ASSESSING RISK AND RETURN OF FOREIGN INVESTMENT IN UNITED STATES RENEWABLE
ENERGY AND CARBON OFFSET PROJECTS: A CASE STUDY
by
Andrew Scott Joiner
Dr. Tim Johnson, Adviser
May 2014
Master's Project submitted in partial fulfillment of the
requirements for the Master of Environmental Management degree in
the Nicholas School of the Environment
Duke University
2014
Table of Contents
EXECUTIVE SUMMARY
INTRODUCTION
CLIENT BACKGROUND AND RISK PROFILE
FINANCIAL CONCERNS
PROJECT CAPACITY
PROJECT LENGTH
PROJECT LOCATION
MARKET ASSESSMENT
OUTCOMES OF CONFERENCE ATTENDANCE REQUESTED BY CLIENT
PRIMER ON GLOBAL COMPLIANCE OFFSET PROJECTS
MARKET OPPORTUNITIES FOR RENEWABLE ENERGY IN THE UNITED STATES
CURRENT BUSINESS CLIMATE IN NORTH CAROLINA
INTERNATIONAL RENEWABLE ENERGY MARKET TRENDS
TARGET DEVELOPMENT MARKETS
SOLAR PROJECT ANALYSIS IN NORTH CAROLINA
SOLAR PROJECT ANALYSIS IN OHIO
BIOGAS PROJECT ANALYSIS IN NORTH CAROLINA
INTERNATIONAL BIOMASS PROJECT ANALYSIS
PROJECT DEVELOPMENT SITING PROCESS
1. PINPOINT INFRASTRUCTURE LIMITATIONS
2. IDENTIFY COMPETITION AND COMMON ACTORS
3. SEARCH FOR POSSIBLE SITES
4. ANALYZE SITES
5. PRIORITIZE POSSIBLE SITES
SOLAR SITE SELECTION
FIND AND IDENTIFY SUBSTATION AND CIRCUIT REQUIREMENTS
IDENTIFY COMPETITOR SITES
PHYSICAL SITE REQUIREMENTS
PROJECT KILLERS
PROJECT DISADVANTAGES
SOLAR SITE IN NORTH CAROLINA (UNDER CONTRACT)
SOLAR SITE IN OHIO (UNDER CONTRACT)
BIOGAS PROJECT SITE SELECTION
LOYD RAY FARM ANALYSIS
INTERNATIONAL BIOMASS PROJECTS
AGRIFUEL BIOMASS PROJECT IN PAKISTAN
BEST CASE PROJECT COMPARISONS
CUMULATIVE PROJECT CASH FLOW
RETURN ON INVESTMENT
PROJECT VALUE (NPV)
LEVELIZED COST OF ELECTRICITY
CONCLUSION
BIBLIOGRAPHY
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Executive Summary
The Munich-based environmental finance and engineering firm Umwelt Projekt
Management (UPM) currently has operations throughout Europe and Asia. The UPM
portfolio contains millions of invested dollars in renewable energy and carbon offset
projects. Policy changes within the international system governing compliance
carbon offset requirements have prompted UPM to reconsider project types,
locations, and new markets for growth.
This analysis has been undertaken to demonstrate the factors driving a move from
large carbon offset and Clean Development Mechanism projects to renewable
energy and clean technology projects. Multiple projects were considered at the start
of the analysis in late 2012. Over the course of the approximate 1.5-year analysis
lifetime, the client UPM requested specific projects for consideration. The goal is to
ultimately demonstrate the most beneficial market based project development
proposals adhering to time and research constraints. Therefore, the projects
analyzed and suggested herein were the most promising at first glance.
The client UPM has achieved successful financial returns and international praise in
compliance and voluntary offset projects, biogas, biomass, solar, and wind
renewable energy technologies, and coalmine and landfill methane waste
destruction projects. The feasibility of considering all of these technologies
throughout an international landscape was far too broad in scope for this analysis.
Further, incentives for different project types vary from country-to-country, and
state-to-state with in the U.S.
Utilization of regional, financial, and logistical controlling factors provided a
template for project comparison against previous and current UPM projects. The
analysis used within this report depended on in-depth market research, qualitative
analysis of infrastructural and land use project requirements, and preliminary
financial models to develop a simplified ranking of 3 project opportunities
compared to the client’s most recent project completed in international markets.
Significant assumptions were made within the qualitative research process. These
were based primarily on regular feedback from the client in real-time, as well as
market realities, time limitations, and in many cases the desire to maintain a
competitive advantage. Most numbers generated specifically for this analysis have
been altered in order to protect proprietary client data. Geographic locations have
been provided, but only where approved by the client.
Renewable energy and carbon markets are extremely complex on both a domestic
and an international level. Therefore, significant analysis of international carbon
compliance market changes as they affect project risk is included. Further, the client
specifically requested and funded attendance at the UNFCCC COP 19 in Doha, Qatar,
and the Navigating the American Carbon World 2013 in San Francisco. These two
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conferences addressed the most significant potential policy changes affecting this
analysis and were integral in the direction of the research completed. The results
and analysis of policy changes described at these conferences is included herein.
An examination of international carbon market forces, federal and state subsidy and
incentive analysis, and logistical requirements of infrastructure realities within
specific regions of the United States drove project consideration. Solar projects in
North Carolina and Ohio, as well as a potential biogas project in North Carolina,
were specified for comparison to the recently operational UPM Agrifuel Pakistan
project. The aim of this research is to document and define the deciding factors that
were used for project consideration, selection, and ultimately modeling of returns
against the client risk profile.
The projects were considered and modeled under a variety of individualized
scenarios using US government-provided modeling templates. This analysis
attempted to standardize each project whenever possible, and used 4 metrics for
comparison. These metrics (Cumulative Cash Flow, After Tax Equity Internal Rate of
Return, Net Present Value, and Levelized Cost of Electricity) are used to represent
both the financial and social costs and benefits of each project.
These comparison metrics eventually showed that of the projects considered, either
the UPM Agrifuel Pakistan or the North Carolina 5 MW Land Purchase Solar project
scenario delivers the most benefits. Additional analysis is suggested in order to
further determine exact individualized project requirements and due diligence
ahead of any development.
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Introduction
Carbon offset project developers face a smaller and smaller window through which
market forces allow financial, social, and economic benefits to international
stakeholders. As such, many project developers are seeking new opportunities to
create economic and environmental benefits for adequate financial gain. Compliance
carbon markets are uncertain and require substantial planning and investment to
even begin operating. The year-over-year growth of voluntary carbon markets
shows promise, but most project development firms lack the in-house marketing
expertise or advertising budgets necessary to find viable partners for projects.
Creating standalone renewable energy projects could hold one possible solution,
however incentives and subsidies can change overnight.
In addition to international market changes driving activity towards specific
technologies and projects, various policy changes are evolving the carbon and
renewable energy markets in ways previously unforeseen. Renewable energy
investment is increasing rapidly in developing countries while global investment in
renewable energy projects in developed countries wanes. Carbon offset developers
are eschewing large industrial projects in China for aggregated micro-projects in
Africa and other Least Developed Countries.
The client for this endeavor, UPM, has requested an in-depth analysis of possible
markets, technologies, and sites for renewable energy and carbon offset project
development opportunities. A significant amount of qualitative, quantitative, and
real-world research was necessary to prepare an accurate analysis of project
proposals that would be of specific interest to the client. Requests to compare global
project potential with development opportunities within the United States had a
driving force on the findings and conclusions reached. The following document
provides the basis for and preliminary findings from this research as requested by
the client from September 2012 to April 2014.
This proposal document contains 10 sections including this Introduction. The
sections are meant to develop a narrative in which the document follows the
research as it develops and is refined. The first section provides a background and
risk profile of the client in order to demonstrate the culture and values from which
future development decisions are made. The second section outlines the markets for
both international compliance and voluntary offsets, as well as renewable energy
within specific areas of the country. The third section uses the bases of the previous
sections to clarify target markets and justify emphasis on development within these
areas. The fourth section presents an accurate but basic process of physical project
site requirements and due diligence. The fifth, sixth, and seventh sections provide
site recommendations based on market and logistical realities covered in previous
sections, and the eighth section compares the estimated returns and financial costs
of each site before presenting a suggestion for further research and development.
The final section concludes.
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Client Background and Risk Profile
This section will focus on the risk and concerns of the client UPM. Of specific
mention will be the current client profile, their expected results from projects
developed, and the challenges associated with an international project developer
diversifying into the United States. The subsections will be addressed in the
following order: subsection 1) will innumerate the financial concerns of the
expansion of a current enterprise into the US, subsection 2) will address the Client’s
capacity for increased project development and oversight within the current project
portfolio, subsection 3) will cover the current internal client competencies and the
potential new hires that may be necessary for expansion, subsection 4) provides the
outcomes of both foreign and domestic conferences where attendance was
requested by the Client, and subsections 4) and 5) will cover the risks associated
with project length and location, respectively.
Financial Concerns
The client UPM will ultimately consider the financial aspects of any project
proposed in the US or internationally. The impact of foreign financial investment
within the United States should be assessed when developing the client profile.
Additional financial concerns of note are the lack of direct UPM employees in the US
market, as well as specific project development risks that may prevent successful
development within domestic or international markets.
The client, possessing a project portfolio with myriad successful enterprises, is well
versed and accomplished in dealing with the complexities of international financial
investments. However, the tax liability and risk exposure faced by a new entity
engaged in such capital-intensive activities in either the US, or a developing country
lacking sophisticated banking infrastructure and regulation in place, should be of
serious consideration when comparing project opportunities. Developing projects in
the United States, if done properly, should provide relatively safe and expected
returns. However, many of the incentives and subsidies in place for project
development require a significant tax liability in order to capture all of the value
added by the incentives. UPM does not currently possess US-based assets, and
cannot be expected to purchase or own enough collateral to justify assuming
otherwise within this analysis.
Another significant hurdle facing UPM will be the lack of direct employees available
to focus on project development and due diligence within either the US or another
developing country. This oversight issue, represents a significant risk on the part of
UPM, and while it has been accounted for in the risk profiles of various projects in
forthcoming sections of this report, it should be noted that oversight risk can never
truly be controlled for.
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The last aspect of UPM’s financial exposure to be considered herein is the general
market risk facing project developers both domestic and international. Renewable
energy and carbon-offset projects are multi-year commitments of time, capital, and
resources. Many markets, especially highly politicized energy markets in the US, can
change very quickly and expose UPM to significant financial risk. Sufficient legal
representation is usually enough to protect any project developers interest in the
wake of swift policy changes, and as will be touched on later, most policy changes
within the US take place at a glacial pace.
Project Capacity
New projects developed by the client will require significant oversight, and can be
expected to compete with current projects for employee time. Within this
subsection, the Client’s current carbon offset and renewable energy portfolio will be
discussed. Expectations regarding project sales or owner-operator status will be
addressed, as there are drastic differences between developing projects for turnkey
sale versus operation and asset management. This will lead into a brief discussion of
the difficulties or management risks associated with growing a development
portfolio owned by an international firm but operated within the US.
