Carbon Financing

Benefits

Use of carbon finance from NEFCO can significantly improve the project economics of an investment by securing additional, euro-denominated revenue which makes the project more bankable, reduces risk and enhances equity return.

Benefits to project owners and developers include

A defined geographic focus means we have an in-depth knowledge of the region in which we operate

Direct experience of energy, environmental and municipal
environmental infrastructure projects, from financing to implementation
with access to in-house advisers on environmental technologies

Responsiveness and flexibility of approach (we are not limited by tenders and engage in continuous project identification)

Potential access to project co-financing from NEFCO and cooperating financial institutions for project financing (risk capital, debt and grant facilities) and co-purchasing of credits for larger projects

An ability to accept smaller projects (<250,000 tCO2e over the crediting period)

Host Countries

Priority will be given to projects located in host countries in the Baltic Sea Region Testing Ground area, currently Poland, Lithuania, Latvia, Estonia, Russia, and Ukraine.

Investment Criteria

Both private and public sector projects are eligible. The TGF will invest in projects owned and operated by private enterprises, public utility companies, public-private partnerships and municipal, regional or governmental authorities.

Energy related projects are given priority with a focus on:

Renewable energy (biomass, small scale hydropower, wind power and geothermal)

Fuel switching

Supply side energy efficiency and cogeneration

Demand side efficiency and energy conservation

However, also other sectors such as waste (e.g. waste to energy, capturing of methane from landfills) and projects related to reduction of other greenhouse gases are eligible for financing from the TGF.

All projects are subject to standard viability criteria: economic, financial, technical, institutional and environmental feasibility. An important aspect will be to determine that all financing needed for project implementation can be arranged and the project development is relatively advanced with most key agreements and permits in place. Assessment of delivery risk is key, with a focus on the supplier's financial standing and technical capacity.

In addition, particular attention is paid to securing the
eligibility of the projects under the Kyoto Protocol and their
potential of providing delivery of ERUs and AAUs (including host
country related preconditions). Host country approval should be
secured.Projects should be implemented in accordance with the so called Track 2 procedure meaning that they undergo assessment by a third party of the project design, including its baseline, as well as verification of the amount of emission reductions and that these are additional to any that would otherwise occur. Once host countries qualify for the simpler Track 1 procedure, it can be agreed that this will apply.

Project proponents are advised to seek guidance from the BASREC
Regional Handbook on Procedures for Joint Implementation in the Baltic Sea Region, which can be downloaded from http://www.cbss.st/basrec/documents/climatechange/dbaFile1556.html.
The Handbook is available in English and Russian.

Purchase of AAUs/ ERUs

The TGF acts as buyer of ERUs/AAUs on the basis of emission reduction purchase contracts concluded with project owners. There is no preset minimum threshold limit for emission reductions but projects should be able to bear reasonable transaction costs and cost-effectiveness will be a criterion in the assessment of project proposals.

The price for the ERUs/AAUs will be agreed individually for each
project in line with current market prices of the relevant asset class. It is expected that payments will normally be made upon delivery of the ERUs/AAUs. For emissions reductions occurring during the commitment period 2008-2012 the TGF will acquire ERUs. For early credits the TGF seeks to enter into agreements with host country authorities for delivery of a corresponding amount of AAUs.

Co-Financing Arrangements

It is expected that projects in most cases, in addition to equity provided by the project owners, will require co-financing from various sources in order to be fully financed. From time to time NEFCO, following its normal project selection and evaluation criteria (which are provided at www.nefco.org), may provide co-financing. The TGF may in addition seek co-financing arrangements with other financiers, including IFIs such as the NIB, EIB and EBRD as well as commercial financiers and private investors.

Procedure

The procedure leading to an emissions reduction purchase agreement is outlined below

Step 1	Submission of a Project Idea Initial approval by TGF Obtaining a letter of endorsement from the host country Conclusion of an Option Agreement (Letter of Intent) between TGF and project developer which includes commercial conditions and period of exclusivity
Step 2	Detailed project design Preparation of a standard project design document (PDD) JI Determination by an accredited Independent Entity (IE) Obtaining a formal letter of Approval from the host country (usually under the Testing Ground Agreement)
Step 3	Negotiation of an Emission Reduction Purchase Agreement (ERPA) ERPA Signature
Step 4	Project construction Payment of any advance payment against agreed milestones
Step 5	Project implementation, leading to the generation of emission reductions Verification of emission reductions by an IE Issuance of AAUs / ERUs by host country government Payment by TGF against agreed delivery schedule

NEFCO will be on hand to assist throughout the above process.

Technical Assistance Funds

The TGF primarily expects project owners to mobilize the resources needed for project development. In individual cases support may be extended by the TGF, from its own or other NEFCO facilities for preparation of technical documentation and JI determination by independent entities.

Primary links

Financing Instruments