Smaller energy projects are often well suited to developing countries but find it difficult to attract funding. The Kyoto Protocol, which sets targets for industrialised countries to reduce greenhouse gas (GHG) emissions, has established the Clean Development Mechanism (CDM) to help fund such projects.CDM initiatives allow developed
countries to fund projects that reduce GHG emissions in developing countries.
These projects produce a reduction in GHG emissions that gain a certified
value, which are sold in ‘carbon markets’. Larger GHG emitters can buy ‘carbon
credits’ to offset their own emissions. Research from IT Power, UK and India,
and the Energy Research Centre in the Netherlands, examines how the CDM process
can benefit developing countries.
The
majority of CDM investments have so far been in large-scale projects.
Small-scale initiatives have been overlooked. A significant reason for this is
that small-scale energy projects struggle to meet the considerable costs for
entering the CDM process. One approach to reduce costs is to group together several
small-scale projects into a larger one. This process is called ‘bundling’.
Bundles
allow small-scale producers to participate without the need to become fully
aware of all CDM processes. Instead, experts in CDM management from larger
organisations act as coordinators. The research provides a comparison of three
projects in different energy sector areas - solar energy, biomass production
and energy efficiency. This comparison suggests:
Energy efficiency projects and biomass
production – such as the recycling of wood, dung and crop waste – are viable
for the CDM.
Solar energy projects are currently less viable
due to low carbon credit generation per system. However, these may become more
suitable as CDM credit prices rise.
Transaction costs are highest for energy
efficiency, followed by solar and biomass projects. However the impact of
transaction costs on the viability of the CDM projects is highest for solar
projects.
Bundles can reduce costs significantly by using
the same technology and baselines for measurements.
Bundles that involve projects developed by a
single organisation have simpler contracts, with lower legal and organisational
costs.
Bundles with a large number of project
developers will be more complex, as each requires separate financing and credit
agreements. The whole organisational task is also more complex to implement,
particularly monitoring the projects.
Bundling
projects together can create funds for small-scale energy projects where
finance is lacking. To develop and successfully implement small-scale CDM
project bundles, the research recommends:
Projects should be bundled at the earliest
opportunity and with projects at similar stages, with the number of projects in
each made as large as possible.
Projects should be assessed for eligibility
before development begins and limited to those with common baselines and
monitoring plans.
Marketing plans should be developed to raise awareness
of opportunities in trade associations and other national, regional and local
forums.
Methods to reduce or share risks must be
developed through monitoring and verification, phased implementation, risk
management and mitigation tools.
Effective national and regional authorities must
be formed to support small-scale project developers and intermediaries.
Knowledge transfer for financial intermediaries
and bundling organisations will support good governance.