The current portfolio held and operated by the Client consists of both carbon offset
and renewable energy projects in the European Union, China, and Pakistan. The
operation of multiple project types in myriad locations throughout the world shows
not only a strong firm acceptance of risk, but also an ability to mitigate risks through
diversified project areas. Within the renewable energy space UPM operates projects
utilizing solar, wind, biomass, and biogas generation. The carbon-offset portfolio
will approach over 25 million Certified Emission Reductions (CER) in coming years,
and operate independently from the renewable energy portfolio. These offset
projects represent biogas, biomass, and small-scale solar lamp methodologies. UPM
is currently reviewing the project requirements for a new Water Benefit project,
which verifies and distributes certificates for water restoration projects in a similar
manner as carbon offsets. The firm’s interest level in project types (Water Benefit)
that do not have finalized methodologies will play a direct role in developing riskacceptance profiles in later sections.
There is no internal mechanism for consideration of project ownership or strict
development within UPM. Therefore, each project proposal herein must contain
some analysis of financial impacts and requirements for either turnkey
development or ownership. On a very basic level, ownership of projects will require
continued management personnel near project sites to ensure continued and
efficient operation. However, the development and sale of projects may produce a
much lower return on investment, and therefore be a less desirable option for a firm
looking for responsible profits from project development. A middle road of shared
ownership with a US-based development partner could be the easiest way to limit
costs and restrict development risk, but is outside the scope of this report. Each
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project considered herein will be analyzed with both ownership and turnkey
development costs and benefits.
Potential risks associated with international firm ownership of US-based assets are
also considered herein. Renewable energy and carbon markets within the US are
very much driven by policy that can change. The patchwork of state and federal
incentives for project investment and development requires a significant
appreciation of policy experience and portfolio strategy. Also, with any instance of
large sums of money crossing international lines, tax and exchange rates are
necessary risks that must be accounted for when determining the viability of any
project considered by UPM.
Project Length
Within project development, length of planning, construction, and operation phases
are tied directly to cost. Therefore, the understanding of projected development
timelines is paramount when calculating return and reward. Lifetime costs and
revenues can be modeled using multiple options for ownership and project sales.
Operational lifetimes are assumed at market-baseline levels for simplicity.
The considerable differences in project development timelines within UPM’s
completed portfolio demonstrate few biases towards project length. However, it is
assumed within this analysis that length of development equates with complexity,
thereby adding to development costs. The complexity of various technologies is also
expected to add to project length, thereby increasing costs and the level of technical
expertise required to operate a project upon completion.
In order to maintain order within the accompanying financial models, this analysis
assumes operational project lifetimes of either 10 or 25 years. Most debt financing
and loan repayment schedules follow these assumptions, thereby making the
expectation of capital requirements easier to adjust to each project. In terms of
length of development time, we assume a general planning phase of 1-2 years ahead
of project operation. This is a much quicker development period than average
carbon-offset projects completed both by UPM and other international developers.
These expedited development timelines provide an added advantage to diversifying
into the US market.
Project Location
Many different issues and variables are at play when determining project locations.
The difference of incentive schemes within areas of the United States must be
considered. Further, any developer operating in the US must consider travel
limitations and proximity to project sites when making decisions on proposals.
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Lastly, the decision to purchase or lease land from an owner for a project can affect
where said project takes place.
In the United States, policy incentives can both support or prohibit renewable
energy (Vorhees, 2014).1 A very careful consideration of the incentives available at
the federal and state levels within the US, as well as international financial support
and subsidies from entities such as the World Bank, must be completed when
comparing projects and the possible development locations. Frequent policy
changes affecting profitability within different project methodologies will also
require someone on the development team with significant policy awareness and
experience.
As a developer with projects across Europe and Asia, UPM has shown repeatedly
that location of a project is rarely a detractor. However, adding new regions such as
North and South America, or Africa (where many offset projects are being
developed) to UPM’s project portfolio may eventually increase the risk of receiving
adequate returns. Markets within the US, as well as international markets, can
mature and become competitive extremely quickly, therefore increased oversight
and travel from UPM partners in the EU will most likely be necessary and
considered in future planning.
UPM should further consider the resources available to purchase or lease land from
owners for both US and international projects. In many cases, the purchase of land
for US projects may increase project returns, but will add an additional stage of
negotiation to project development. The financial costs and project benefits related
to land ownership in relation to projects should be considered, as well as the
capacity for UPM to fund large land purchases in foreign countries.
Market Assessment
The majority of the UPM portfolio is carbon offset projects, specifically within the
UNFCCC Clean Development Mechanism methodological framework. However,
emphasis on renewable energy projects within the United States will be necessary
as carbon markets grow and reach a maturity level worth investing in. In an effort to
cover both areas of UPM’s project portfolio, this analysis will compare and contrast
renewable energy projects with carbon offset projects, both within the continental
United States and internationally.
Oklahoma Senate Bill 1456: Modifies prohibition relating to recovery of fixed costs from electric
consumers utilizing distributed generation.
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UPM involvement in either the US voluntary carbon market or project development
sector will require significant consideration before taking action. Both research
areas are closely related, as a well-rounded UPM strategy will most likely utilize all
possible avenues for revenue generation. Included below are specific points of
interest regarding both work-stream areas that will affect marketing suggestions
and the analysis included herein.
Important Factors when Considering Offset Project Development:
 California continues to motivate the market for carbon offset project
development in the US (Forbes, 2014).
 Domestic compliance markets can be expected to grow, with RGGI increasing
trading, and eventual domestic and international market linkage possible.
 Well-funded public and private entities have demonstrated significant
interest in supporting project development through coordination, financing,
and community actions.
 Project development in the US can be seen as a large segment of Business to
Business (B2B) relationship building, as there is hesitation to purchase
offsets only generated outside the US but increasing demand for offsets.
 Smaller, community based banks, financial institutions, and investors are
knowledgeable of and willing to consider the financial requirements facing
offset projects in their region but lack experienced and qualified project
developers.
 The overall business environment regarding carbon offsets and renewable
energy development supports potential coordination with other firms in the
region, but action remains limited due to the knowledge gap that exists
regarding project design and management.
These issues are all addressed further in the sections below, but for the most part
are the driving concerns behind marketing suggestions and selection of
stakeholders within the research analysis. The strategic selections included are a
balance between new marketing designs and an analysis of current market
participants and opportunities for UPM to capitalize within the market.
Outcomes of Conference Attendance Requested by Client
UPM, in an effort to gain a better understanding of the compliance and voluntary
markets in both the United States and internationally, funded and supported
attendance at two conferences in 2012 and 2013. These conferences, the UNFCCC
COP 19 in Doha and the NACW in California, are specifically designed to gather the
most important stakeholders to discuss policy, market trends, and development
opportunities for the next year. The outcome of conference attendance is provided
in the following sections.
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United Nations Framework Convention on Climate Change: 19th Conference of the
Parties (November 2012 in Doha, Qatar)
Most of the discussion regarding CO2 projects and markets centered around the
floundering of CDM, the importance of keeping this market functional, and the
potential of new market developments. In terms of project development based
specifically on internal discussions, it is suggested that the client look towards the
voluntary carbon market (VCM) continuing to grow in the future, as well as the new
markets and linkages in California, Australia, and potentially South Africa. The POA
continues to accepted by the market, and may become the preferred CDM
methodology in coming years. There was very little discussion of the 7 Chinese pilot
projects (which I had expected to be mentioned heavily). The 2nd commitment
period of the Kyoto Protocol (KP) seems to be almost 100% dictated by the desires
of the EU, but ensures the continuation of the CDM in some capacity.
Point Summary
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The second commitment period of the KP will go until 2020.
Multiple high-level UNFCCC panels praised the CDM, but there seems to be
generally confusion within discussions related to how to support it. Axel
Michelowa and other CDM experts repeatedly mentioned the CDM as a basis
for a new global marketplace, but stressed the decreased likelihood of
establishing a market if all the project developers leave.
The New Market Mechanism is expected to be a big deal, but very few details
are available with regard to framework, function, operation, or scale.
The creation of new compliance markets (AU, CA, possible South Africa) is
encouraging, but may not matter if greater actions are taken ahead of a
pending 2020 agreement.
The CA marketplace holds great potential, but only for domestic projects.
The VCM is expected to continue growing as a result of suppressed demand
and low CER prices, but is implicitly linked to general government action and
interest in CO2 markets.
The GCF is expected to be operational ahead of 2020, plans to use CDM
infrastructure, and support POA projects.
CDM & KP Second Commitment Period
Extensive discussion took place regarding the findings of the High-Level Panel on
the CDM Policy Dialogue. The COP repeatedly praised the CDM, the infrastructure in
place, and the function of a public-private marketplace for climate change
adaptation. Each statement in favor of using the CDM as a starting point for a new
legally binding mechanism in the future was prompted with warnings that letting
the CDM disintegrate would be devastating for any new markets post-2012.
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The second commitment period of the KP was argued mostly in closed sessions;
therefore the ability to follow exactly what was being discussed was limited. The
decision regarding the second commitment period going until 2017 vs. 2020 was a
sticking point, as was the ability of states and entities that have not signed onto
Kyoto Protocol 2 (KP2) to host projects under the CDM.
The 2nd KP period has kept the status quo, retaining a low-functioning offset market
between the EU and LDC’s, and places greater amounts of emphasis on the New
Market Mechanism being developed.
New Market Mechanism & Nationally Appropriate Mitigation Actions
The NMM was heavily discussed in plenaries and side events at COP 18. Many
presentations predicted the NMM acting in the same role as an AAU, as well as
market development of sectoral trading approaches under whatever NMM
framework develops. A general consensus that NMM and NAMA would be as or
more difficult to define and implement as the POA seemed to exist. The environment
minister from Costa Rica put forth a suggestion that the NMM act as a Net Avoided
Emission similar to the REDD framework. The NAE and AAU ideas were the only
concrete suggestions for an NMM that I heard while at COP 18.
In regards to NAMAs there seems to be a general understanding that myriad levels
of ambition, equity, and feasibility exist.
Global Compliance Markets
Most of the discussion regarding CO2 compliance markets was directed towards
developments in both Australia and California. The AU ETS presents a relatively
more stable picture for the EU ETS, with linkage in 2015 and reciprocity in 2018,
respectively. All presenters expected a future connection of domestic markets, but
reiterated the difficulties in combining markets with different designs (one poorly
designed domestic market could bottom out prices in all other linked markets, etc.).
The AU market linkage to the EU ETS is expected to address some of the suppressed
demand in global markets, but will not be linked early enough if the NMM is
established in the upcoming COP (specifically the awaited decision possible in
2015). Full linkage two years ahead of a potential global legally binding agreement
in 2020 may not be enough to support the current market. One aspect I found
particularly positive was the mandate that any market changes must be announced
3 years ahead of time to ensure stability and reduce uncertainty.
The CA ETS was also discussed to a relatively full extent. Current market make-up
calls for a limit of 8% of emissions to be met through offset purchases, and requires
the offsets to be generated domestically. A link with the Quebec market is expected
to be operational in the coming months. The first allocation auction was considered
a general success. For future reference, only 5% of allowances in preliminary
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auctions, but by 2015 50% may be auctioned. A peak expected demand for offsets is
approximately 200 million.
South Africa is currently developing a domestic market, and wants to host projects.
