate Summit, held last weekend, to scrap Kyoto Protocol and move to next level of environment compliance. The summit, however, decided to continue the emission reduction initiatives started by the Kyoto Protocol.
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"The Durban meet has reinstated confidence in CDM and other projects initiated during Kyoto Protocol. This sentiment will drive CER prices up... We expect CER prices to move up in January; we expect a gradual rise in demand by then," said Sudipta Das, partner- climate change & sustainability advisory services, E&Y.
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