A delegate made a loose reference to a commitment of 30% below baseline by 2020.
The Middle East and Northern Africa (MENA) region was discussed heavily given
the country hosting the COP. Most agreed that the possibility of any CO2 market in
MENA was extremely unlikely, touted the heavy level of research in CCS, and
focused mostly enhanced oil recovery as an incentive for this research.
Voluntary Carbon Market
The known stability present in the VCM over global compliance markets was
mentioned frequently. All presenters and carbon professionals expected this to
continue into the future, with VCM playing a basis for future global carbon
compliance markets. Points were made that corporate buyers of voluntary credits
are reassured through government action, either government voluntary offsetting
or compliance purchases. Japan delegates repeated at various events and
presentations the expected 2013 development of a joint crediting mechanism with
other global markets.
The voluntary registry with the highest market share is the Verified Carbon
Standard at 58%. Expectations for the VCM varied widely. One presenter suggested
the VCM could provide at least 1 gigaton of offsets ahead of a legally binding
agreement in 2020. Most voluntary offsets are currently purchased for travel or
business operations, however some governments are showing interest in the VCM,
which may lead to increased business interest.
Navigating the North American Carbon World (March 2013 in San Francisco, CA)
The Navigating the North American Carbon World conference (NACW 2013)
provided significant strategic benefits to the potential for UPM to enter and engage
the US compliance market in the future. The majority of the discussions, both
organized and during networking breaks, focused on the importance of the
California market and it’s potential to drive a more integrated global market in
coming years. A specific summary of findings and important information follows:
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The organizations regulating the CA market understand the influence this
market will have on global carbon prices and trading, and are taking future
integration with other markets into account, i.e. issues facing more mature
markets are being accounted for in CA, and addressed in new rulemaking.
There is significant work being done at all levels to create a market that can
connect with other countries. Australia and China were heavily mentioned.
Specific emphasis was placed on forestry projects and offsets, both domestic
and internationally generated. Forestry offsets seemed to be the darling of
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many regulators discussions, and there were statements made insinuating
Reducing Emissions from Deforestation and Degradation (REDD) and REDD+
being the first internationally accepted offsets in CA compliance (“if” they are
found to be compatible in the future).
Much of the discussions surrounded the impending 2015 inclusion of
emissions from mobile sources and the effect oil and natural gas companies
will have on market forces (this is a large hurdle, but significant opportunity
exists for offset developers that can create projects generating offsets that
are cheaper than allowances).
Risk of offset invalidation was heavily discussed, but at this point seemed to
pertain to forestry projects that require frequent verification due to projectspecific issues related to forest management.
Members of the California Air Resources Board were in almost every meeting and
on almost every panel. Statements concerning the importance of the role of
California, both economic (as a single entity CA would represent the 8th largest
economy in the world) and political, showed that regulators know the situation they
are in and are doing everything in their power to create a market that translates to
the rest of the United States, (Wikipedia, 2014). They are designing it with the
understanding that their decisions will translate to the US as a whole, and not just
California. As a side note, many of the environmental laws and policies that exist in
the US have been generated from local California rulemaking, and CA policymakers
are actively trying to push the US to adopt a nationwide carbon market rather than
simply create a market that succeeds in CA alone (Brown, Year Unknown).
Future connections with Australia and potentially China were discussed and seemed
plausible in the future. This is assuming the feasibility of verification and offsets
translating to various countries, but both rule makers and private representatives
seem optimistic that CA will directly connect with more national markets other than
Canada.
Significant discussion surrounded forestry projects, as they demonstrate great
potential for CA, but are extremely complicated and have a host of issues associated
with long-term planning and legal issues regarding land trusts, conservation
easements, and transfer of ownership. Multiple statements to the effect that CARB
employees were examining the potential to accept REDD-type international offsets
seemed to imply that if/when the CA compliance market begins incorporating
international offsets, they will be of this type.
Almost every discussion, organized or not, included the fact that in 2015 the market
will explode in size and scope. The financial power of oil and natural gas companies
in the US cannot be understated, and CA is the 2nd largest consumer of NG in the US
behind Texas (PG&E, 2011). 2015 will also be a huge year due to the inclusion of
mobile sources, at which point consumer gasoline usage and oil production will be
covered, creating a market different than any that currently operate. These changes
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will be implemented while CARB also limits the amount of allowances provided,
increasing the likelihood that offsets will become cheaper than allowances.
Offset invalidation risk received significant focus. Questions centering around who
should account for the risk of invalidation in a market that allows offset transfers
through multiple transactions, and how should that be accounted for in investment
portfolios, were frequently asked. These issues are likely to be determined as the
market continues to mature, but most of the signs point to the project developer.
Primer on Global Compliance Offset Projects
The UNFCCC Clean Development Mechanism was considered a hallmark of
progressive environmental policy making a decade ago (ISO, 2006). The prevailing
idea: that concerted efforts by various national development organizations, financial
investors, and community stakeholders could utilize a global market incentive to
both alleviate poverty and the effects of climate change. Significant emissions
reductions have been realized by CDM projects, but continued policy changes by
UNFCCC regulators are preventing high levels of investment and transfer of climate
debt. New rulings increase market uncertainty and project risk, hindering
achievement of the full suite of CDM goals.
The UNFCCC Programme of Activities (POA) was established amid a significant
amount of optimism that project benefits would finally reach community
stakeholders. However, current CDM and POA data comparisons demonstrate that
updated UNFCCC rules and regulations have failed to alleviate significant amounts
of financial risk, and that uncertainty regarding the POA implementation is
preventing action from otherwise committed CDM stakeholders (UNEP, 2009). The
analysis of the current rule structure, market data, and individual project evidence
provided here strives to explain the policy gaps currently facing POA’s.
The POA modality was designed with the potential to realize significant economic
gains in Least Developed Countries (LDC) (South Pole, 2010). Current CDM design
disadvantages were taken into account when establishing the POA validation and
registration methodology, but the desired flexible project structure intended to
reduce registration timelines has instead become a vague system representing new
bureaucratic issues. The difficulties of organizing and installing of hundreds and
thousands of POA micro-projects versus much larger centralized CDM projects are
not without merit (KfW, 2009). However, the programmatic differences between the
CDM and POA modalities demonstrate new policies that fail to increase efficiency
and limit financial uncertainty.
This section tries to fully address the current drawbacks of POA implementation
through raised awareness of the issues facing stakeholders and how policies
translate to project implementation. The available data from traditional CDM and
new POA projects both completed and under consideration for registration will
15
provide a basis for practical analysis of current UNFCCC policies. Internal
stakeholder documents outlining the POA process have been used to demonstrate
how policies are currently applied. The use of publicly available stakeholder data
will provide the best platform to address current disadvantages of implementing
POA projects.
The remaining six subsections of this article address the issues mentioned above.
The first section defines the current market status for Clean Development
Mechanism projects. The second section 2 goes into detail regarding the nature of
POA projects, and the motivation behind current UNFCCC POA regulations. The third
section includes a quantitative analysis and comparison of the CDM and POA
markets. And the fourth section qualifies the findings of the third section, before
extrapolating the effects of different policies in the respective markets.
Status of CDM and Projects
The Clean Development Mechanism was originally designed to facilitate the
payment of climate debt from developed (Annex I) countries to developing nonAnnex I countries, while generating economic benefits for host countries. Although
not an outright success, the CDM has reduced global emissions and increased
renewable energy investment (IETA, 2013b). However, most of the money
mobilized through CDM has to date disproportionately benefitted the Annex I
countries reflecting limited investment in Least Developed Countries (LDC) (Hoch,
2013). The various regulatory measures implemented in response to these market
inefficiencies have created a hodge-podge of rules adopted in hindsight (IEA, 2006).
The project timeline under the CDM remains extremely unpredictable; therefore
CDM projects are currently underperforming. Currently initiated CDM projects have
a success rate of 52% reaching the CER issuance phase (or the point in which
investors begin to receive
compensation for provided
capital) without experiencing
extensive delays (Cormier and
Bellassen, 2013). The average
time from submission of the
Project Design Document (PDD)
for review on the UNFCCC
website to certified CER
issuance is 1333 days (IGES,
2013).2 The prolonged effects of
the recent global economic
Figure 1: Days Spent in Various CDM Development Stages
downturn demonstrate
credit availability and
that
risk
Many projects also start ahead of the PDD submission. PDD records on the UNFCCC website
represent the first account of project information available to the general public.
2
16
aversion continue to be paramount in project investment decisions (Ederlin, 2009).
U.N. sanctioned infrastructure projects with decades-long ROI schedules had great
potential to represent capital safe-havens for institutional investors during the
Great Recession (Alliance, 2007). 3 Predictably, uncertainty regarding project
approval is stifling the level of CDM investment and the market performance of
CERs continues to disappoint from an economic perspective.
The traditional CDM method faces multiple risks of non-completion or non-issuance.
Each step in the process represents an opportunity for errors, delays, and
mismanagement to affect the project timeline. Current data shows that these delays
have resulted in multiple projects being abandoned in the process (IGES, 2013b).
Out of the approximately 8,000 submitted PDD documents, roughly 26% of projects
are outright rejected at the validation or registration phase (CDC Climat, 2013).
Administrative delays, at both validation and issuance, have prompted 22% of CDM
projects to get stuck in the CDM pipe (Climate Focus, 2011). Many projects that
experience extended delays or increased difficulties are simply abandoned.
Large
CDM
projects
become expensive and
difficult to manage as
timelines are extended.
Many renewable energy
and emissions reduction
projects are prevented
from
crossing
international
borders
although the regional
electricity grid dictates
shared access (Szulecki et
al
2011).
Under
traditional CDM rules, Figure 2: Location of CDM projects show a lack of emphasis in Africa
most small developing (CDMPipeline.org)
countries
were
not
targeted for investment due to their small levels of industrial emissions, and
therefore could not benefit from CDM (UNEP Risoe, 2007). The concept of
suppressed demand accounts for potential baseline calculations and future
anthropogenic emissions based on development and economic goals (LDC
Environment, 2011). The hope is that UNFCCC regulations will prevent previously
planned and heavy emitting industrial projects to simply revise small aspects of
their business plan and file for CDM status through additionality loopholes (EJOLT,
2013). These issues eventually gave rise to the Programme of Activities modality,
designed as a microeconomic counterpart to traditional CDM.
Safe-haven investments such as municipal bonds or government issued debt can be implemented
with CDM projects to generate considerable capital, but require stable risk levels to be financially
viable.
3
17
The Programme of Activities
The CDM Programme of Activities modality was established in 32nd Executive Board
meeting in order to address the lack of CDM involvement in Least Developed
Countries. The concept included the bundling of large numbers of small micro
projects, and incorporated the emissions reductions into a single entity. These small
projects tend to be applicable to LDCs because of their relative size and low
technology cost, i.e. biogas cook stove, cfl, and solar lamp distribution. Original
policy design ensured many of the constrictive elements of traditional CDM projects
would be minimized in POA’s; CDM Programme Activity (CPA) projects could be
implemented across various countries, timelines would be expedited, etc. The idea
remains that POAs have the capacity to implement the economic development
promised to developing countries by the CDM.
Creating a new project type, within the same scope of the CDM, required an
accelerated learning curve for stakeholders and investors. The project timeline
creates a framework similar to that of small-scale CDM: POA PDD Publication,
Validation, Registration, and eventually Issuance of CERs from CPA projects.
Increased rule flexibility through CPA adoption, in which each POA can expand
without engaging in another lengthy registration process once the initial POA is
registered, was designed to decrease project timelines and support higher project
investment. But POA projects can consist of hundreds of thousands of small scale
efforts bundled into a single project, spanning entire regions and multiple countries,
which presents problems for validators and governing bodies responsible for
verifying both legitimate project activities and aggregate emission reduction levels.
The development of the POA modality presented the opportunity to standardize
many statistical and sampling practices used in traditional CDM.
These
new
aspects
designed to emphasize
flexibility in CDM projects
have in many ways stifled
project investment. Many
CDM
firms
and
consultants remain ill
equipped to negotiate the
implementation process
with stakeholders, as they
lack the expertise and
general
manpower
necessary to document
each member of the
Figure 3: POA pipeline by Region, Days in Validation, and Expected
number of CERs issued
18
community that takes part in a POA. Figure 3 demonstrates the geographic
distribution of POAs currently in the pipeline compared to their respective regional
emission reductions, and shows that current projects still face considerable
validation times. DOE validation can quickly become arduous process due to
multiple visits to hard to access rural areas. Current regulations utilize a system of
sampling, in which a percentage of the POA is validated with the findings applied to
the remaining project sites.
Many of the current POA’s in development find them stuck in the validation stage.4
The amalgamation of various rulings by the Executive Board has prompted some
ambiguity regarding whether project CPAs already underway will be viable under
the regulatory hurdles faced by completed POAs. Many of the steps taken by the
UNFCCC to hedge against fraudulent or erroneous activity under a POA are sending
market signals that prevent risk-taking by capital investors that could grow and
support a struggling market (Point Carbon, 2013).5
The opportunity for miscalculation or error under current rules regarding POA
documentation is easier than current traditional CDM projects due to smaller size
and greater geographic distribution (Schneider, 2007). Current POA rules
necessitate an exhaustive validation process in order to prevent double counting or
fraud, but until recently did not provide distinct guidelines for various aspects of
validation and verification (EPRI, 2013). Standardized baselines currently in
development will most likely help relieve some confusion, and streamline part of the
POA process (Castro et al 2011). However, previous CDM rulemaking would
demonstrate that new policy guidelines could inadvertently exacerbate the
problems they were meant to solve.
Quantitative Analysis of CDM and POA Markets
The POA was designed to address multiple traditional CDM project flaws; therefore
timeline performance comparisons between the two modalities should reveal
increased performance from POA projects. The aggregate POA data available
constitute a relatively small dataset compared to the thousands of CDM projects that
have been developed. However, quantitative analysis from previous CDM studies
contrasts with current POA data showing concentrations of project risk, which can
lead to more informed decision-making. This section compares risk analyses from
both traditional CDM and Programme of Activities (with CPA), and quantifies
current policy shortfalls.
In terms of rulemaking and market certainty, the POA modality is still relatively young and
therefore it is difficult to determine which projects are legitimately stuck or bogged down compared
to traditional CDM.
5 The effects of current market signals and regulatory decisions have created an approximately equal
market reaction from CDM investors, with 51% already invested or planning to invest in POA
compared to 49% with no plans or no knowledge of plans to invest (Point Carbon, 2013).
4
19
Accurate and in depth analysis of POA project results can at this point only be
speculative; only 24 projects have completed the registration phase (UNFCCCb,
2013).6 Another 285 POA projects are still in the validation phase, and no CERs have
been issued from POAs to date (IGES, 2013a). Only 2 projects have also registered
CPAs. Traditional CDM projects had approximately 700 projects registered and
issuing CERs when compared to a similar time frame.7 These results demonstrate
that current underperformance of POAs demonstrates more than a lack of finance or
a preference for traditional CDM projects.
According to public data on the UNFCCC CDM website, the average validation period
for registered POAs is currently 428 days. Including projects still in the validation
phase extends the average validation timeline to approximately 647 days.8 These
time periods do not account for the later registration and issuance stages, which
account for another 86 and 515 average days using 01 May 2013 as a data point,
respectively.9 The current backlog for POAs to issue CERs will likely push many of
these projects past the overall CDM average of 1333 days from project start to CER
issuance.
Figure 4: Linear regression analysis of traditional CDM project sample after CER issuance compared to
current POA pipeline and expected CERs issued by each project
Current POA projects, when compared to a random sample of traditional CDM
projects, demonstrate no significant relationship between project size and timeline
length. Figure 4 shows the correlation between the amount of expected CERs to be
22 successfully registered, 2 rejected by the Executive Board as of 10 July 2013.
Timeframe of 4 years post policymaking: CDM- 2005 – 2009, POA 2008 – 2013.
8 It should be mentioned here that this data refer to public information on the UNFCCC and UNEP
Riso Centre website, and contains all POA projects in the validation phase before 31 December 2010,
as this period represents 428 (Average Validation Period) or more days from 01 March 2013, the
date of validation data collection.
9 1 May 2013 is used as a data point 8 weeks past 1 March 2013: The registration by the Executive
Board shall be deemed final eight weeks after the date of receipt by the Executive Board of the
request for registration, unless a Party involved in the project activity or at least three members of
the Executive Board request a review of the proposed CDM project activity (3/CMP.1, Annex,
paragraph 41).
6
7
20
issued by both CDM and POA, and the time spent in validation, registration, or
issuance stages. This would demonstrate that the goal of achieving a more flexible
process could be attained. While many differences exist between POA project type,
location, and stakeholders, the size (which remains one of the POA’s defining
characteristics) does not seem to be a factor that affects project success. Many of the
rules for POA’s are still being revised, so it may be too soon to perform the rigorous
quantitative analysis available to traditional CDM projects. However, the recent
increase in project submission, as well as the registered CPA inclusions from
registered POA projects would suggest that heavy movement towards POAs in the
future might be possible.
POA Risk and DOE Liability
Market uncertainty is one of the most common detractors of private and public
investment (Bernanke, 1980). Multiple rule changes within a policy-created
marketplace are creating confusion regarding POA regulation, and continue to
increase investment risk. The inability to provide the necessary regulatory structure
is lengthening existing project timelines, and preventing the much needed capital
inflows to LDCs (Climate Strategies, 2008). Even upon project completion, there
exist strict corrective measures in place for CPA inclusion errors that alarms project
participants (Pastor, 2010).10 From a policy standpoint, it is counterintuitive to
leave significant regulatory issues unaddressed while the repercussions for
mistakes remain unclear.
Increased rule changes within a market (regardless of merit) can have devastating
consequences on capital movements. Multiple regulatory changes within a short
period of time exponentially increase investment risk, which increases the value of
withholding investment, and therefore constrict project finance (Bernanke, 1980).
New information has a distinct bearing on investment decisions, regardless of
relatively stable long term returns: short term regulatory changes lower the cost of
waiting to invest.11 Rule changes by the Executive Board raise the probability that
future projects costs will fluctuate, decreasing the cost of delay, and impeding
investment.
Also knowledge of POA process management is still developing. Planning and
management of a POA requires skills which few consultants or firms outside of
individual host countries possess, resulting in an industry-wide knowledge gap and
the need for increased policy support (Carbon Finance, 2008). The developmental
considerations of POA projects usually require significant workforce or community
training platforms in order to maintain the project after registration (Rana, 2010).
These aspects make it extremely difficult for project management to find the right
The more uncertain government policy remains, the greater the discount rate effect, which reduces
profitability and increases risk of project (or investment) loss.
11 Ibid, Investment occurs only if: costs of delay are greater than or equal to the probability that
investment is a mistake times the expected effects of the mistake. C ≥ P x E.
10
21
people, for the right project, in the right country, and provide continual maintenance
once registration is complete.
The issue of DOE liability continues to present setbacks as well. POA protocol
provides DOEs with the ability to approve a CPA within a registered POA without
direct Designated National Authority (DNA) or EB oversight. This distinct difference
from traditional CDM projects is meant to streamline the process. However, CPA
rules allow any member of the EB or DNA to review CPA inclusions, and any
erroneous inclusions find the DOE liable (CDM Executive Board, 2011). This liability
for the DOE currently translates to:
 The initiation of a process of erroneous inclusion at any time over the first
year of the CPA.
 A potential return by the DOE of erroneously issued CERs at market price
rather than issued price.
 An unclear and vague explanation of what erroneous inclusion even is, or
whether there are actions that differentiate levels of liability (i.e. calculation
and sampling mistakes versus outright fraud).
These issues are justifiably responsible for some percentage of the POA validation
and registration backlog. DOEs cannot be expected to swiftly and judiciously
validate or register projects if they are liable for mistakes they are unaware they are
making. The Executive Board can at any point clarify or change these rules, and in
previous instances has improved on existing rule frameworks. However, changes to
regulatory structure will continue to negatively affect market certainty, in turn
signaling to investors that the market is not stable enough to dedicate financial
support to projects.
Market Opportunities for Renewable Energy in the United States
UPM’s market position as a well-known and established international renewable
energy and carbon offset project developer could provide significant new
opportunities in the United States. By establishing strategic partnerships with USbased project developers, utilizing UPM consultants to develop proprietary offset
projects in the US, or providing independent consulting services to clients in the US,
UPM could open entirely new revenue streams and further establish credibility
within the California compliance and US voluntary offset market.
The potential for US project development by UPM in the US state of North Carolina is
considerably high under the current policy and market circumstances. Further
research is required in order to accurately consider the potential for strategic
development or consulting partnerships outside of the NC region; however,
increased emphasis on this aspect in the future should develop possible strategies
moving forward.
22
Defining specific project developers currently operating in the US that would
support a constructive relationship with UPM could position the firm to better
access the US carbon market as policy or market changes increase demand. Many of
the previously mentioned collaborators would provide a promising starting point
for any relationship-building effort; however a significant portion of the project
developer population, namely REC consulting firms, is missing from research data.
Contributing the UPM carbon offset knowledge base to firms that to date have only
focused on REC policy and trading may be the most advantageous type of
partnership for UPM.
Opportunities for UPM to engage with the US carbon market are not specifically
limited to projects in North Carolina. Strategic development partnerships with other
consulting firms throughout the country could provide favorable conditions for
other project types moving forward. Generating a US-based consulting practice as it
relates to UPM’s other activities could also prove profitable in the near future.
The creation and operational success of the California carbon offset market
resulting from the passage of Assembly Bill 32 (AB32) has created a new demand
for domestically sourced carbon offset projects in the United States (Forbes, 2014).
Regional requirements (such as state/region-wide Renewable Portfolio Standards
or Clean Energy Standards) in some areas of the country have made specific project
types more feasible and profitable. Natural resource constraints, market demand,
project timelines, and ability to secure finance add considerable risks and potential
rewards for experienced project developers.
The California market currently operates with approximately 140,000,000 tons of
carbon covered and eventually over 800,000 offsets traded in the Intercontinental
Exchange during the last compliance period auction (CARB, 2014). The number of
covered entities under AB32 (currently 558) is projected to grow as the cap-andtrade program expands. Stricter emissions caps and lower allocation levels are
expected to increase the immediate demand for domestic offset projects barring any
significant agreement between CA market regulators with other international
compliance schemes. Additional US states in the region such as Washington are also
considering cap-and-trade programs in the near future.
International climate negotiations under the Durban Platform will not see any new
global carbon compliance-trading scheme ahead of 2020, making the California
compliance market the most favorable market for current project development
(UNFCCCc, 2012).
23
Focused Analysis on Regional Electricity Markets
Considering the regional limitations of studying the entire United States renewable
energy market, specific research choices had to be made. The Southeastern region of
the US is believed by most to be an extremely politically conservative area, and
therefore in many ways, inherently against renewable energy or environmental
financial products like carbon offsets. The emphasis of this analysis on the
incentives in place in this region should provide a strong understanding of what
financial landscape awaits a project developer in even the most inhospitable
renewable energy market in the United States.
The financial benefits for renewable energy are analyzed from the top down, i.e.
consideration of incentives will start with the highest levels of governance in terms
of the US Federal government and follow to State level incentives and finally
regional or utility incentives. One aspect missing from the US Federal energy
landscape is a clean energy standard or renewable portfolio standard, however
these policies can exist at the state level and will therefore differ regionally.
Energy Source
Federal Incentive
Limitation
Expiration Date
Solar - Investment
30% of Project Cost
None
Dec. 31, 2016
Wind - Investment
30% of Project Cost
Biogas - Production
$0.011/kWh
Turbines must be less
Dec. 31, 2016
than 100kW
150 kW Minimum Project Size
Expired
Biomass - Production
$0.023/kWh
Expired
Table 1: Federal Incentives According to DSIRE Database
Within this analysis, the State of Ohio (included at the request of the client), along
with the Southeast region are considered for project proposals. We assume the
Southeast to be the states of North Carolina, South Carolina, Georgia, Florida,
Alabama, and Tennessee. The table below demonstrates the available incentives in
place at the state level for renewable energy development.
24
State
Renewable Portfolio
Standard
State Incentives
Private/Utility Incentives
Alabama
None
None
TVA-Green Power Providers
TVA-Mid-Sized Renewable Standard
Offer
Georgia
None
Corporate Clean Energy Tax
Credit
Georgia Power Small and Medium
Scale Advanced Solar Initiative
Georgia Power - Solar Buyback
Program
TVA-Green Power Providers
TVA-Mid-Sized Renewable Standard
Offer
Net Metering
Solar Easements
Florida
JEA - Clean Power
Program
Renewable Energy Production Tax
Gainesville Regional Solar FIT
Credit
Net Metering
North Carolina
Renewable Energy
Portfolio Standard
Coroporate Renewable Energy Tax
TVA-Green Power Providers
Credit
Renewable Energy Equipment
TVA-Mid-Sized Renewable Standard
Manufacturer Tax Credit
Offer
NC GreenPower Production
Incentive
SystemVision Energy Guarantee
Program
Net Metering
Ohio
Alternative Energy
Portfolio Standard 12.5% RE by 2025
REC Purchasing Requirements for
Utilities
Solar Easements
Net Metering
Property Tax Exemption for
Projects over 250 kW
South Carolina
None
Corporate Tax Credit
SC Municipalities-Green Power
Purchasing
Net Metering
Tennessee
None
Property Tax Incentive
TVA-Green Power Providers
TVA-Mid-Sized Renewable Standard
Offer
Table 2: State Incentives According to DSIRE Database
Preliminary Analysis of North Carolina Biogas Market
Renewable energy generation from livestock biogas in North Carolina would
address multiple customer needs considering the nature of the project. Both federal
25
and state government policy has created an immediate demand for this type of
project, with limited development providing supply. The regulated electricity
utilities in North Carolina have recently merged, providing a more streamlined
organization to potentially work with. A hypothetical livestock swine biogas project
utilizing anaerobic digesters would generate both electricity sold to Duke Energy
(the largest US electricity utility) and either California Compliance Offsets, or
domestic US Voluntary offsets to be sold on respective marketplaces.
Duke Energy
Duke Energy headquartered in Charlotte, North Carolina, is one of the largest
electricity providers in the world. Under current state policies, electric utilities
operating North Carolina are legally required to source a specific amount of energy
from renewable production, with a specific unmet requirement to utilize the state’s
significant swine livestock population for electricity generation from biogas (NC
SEA, 2014).12 North Carolina currently boasts the largest population of swine in the
US.
Duke University
Duke University has made a significant commitment to become carbon neutral by
2024 (Duke, 2009). Most of the current reductions in emissions are developed
through university-wide initiatives as opposed to offset purchases. However, there
is an expected emissions gap of at least 180,000 tons annually that cannot be met
through any means except offset purchases. Rather than buy offsets outright, Duke
University has opted to support renewable energy and carbon offset projects both
strategically and financially.
In collaboration between Duke University, Duke Energy, and Google, staff at Duke
University planned and implemented a the Loyd Ray Farms Project, a $1.2 million
swine gas pilot project, in 2012. $500,000 was contributed through federal and NC
state government grant and/or loan, with the remaining $700,000 provided by the
aforementioned project participants in return for RECs, electricity, and carbon
offsets respectively. Conversations with the staff who planned and are currently
operating the project have explicitly stated that this project was designed to
demonstrate the potential for this project type in the region, and that Duke
University will only be supporting similar projects financially in the future (as
opposed to actively planning/operating).
Google
The involvement of Google in the Loyd Ray project ensured an easily repeatable
open source design with currently available technology. Because the technology
produces electricity and prevents the release of a significant amount of CO2 per
12
North Carolina General Statute 62-133.8
26
year; both Renewable Energy Credits and offsets can be produced through this
project type.
Apple
Other organizations with extremely deep pockets have a presence in North Carolina.
This included Apple, which has significant data centers located within the state and
has made public statements that they intend for these data centers to run on
renewable energy in the future (Apple, 2014).
Based on qualitative interviews and preliminary research, very few project
developers with biogas digester expertise are currently located in North Carolina.
Consideration of a larger geographic area produces higher results, but by no means
a significant regional presence of developers or consultants. Each entry below has
developed one biogas project in North Carolina (with RCM International producing
two), representing the 4 projects in NC aside from the Loyd Ray project mentioned
above. Results are included below:
Name
Location
RCM International, LLC
Env. Credit Corporation
Murphy Brown, LLC
Berkeley, CA
State College, PA
Faison, NC
Collaborators
Many more reputable anaerobic digester designers and manufacturers exist than
the necessary project developers or consultants required for the NC biogas market
to flourish. Below is a small reference group demonstrating the geographic diversity
of various engineering firms that work with digester design and operation:
Name
Location
Environmental Fabrics, Inc.
CH4 Energy
Entec Biogas USA
Cavanaugh and Associates
Ely Energy
Storm Fisher Biogas
Gaston, SC
Bakersfield, CA
Orleans, IN
Winston-Salem, NC
Tulsa, OK
Toronto, Canada
Increased research efforts will be necessary to more accurately define regional farm
owners, strategic partners in government, and alternative financial support.
27
Current business climate in North Carolina
The political climate in the US remains contentious, and is inherently tied to the
current economic status of the average citizen. The most important issue facing any
international project developer looking to enter the US market is going to be the
return on capital invested. Until the federal government addresses greater budget
and economic issues, many businesses (large and small) will hesitate to make any
long-term contracts or decisions due to the uncertainty facing taxation within
current business cycles.
Establishing the business climate in North Carolina as it relates to biogas project
development has been undertaken through both individual research as well as
networking efforts. Many financial incentives exist that would drastically reduce any
burden on project developers regarding design, implementation, and installation.
Significant government-backed grant and loan programs exist specifically to spur
increased development of this project type, as well as demonstrated buy-in from
some of the largest and most influential community stakeholders. Please note the
programs and amounts listed below are simply provisions by the state government
and increased federal financial incentives exist for renewable energy projects.
North Carolina Energy Improvement Loan Program13
 Up to $500,000, %3 interest rate, 10 year maximum payback period
North Carolina Renewable Energy Tax Credit
 Up to $250,000 applied against income tax or franchise tax but may not
exceed 50% of annual tax burden. May be carried over for a maximum of five
years
North Carolina Section 319 Grants
 Between $6,000 to $400,000 with typical grants approximately $100,000 but
digester must demonstrate an improvement of area watershed through
reduced animal waste
Many local and community investors see waste-to-energy biogas projects as a safe
and reliable investment due to the political support they receive. Through
discussions with regional financial representatives (start-up incubators,
sustainability professionals at credit unions and local banks, etc.) there is a
significant amount of available capital waiting to be invested in reliable and wellplanned biogas projects. This environment would produce the greatest possible
financial terms of any potential contract negotiated between UPM, investors, and
farm owners.
All State Incentives used throughout were generated by the NCSU and U.S. DOE DSIRE incentive
database and cited in the attached bibliography.
13
28
Opportunities for UPM to engage with the US carbon market are not limited to
biogas projects in North Carolina. Strategic development partnerships with other
consulting firms throughout the country could provide favorable conditions for
other project types moving forward. Generating a US-based consulting practice as it
relates to UPM’s other activities could also prove profitable in the near future.
International Renewable Energy Market Trends
According to the most recent reports by the United Nations Environment
Programme, international renewable energy investment decreased in 2013
(Frankfurt/UNEP, 2014). However, this decrease is partly due to the lower cost and
increased efficiency of solar panels, which saw as a whole record increases of 39GW
installed in 2013. Utility scale project finance fell 13% to $133 billion, however
government R&D for renewables increased to $5 billion. Of specific interest is the
201% increase in public market investment for companies and funds generating
stable returns from renewable energy projects. 2013 was also the first year that
renewable energy projects in various regions started achieving grid parity with
other generation; many projects were developed without the help of subsidies or
incentives.
Global New Investment in Renewable Energy: Developed and
Developing Countries, 2004-2013, $BN
187
153
113
103
74
49
32
8
16
2004
2005
25
2006
43
2007
106
58
63
2008
2009
Developed
74
2010
142
92
2011
107
2012
122
93
2013
Developing
Figure 5: Courtesy of Global Trends in Renewable Energy Investment 2014 Key Findings
These market trends are expected to change year over year, and are shown herein
simply to give guidance to project proposal decisions included below. Considering
the diversity of the UPM portfolio, renewable energy trends are not so important to
29
prevent investment in an otherwise profitable and important project. However, they
can be indicative of where markets, and therefore prices, are heading.
Target Development Markets
The extensive market analysis provided earlier is meant to drive the choices herein
considered for project development. Four project choices are made below based on
the respective markets and opportunities. Each project will be compared to its
development market, and will provide a step-by-step process of how sites were
chosen and why. Further, there will be limited analysis of each project to further
support projected costs and returns in forthcoming sections.
Solar Project Analysis in North Carolina
The North Carolina solar market is the second strongest state market behind
California. The image shown below is the layout of solar projects both operating and
in development. The growth in solar project development in North Carolina is the
result of a strong combination of federal and state incentives (discussed earlier)
combined with a statewide requirement for Utilities to purchase 12.5% of electricity
from renewable sources by 2021 (DSIRE, 2014).14
Figure 6: Courtesy of NRDC Renewable Energy Map
The solar market in North Carolina can be seen as a mature market with a closing
window of opportunity. The incentives in place will only exist for a short while
longer (NC State Tax incentive expires 12/31/2015) and the nature of the tax-
14
North Carolina Senate Bill 75 Passed in 2011.
30
liability requirements to use the incentives means there is a limited group of
investors with the capacity to claim the available tax credits (DSIRE, 2014).
Solar Project Analysis in Ohio
The solar market in Ohio is relatively piecemeal, but is slowly growing. Much like
the early stages in North
Carolina, a number of
developers and solar
panel manufacturers call
Ohio home, and with
enough
positive
reinforcement
could
generate new policies
within
the
state
legislature.
The solar market in Ohio
is being considered for
project
development
herein specifically due to
the an available plot of
land under control by one
of UPM’s US partners.
Therefore,
the
“sweetheart” aspect of
this potential project is expected to overcome any logistical issue resulting from
development within the Ohio market. Regardless, the image below demonstrates the
viability of solar development within the state. Multiple projects are on the ground
and operating, but not nearly at the capacity of the state of North Carolina.
Figure 7: Courtesy of NRDC Renewable Energy Map
Biogas Project Analysis in North Carolina
There are a number of reasons a biogas project in North Carolina may interest UPM
as a developer. The state incentives in place for renewable energy greatly favor
projects developed from livestock biogas (Duke Today, 2010). The incredible
amount of livestock existing in North Carolina (specifically swine biogas) mean that
there are a dearth of potential partners available for project development.
Additionally, some of UPM’s largest offset and renewable energy projects are
focused on biogas capture; many specifically from swine farms.
31
Table 3: Courtesy of Duke Sustainability Loyd Ray Farms Analysis
Figure 8: Image Courtesy of Duke Sustainability Loyd Ray Farms Analysis
There are significant market disadvantages to a project of this type. Very few
projects are operating, i.e. there are only five digesters installed as seen below in the
figure. Further, the infrastructure necessary to capitalize on a biogas project is far
behind what is necessary to support the investment required to generate healthy
project returns. Given the risk appetite by UPM in previous situations, these projects
are considered and compared, but in most cases only at a conceptual level moving
forward.
32
Figure 9: Courtesy of NRDC Renewable Energy Map
According to analysis by Duke University, the current back-of-the-envelope
projection for biogas projects needed to meet demand from the North Carolina RPS
is approximately 40 if sized and executed in a similar manner to the Loyd Farm pilot
mentioned herein. There are currently 5 operational projects statewide, but only 3
produce electricity (the other 2 biogas projects operate boilers).
Project Cost
FINANCIALS
Commercial Loan
Interest
10 yrs @4%
Total Income
OPEX Against Revenue
Total Profit
$
655,000.00
$
458,500.00
$
11,869.48
$ 1,120,261.53
39%
$ 1,053,221.05
Average NOI/yr
Principal + Interest
DSCR
IRR
$112,026
$6,704
16.71
214%
The table above is a loose financial model demonstrating the potential for revenue
from an actual farm in North Carolina under 2012 policies provided by
Environmental Fabrics, Inc (EFI, 2008). It demonstrates the financial benefits from
North Carolina’s Renewable Portfolio Standard as it relates to the operation of an
anaerobic digester rated up to 180 kilowatts. Please note the total profit line does
not include the revenue possible from sale of carbon offsets on the CA compliance
market; another $780,000 in profit (5200 tons annually @ $15 for 10 years) is
possible.
International Biomass Project Analysis
Per a specific client request, the above-mentioned project markets are compared
with the potential for returns from the most recent UPM project. Utilizing an
efficient and effective method of gathering and processing agricultural waste in
33
rural Pakistan, UPM has found a market and project type that provides a much
needed benefit of reliable electricity at an extremely competitive revenue margin.
Although limited project information is available due to the current development
methodology only just now being finalized, this project type is compared with
opportunities within the United States. As the project revenue margins represent a
very high level of return on investment, the geopolitical and infrastructural
complexities facing the Pakistani electrical grid and the general instability of the
Pakistani economy will require a high level of investment scrutiny within the
models used for US projects. We expect the risk premium in place for such a project
to severely limit the possible duplication throughout other areas of the country,
thereby making a comparison to projects existing in more stable markets possibly
more attractive.
34
Project Development Siting Process
There are multiple physical considerations that are suggested when determining
project development sites. Of specific importance is the existence of necessary
infrastructure in place to support any project. Further, limited competition within
the area is preferable, but with limited circuit and substation capacity, exact location
and project size of competitive sites should be determined before contacting
landowners or breaking ground. After establishing the necessary infrastructure and
active competition, site searches can then start in earnest. Site searches lead to the
consideration of specific sites, and analysis of costs and returns from project sites
should provide a relatively stable internal priority of potential sites. At this point the
developer can then move to the actual steps required to put such a project on the
ground.
This section will describe each step mentioned above, and provide guidance for
developers to consider project costs. The following subsections will discuss what a
developer should look for, before going deeper into the requirements specific to
project types considered within this analysis.
1. Pinpoint Infrastructure Limitations
Any project developed must fit within existing infrastructure. In many cases, with
renewable energy or carbon-offset projects, this infrastructure has not yet been
built, or is being built at a slower pace than the project is being developed. This
issue is of utmost importance when comparing the development of proven
renewable energy technologies in the United States with more cutting edge or new
technologies installed in developing countries.
Of specific importance is the ability of the electricity grid, or other receiving
infrastructure to support the increased generation from a proposed project.
However, in comparison, many carbon-offset projects are created through the
aggregated delivery of minute displacement of carbon, such as the distribution of
cookstoves or lamps. While these small technologies do not require increased
infrastructure in place ahead of development, they create a host of administrative
and oversight-related issues.
The support of the community, and in many cases suppliers, is necessary to make
both renewable energy and carbon-offset projects successful. Not-In-My-Back-Yard
(NIMBY) problems can derail renewable energy projects in the United States just as
quickly as stakeholder opposition can uproot a carbon-offset in Zambia. Therefore,
community engagement is always a necessary step when considering the costs and
benefits of each project type.
Lastly, with regards to renewable energy projects, many states and regions have
different incentives in place for new technologies. This can affect whether a project
35
in one county is more profitable than another. Additionally, solar and wind projects,
among other renewable technologies, can have their own set of incentives on a
utility-by-utility basis. The presence of a Renewable Portfolio Standard can greatly
affect whether the same project is profitable in different utility territories.
2. Identify Competition and Common Actors
The consideration of competitors and other common actors must be undertaken in
order to ensure accurate financial projections and actual development of a planned
project. In many instances, a site may be found, analyzed, projected and planned for,
only to find out that a competing developer has already secured the land rights to
the area. This becomes especially complex when considering the previous section’s
restrictions on the limitations of built infrastructure.
Access to public data and property records varies from county to county and state to
state. Therefore, it is relatively difficult when siting renewable energy projects to
adequately ensure that the potential development will not be mothballed once the
utility establishes that their circuit or substation can only accept power from one
project. This must be considered on a case-by-case basis, but it is relatively
beneficial to be the first mover within dynamic markets.
Generally, when considering the grid limitations for renewable energy projects, the
utility will make the final call on whether any projects can be added to the grid. The
filing of paperwork to review the addition of the project to the utility’s generation
resources is in many cases the last step in the pre-development process, and the
approval to break ground is the only insurance that any project developed to this
point will become a physical reality.
3. Search for Possible Sites
Assuming compliant infrastructure and a lack of competition in a surrounding area,
the actual search for viable project sites can be undertaken. Of specific use are tools
such as Google Earth, which enable a remote view of property and built
environment. State and local government resources can be used to establish
ownership and property lines, but in many cases, rural and underdeveloped areas in
the United States do not have easily accessible records.
Databases for GIS and topographical searches can ensure that landscape and
geography are suitable to potential project types. In many instances in the United
States, the United States Geological Survey’s considerable resources are sufficient to
conduct preliminary analysis of a potential sites physical profile.
36
4. Analyze Sites
Assuming a suitable site can be established through Internet and records research,
the next step is conducting an in person visit. In many instances, this will enable the
project development team to immediately view any red flags to the project, as well
as verify previous research into the project sites potential for development.
Of specific emphasis should be the complete verification of any electrical grid
requirements. Multiple public and private utilities operate the distribution and
transmission grid throughout the United States, and viewing specific sites with
respect to specific substations, circuits, and electric pole numbers in many cases is
the only method of accurately ensuring the location of a project site on the grid.
Viewing any land being considered for a project in person will also allow the
developer to assess the impact on the community of any new project. Ensuring
explicit compliance from neighbors and other community stakeholders is one of
many issues that must be addressed ahead of development.
5. Prioritize Possible Sites
The final step in successfully developing a (proposed) project is compiling projected
financial data and comparing returns across multiple scenarios. Within this analysis,
models provided by the National Renewable Energy Laboratory (NREL) are utilized
for preliminary projected returns. The Cost of Renewable Energy Spreadsheet Tool
(CREST) created by Sustainable Energy Advantage, LLC is used to project the
impacts of various projects compared herein.
Once project sites are finalized, both the CREST and UPM proprietary models
generate financial metrics that can be analyzed on a per project basis. Of specific use
within this report are the Return on Investment, Cumulative Cash Flow, Net Present
Value, and Levelized Cost of Electricity. Each of these metrics demonstrates the
variable success of a project within the consideration of benefits, i.e. a project may
lower electricity costs, but cost more than the return generates.
These models, as well as the metrics they produce, can also be used to generate the
expected capital necessary to develop a proposed project. Ensuring that all duediligence has been completed on the front end of a project, and the financials have
been weighed accurately will greatly increase the probability of a project actually
being developed and built.
37
Solar Site Selection
In this subsection, we apply the project development siting process described in the
previous section to solar projects. The goal of this section is to provide a step-bystep process of ensuring the best possible solar projects are sited, and the required
due diligence completed before contacting landowners for lease or purchase
contracts.
Find and identify substation and circuit requirements
The built infrastructure necessary to develop a solar project depends on the
capacity of lines leading from the project site to the grid. Specifically, the use of
heavy-gauge, 3 phase power lines must be in place in order to successfully add a 5 to
10 MW solar project to a circuit.
Using the previous sections basis for site selection, the proximity to 3 phase lines
can be extended, should a project site exist outside of heavy gauged grid areas.
However, according to solar project developers in North Carolina, any project
requiring a relative baseline of more than 1000 feet of heavy gauge 3-phase lines
installed will in most cases no longer be profitable to consider. In best-case
scenarios, the 3-phase line extends directly to the project site, and no additional
infrastructural changes are necessary.
Identify Competitor Sites
In many cases, a competing developer may have already filed the necessary
paperwork or broken ground near a site being considered for development. An in
person review of the circuit and grid near a proposed site will verify whether a
nearby project is utilizing the same wires and substation.
In addition, many solar markets ebb and flow with project proposals and
competition. Completing a sound development proposal and ensuring accurate
projections may place a proposed project ahead of another in a utility and
regulatory pipeline should the competing developer complete an unsatisfactory
project proposal.
Physical Site Requirements
In most scenarios, a NREL modeled 5 MW solar farm needs approximately 35 acres
of clear flat land to operate effectively. The considerable amount of land necessary
for a 5-10 MW solar plant requires project sites to usually be at least 100 acres.
Developing 35 of 100 acres usually ensures the landowner can continue operation
or development of the rest of the parcel while the solar farm is built and operating.
These 100-acre parcels are much easier to develop when they are owned by a single
person or family, and within a single parcel. Most city ordinances prevent the
38
generation of electricity within city limits, but many economic development zones
have varying jurisdictional boundaries, therefore avoiding these areas is best as
well. Flat open land is preferred for development, however wooded or recently
cleared forestland will suffice should the land remain flat enough.
Lastly, due to the nature of PV panel axes, rectilinear parcels that track east to west
are preferable, as shoulders from surrounding tree lines or buildings can affect the
amount of sunlight panels receive. This issue is especially important during times of
the year with less sunlight.
Project Killers
Both current regulations and unseen physical issues can affect a project; many to
the point that they can no longer operate. The supposed “project killers” can be
issues such as nearby protected wetlands, or the existence of the project site on a
flood plain. As the impacts of climate change begin to reshape the geography of
much of the Earth, these issues can be exacerbated in more at-risk areas.
The presence of underground storage tanks is also a prevalent concern when
identifying large parcels of farmland. These tanks may exist unknown to the parcel
owner, but cannot be ignored once found. If an underground storage tank is present
on a potential project site, analysis must be done to determine whether said tank is
leaking. If the tank is found to be leaking, and the project site has already been
secured, the developer may possess limited liability for the clean up costs. For most
developers, the risk is too great and the costs are too high to consider project sites
with storage tanks.
Lastly, the existence of historical artifacts or endangered species should be
researched. This in many cases is difficult and time-consuming, but marks the
difference between a successful developer and one that may cut corners. In most
cases it is better to discover the environmental impacts of developing a project
before ever breaking ground, should the project be derailed and undercapitalized.
Project disadvantages
Many aspects of project development may disadvantage a project without
necessarily killing it. In most cases, the development may continue, but with a
longer timeline or greater capital investment, which in both cases will detract from
project returns.
These disadvantages are issues such as the attempted development of a project
existing on separate parcels, which can complicate ownership and property disputes
among family members and farmers. Further, the existence of ditches along and
through cropland is commonplace in areas where water is likely to stand in fields
that do not drain well. The removal or consideration of these ditches when building
a project can complicate the process and upkeep of a solar array.
39
Solar Site in North Carolina (Under Contract)
Using the criteria for overall project development, as well as the solar-specific
requirements, the first site for consideration is included below. The regional
development of solar projects in North Carolina is driven by utility rates, and
currently the Progress utility is offering the highest rates for electricity from solar.
The plot shown below is in Harnett County, and represents a level cleared field of
approximately 120 acres.
Figure 10: Google Earth and Topographic Render of NC Site Location
Figure 9 shows the topographical layout of the parcel under consideration, and
modeled for this potential project. The parcel is relatively flat, cleared of all trees,
and located in an area with very few competing projects.
This project site, selected for this analysis, is only one of many possible locations for
solar development in North Carolina. Using the site selection criteria, it is extremely
likely that UPM will benefit from having multiple project sites for comparison.
Considering the dynamic nature of the solar market in North Carolina, and the fact
that no land deals are yet in place on behalf of UPM, the use of multiple proposals
will ultimately benefit the client in terms of controlling project risk moving forward.
Solar Site in Ohio (Under Contract)
The site under consideration in Ohio has already been selected for this analysis. An
existing relationship between the client and an un-named subsidiary body has
established the site included below for an undisclosed land lease or purchase
40
amount. The cleared section of the parcel is approximately 84 acres, and currently
zoned for agricultural purposes.
The parcel is located approximately 20 miles from the town of Sunbury, Ohio. The
highlighted section below represents approximately 84 acres of a 250-acre farm
that will continue to operate should the project move forward. In addition to the
size criteria for acceptable project sites, all other site selection criteria are fulfilled,
and in-person site visits have been completed. The natural tree cover shown below
is expected to cause limited problems, and zoning issues have been addressed with
the county records office.
Figure 11: Google Earth and Topographic Rendering of OH Site Location
Heavy gauge 3-phase wires are present up to the property line, and there are no
topographical issues present, as seen in the image above. No other projects or
proposed sites are in the same area or on the same circuit, however a large
government site is located approximately 30 miles away. The parcel exists in
American Electric Power Ohio’s territory, and UPM is currently reviewing a Request
for Proposals from panel suppliers.
Biogas Project Site Selection
Considering the extent of swine waste biogas projects in the UPM project portfolio,
significant emphasis on this project type with respect to the North Carolina market
was expected. Preliminary research on potential biogas opportunities, including
41
possible site locations, was undertaken with direction from the Duke University
Carbon Offsets Initiative (DCOI). The DCOI office, during the course of this research,
drafted and released the sweeping “Spatial-Economic Optimization Study of Swine
Waste-Derived Biogas Infrastructure Design in North Carolina” with the help of the
Nicholas Institute for Policy Solutions.
Using the aforementioned Loyd Ray Farms project planned and executed by the
DCOI office as a starting point, this optimization study demonstrates in great detail
the opportunities available in the NC swine waste biogas market, as well as the
necessary infrastructure improvements that must be in place before any such
project can be financially competitive.
Conclusions from the DCOI report show that while North Carolina has significant
swine waste resources, and therefore few farms required to meet the portfolio
standard in place for swine WTE, the costs of developing projects and achieving an
economy of scale are far too high to justify investment at this time. While significant
assumptions were made in the model used for analysis, the combined uncompetitive
LCOE shown in pilot projects and expired federal tax incentive for biogas production
discussed in previous sections would suggest that UPM consider other project
opportunities at this time.
For the sake of clarity, a brief project analysis of the DCOI Loyd Ray Farms project is
included below, and economic projections for hypothetical projects are compared to
other opportunities discussed in forthcoming sections.
Loyd Ray Farm Analysis
The Loyd Ray Farm (Duke Sustainability, 2013) is located in central North Carolina,
and operates with 9,000 head of swine. Using federal and state funds, the driving
project designer and developer has been the Duke Carbon Offsets Initiative at Duke
University. Originally planned as a pilot project to demonstrate the feasibility of
offsetting methane emissions and generating electricity from swine waste in North
Carolina, the Loyd Ray Farm project received significant financial backing from the
University and Duke Energy, as well as private companies such as Google and Apple.
The farm system is displayed in the figure below. A 65 kW micro-turbine burns
methane in the anaerobic digestion process, and the system as a whole prevents
significant other greenhouse gases and odors from escaping. According to project
design documents, any excess electricity is used on the farm or lost, Duke Energy
uses the Renewable Energy Credits, and Apple and Google offset the power used by
data servers throughout the state with the carbon offsets generated.
42
Figure 12: Graph Provided Courtesy of Cavanaugh Associates
For the analysis considered here, the financial and projected cost modeling done in
subsequent sections used both the Loyd Ray data provided by Duke University, as
well as a hypothetical version in which increased swine population and electricity
generation capacity was included. The Loyd Ray project still lacks the capacity to
connect to the electricity grid in North Carolina, and the 65 kW generator is on
average not generating enough electricity to justify infrastructure expenses. Unused
excess electricity generated on-site at Loyd Ray Farms is lost, therefore the
hypothetical project proposed and compared herein has assumed generation and
population values comparable to other operating projects in North Carolina.
International Biomass Projects
The client UPM has requested that the recently completed Agrifuel pilot project in
Pakistan, using agricultural biomass to generate electricity, be used as an
international project baseline for comparison. The Agrifuel project capitalizes on the
electricity reliability needs of the Pakistani textile industry; one of the leading cotton
production and manufacturing regions in the world. Current textile facilities are
purchasing electricity generated by burning diesel fuel, as the Pakistani electrical
grid is extremely unreliable in many places and frequently experiences rolling
blackouts.
43
The Agrifuel project started as a
simple plan to recycle the cotton
waste from fields and provide
biomass brickets to electricity
generators. However, UPM found
that clients were more interested
in the electricity specifically, and
the margins were too great to
ignore. Eventually, the Agrifuel
project, a full facility creating
biomass brickets and burning
them for clean steam generated
power, was created and is now
operational.
With the incredible margins
possible due to the high price
with diesel fuel,
Figure 13: Cotton in Pakistani Regions Courtesy of Spectrum associated
Commodities
replicating this success could
provide extremely high returns
for UPM. Current projections show the price of a liter of diesel fuel costing $1.14
(113.85 Rupees) in Pakistan (Hamari, 2014). This translates to approximately $0.10
for 1 kWh, which is then delivered by the power sector at approximately $0.18 (and
higher) after value-added services. The UPM Agrifuel project provides power from 1
kg biomass brickets that generate 4.2 kWh approximately. The net cost to UPM from
all operations and delivery of electricity results in an LCOE of $0.03 per kWh. The
use and reliance on expensive thermal fuels to generate electricity is one of the
reasons Pakistan has a swiftly developing renewable energy sector.
Agrifuel Biomass Project in Pakistan
There are significant risks with continued business operations in Pakistan, which is
considered an extremely unstable global economy. Significant natural gas
infrastructure exists in Pakistan, connecting many manufacturing and industrial
regions to Iran. However, the Iranian sanctions currently in place by the EU and the
US prevent the large NG pipeline connecting the two countries from being finalized.
Earlier this year Pakistan officially stated it was discontinuing construction of the
“Peace Pipeline” between Iran and Pakistan in the near future. Should this pipeline
ever be built, and cheap natural gas flood the Pakistani electricity sector, the UPM
Agrifuel project would lose significant revenue.
In addition to the risk of a natural gas shock to the Pakistani electricity market,
there is significant risk associated with doing business in Pakistan at all. The
Country Default Spreads and Risk Premiums database maintained by the NYU Stern
44
School of Business currently places a total equity risk premium of 16.25% on
investments in the country of Pakistan (NYU Stern, 2014). Considering the nature of
the natural gas market risk, and using the NYU metrics as a baseline, an overall risk
premium of 17.25% when calculating potential returns from the UPM Agrifuel
project was developed for further analysis.
Best Case Project Comparisons
This section seeks to accurately project the possible returns of each project type,
assuming best-case scenarios within each market. Utilizing federal, state, and
international incentive and risk profiles, model runs of the NREL CREST and SAM
models for solar and anaerobic digesters are provided and compared for each
project type within the variables discussed in earlier sections. Of specific note are
the comparisons of project land deals for solar projects, generator size for biogas
projects, and geopolitical risks for international biomass projects.
Most financial information was in order to run the models for project cost and
return estimation was provided by NREL or other government agencies. The CREST
model requires significant assumptions be made within the size of each project in
MW and the financial incentives stemming from project location. Most variables are
provided initially and can be adjusted for level of complexity should the developer
want a quick run of the model. Multiple model runs are utilized to consider the bestcase scenario within changing variability.
As mentioned before, these variables are purchase and lease amounts for land for
development, amount of project financed with debt, utility purchase rates (which
stay the same for project runs within the same market), and whether tax credits are
implemented based on amount of investment (ITC) or level of electricity production
(PTC). The table shown below demonstrates the general variables for each project
site compared:
Solar Project Inputs for NC and OH
Summary
Amounts
Nameplate Capacity
Project Lifetime
% Equity
Target After-Tax Equity IRR
Debt Term
Interest Rate on Debt Term
5 MW
25 Years
70%
12%
15 Years
7%
45
Different variables had mixed effects on solar projects modeled in NC and OH. Using
the same amount of land, and the same project inputs above, significant differences
arose across scenarios in which land was purchased outright versus leased from
landowners. Relative land prices were researched in both states, however an
acknowledged and significant dependence on market changes in terms of land price
and legal structure of each project exists. Therefore, all model results shown below
utilize either a land-lease or land purchase legal structure, with most other variables
being equal. Other model scenarios were run in order to calculate project margins,
however per client request these results have been omitted from this report.
Biogas Project Inputs for NC
Summary
Amounts
Nameplate Capacity
Project Lifetime
% Equity
Target After-Tax Equity IRR
Debt Term
Interest Rate on Debt Term
65 / 180 kW
25 Years
40%
12%
13 Years
8%
The models run for the biogas inputs were decidedly less empirical compared to the
solar project analysis. This is due to the significant market barriers existing within
the North Carolina built infrastructure. Utilizing the same general structure and
incentive scheme for the NC market, projected results are shown below from both
the Loyd Ray project and a comparable project generating higher levels of electricity
(and emissions).
A significant driving factor in the biogas returns is the level of offset revenue.
Currently, the DCOI values and markets offsets from the Loyd Ray project at
approximately $40. This amount is a magnitude of scale higher than most
compliance or voluntary offset market prices. Expecting the sale of offsets at this
price is very unrealistic (please see previous sections on carbon markets), however
this value was kept static in the included model run in order to demonstrate the
impact of scale on project returns within this methodology.
46
Biomass Project Inputs for Pakistan
Summary
Amounts
Nameplate Capacity
Project Lifetime
% Equity
Target After-Tax Equity IRR
Debt Term
Associated Financial Risk
250 kW
10 Years
100%
200%
0 Years
17.25%
The UPM Agrifuel Biomass project is decidedly different than the other projects
considered herein. First, the market forces at play in Pakistan provide an (internally
reported) break-even point on this project methodology of 6 months. Second, the
significantly lower capital intensity of this project type requires little to no debt
financing. Third, the project lifetime of 10 years is considerably less than the 25 year
commitments to solar and biogas necessary in the United States.
The model designed for projecting the Agrifuel returns and benefit metrics was
based on the NREL CREST and SAM models, but considering the international
market the project operates within, this analysis was not able to generate a fully
comparable model projection. Further, in the interest of comparing similar capital
requirements for each project, the UPM Agrifuel project methodology was
extrapolated to show the returns of creating 5 project sites simultaneously.
Therefore, there are some significant assumptions within the model projections. The
comparisons below between the current risk scenario, and the returns should
Iranian sanctions are based on internal UPM documents combined with the
assumptions made specifically for this analysis.
Cumulative Project Cash Flow
The figure below demonstrates the projected returns of a 5 MW solar project using
tilt-axis arrays in the state of North Carolina. Using NREL data, a state average
capacity factor of 15.3% generates a 1st year production of 6,687 MWh. The model
maintains the NC state incentives, as well as controls for the fact that NC does not
collect the usual 10% property tax on renewable energy.
The state Investment Tax Credit (ITC) generates between $900,000 and $1,000,000
in savings over a five-year period. The decision to purchase or lease the land is only
available to those project developers with higher capital reserves, but the graph
below shows the benefits available should UPM decide to invest additional money in
land deals in the state.
47
12000000
10000000
8000000
NC Land
Lease
6000000
4000000
NC
Purchase
2000000
0
-2000000
1
3
5
7
9 11 13 15 17 19 21 23 25
-4000000
-6000000
Figure 14: NREL CREST NC Solar Project Outputs
The UPM Agrifuel Biomass project in Pakistan generates extremely high and steady
returns compared to solar and biogas projects. Seen in the graph below, the lack of
debt financing provides a very quick turnaround on project revenues. The increased
projected risk is decidedly worth it, considering the projects will still break even
within the two years of operation. There is very little expectation that the
aforementioned Peace Pipeline will be completed, therefore the project breakeven
returns can be gained before there is any competition from natural gas in the
Pakistani electricity market.
1000000
500000
International
Biomass
0
0
1
2
3
4
5
6
7
8
9
10
-500000
-1000000
Iran
Embargo
Lifted
-1500000
-2000000
Figure 15: Assumed UPM Agrifuel Model Outputs
The Ohio solar project is markedly different than the North Carolina proposal due to
the lack of comparable state tax incentives available. However, Ohio does boast a
48
significant REC market compared to other states due to the Renewable Portfolio
Standard currently in place. The land lease scenario in Ohio is used for further
comparison, in order to demonstrate the impact contractual land decisions can have
on solar project returns.
12000000
10000000
8000000
6000000
OH Land
Lease
4000000
2000000
0
-2000000
0
2
4
6
8 10 12 14 16 18 20 22 24
OH
Purchase
-4000000
-6000000
-8000000
Figure 16: NREL CREST OH Solar Project Outputs
The cumulative cash flow of the proposed North Carolina Biogas project looks
substantially different to the solar and biomass models. This is due to the difference
in incentive structures, as well as the maintenance and upkeep associated with
biogas digesters compared to (relatively) static project infrastructure. The increased
operation and maintenance costs drive the unpredictable return estimates.
Combined with the significant capital costs associated with building out the
necessary infrastructure, there are very few metrics in which the NC biogas project
excels when compared to the other project types.
1500000
1000000
Loyd Ray
Pilot
500000
0
0
2
4
6
8 10 12 14 16 18 20 22 24
-500000
Loyd Ray
Potential
-1000000
-1500000
Figure 17: NREL CREST AD NC Biogas Project Outputs
49
Return on Investment
The after-tax equity internal rate of return is used to compare the value of
investments made by UPM for each project. There are some quantitative limitations
to this assumption however, because the use of IRR in comparing projects is
especially useful with the projects have the same capital requirements.
Below are the preliminary model estimates of each projects internal rate of return
on equity after tax. As these projects each cost different amounts, possess differing
equity requirements, and have different project time periods, the IRR is not
necessarily the most accurate project comparison metric.
After Tax Equity IRR
Ranking Project Name
1
PK Biomass
2
Land Purchase NC Solar
3
180 kW NC Biogas
4
Land Lease OH Solar
Metric Value
17.80%
12.06%
12.03%
11.95%
Project Value (NPV)
The net present value of each project is estimated below. NPV is used to compare
the present value of costs and benefits with reference to interest rates. As can be
seen in the table, the Land Purchase NC Solar scenario provides the highest NPV,
followed by the Agrifuel biomass project. It should be stated that while it is
undoubtedly profitable to develop solar projects in North Carolina (see previous
state-wide project activity), the Agrifuel project NPV is greatly affected by the
extremely high risk premium added into the calculations. Further, in many cases IRR
is a more useful metric when considering project returns within different time
frames.
If at some point the Agrifuel project could ensure greater longevity under the
economic duress associated with an instable Pakistan, the biomass project would
certainly have a much higher NPV rate and be more competitive with the NC Land
Purchase solar scenario.
Net Present Value (NPV)
Ranking Project Name
1
Land Purchase NC Solar
2
PK Biomass
3
Land Lease OH Solar
4
180 kW NC Biogas
Metric Value
$16,175
$7,942
$1,393
$796
50
Levelized Cost of Electricity
Levelized cost of electricity is used to demonstrate the efficacy of using various
technologies against their capacity factor and efficiency rates. Seen in the table
below, again the Agrifuel project is much more competitive within this metric than
any other project considered. The expected technological advances in solar may
change this LCOE comparison in coming years, however, the high capital cost
compared to the capacity factors associated with solar prevent these projects from
competing within this metric.
Surprisingly, the 180 kW NC Biogas scenario provides a healthy LCOE value
compared to the solar projects. This should demonstrate the ability of biogas to
effectively provide electricity on a per-unit basis, but further shows just how much
investment is necessary to gain an economy of scale and provide benefits outside of
the project site.
Levelized Cost of Electricity
Ranking Project Name
1
PK Biomass
2
180 kw NC Biogas
3
Land Purchase NC Solar
4
Land Lease OH Solar
Metric Value
$0.03
$0.13
$0.16
$0.19
Using these metrics as a basis, the preliminary estimate of this analysis is that UPM
should consider significant financial investment in the solar market of North
Carolina. While some of the returns possible cannot and do not rival current
projects within the client portfolio, the high NPV values and considerable risk-free
nature of solar projects within this specific market can add a significant level of
certainty to UPM portfolio returns.
Further, the considerable market cooperation that could be found within the state
could provide a “tent pole” of sorts should UPM wish to develop a taxable asset
footprint within the US. The California offset market is primed to grow in coming
years, and should UPM wish to be one of the few offset developers working with
covered entities within that market, developing relationships and proof-of-concept
projects within the country could be extremely beneficial.
51
Conclusion
It has been shown in previous sections of this report that the client, UPM, has a
significant appetite for risk. In addition, firm-wide acceptance and mastery of new
technological methodologies and policies demonstrate an ability to specify projects
that are inherently valuable and worthwhile. The company seems willing and able to
develop profitable renewable energy or carbon offset projects within the US.
After careful consideration of the most accessible and financially viable markets and
technologies, this analysis has relied on model inputs and assumed values from a
limited range of possible locations. Solar projects have different return profiles in
every state; the comparison of only two possibilities should not be the end of UPM
consideration of the solar market. Biogas resources are extremely viable in North
Carolina, but Texas for example, has one of the largest cattle populations in the
country.
Project decisions were ultimately made on available market data and proximity to
said markets. The research for this analysis took place in North Carolina, therefore it
was much easier to gather data pertaining to these markets compared to other
possibilities. Values and projected returns based on this data should be considered
estimates only, and increased scrutiny of forthcoming proposals within these
markets is suggested.
The client drove the choice of project development sites in many instances, as
internal firm-wide deliberations regarding the location of potential resources and
consultants are ultimately going to determine project site location. Further, the
process depicted within this report only demonstrates what could be considered the
first half of the necessary due-diligence for project development in the U.S.
Increased emphasis on land contracts, utility purchase agreements, and PUC
regulation should be included in any research moving forward.
Ultimately any investment choice comes down to the resources and information
available to the client at that time. It is suggested that should UPM wish to act on
these recommendations and secure project sites in North Carolina for development,
they do so soon and in high volumes. The window for the both the state and federal
tax incentives for solar projects is closing, and the market landscape will
undoubtedly look very different once these policy changes take place.
In addition to increased research and project planning, it is suggested that the client
develop internal or standardized methods and metrics of proposal valuation should
they continue to compare multiple project opportunities. A standardized method
would be decidedly difficult considering the breadth of the client portfolio, however
emphasis on developing this internal process would shorten project design
document creation lead time, as well as save significant resources related to market
research and modeling.
52
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