With one or two key exceptions, Clean Development Mechanism projects have yet to reach their potential in Africa. Anjali Saini argues governments need to grasp the opportunity.
"I’ve had to learn to think like a banker," says Tom Owino, an energy consultant who structured the carbon financing deal for Mumias Sugar Company’s new cogeneration scheme in Kenya. Under the scheme, the company will use sugar cane process waste (bagasse) that currently gets dumped, to generate steam and power for its internal operations. Excess power (25MW) will be available for sale to the grid. The project will also generate carbon revenues from approximately 100,000 tonnes of carbon dioxide equivalent (tCO2e) certified emission reductions (CERs) per annum. It is likely to become Kenya’s first fully approved Clean Development Mechanism (CDM) project.
According to recent World Bank analysis, the current average market price for CERs is US$10.30. This year, African projects have traded at $8.30 per CER, a discount of $2 from the average. Although the negotiated price for CERs generated by the Mumias project is confidential, it is likely to be at the lower end of the price scale for African projects. "It’s the perception out there about the high risk of investment in projects in Africa that gave us less leverage to negotiate the carbon prices," says Owino.
Reducing risk
In the recent Ai projects summit on project financing for infrastructure development, Professor Charles Soludo, the Governor of Nigeria’s Central Bank, argued that African countries must create an enabling environment for investment funds to flow. Pre-requisites include the right institutional and legal frameworks, the right macro-economic conditions, players who have the capacity to develop projects and structure financing and, most important, "skills, skills, skills".
Owino himself bemoans the fact that it took months for Kenya’s Designated National Authority (DNA), the institution responsible for approving projects before they are forwarded to the CDM Executive Board, to provide the required letters of approval. "I know and understand that the DNA is under-staffed and lacks capacity, but taking an uncertain length of time for project approval gives a really negative signal to potential investors out there, who then automatically lump us in the high risk category for carbon projects. This is something that we could and should be able to control."
While a non-level playing field is a major reason why there are not more CDM projects in Africa (unfair methodologies are currently under consideration by the CDM Executive Board), ultimately the political will of a country is the key determinant.
"Look at Honduras," says Mike Bess, International Director for ESD UK, an international consulting firm in energy and carbon finance. "This is a small Latin American country with a similar investment climate to many African countries. What is it that makes a country like Honduras have more CDM projects than sub- Saharan Africa as a whole?"
Stimulating private interest
African countries have no shortage of projects that would make excellent CDM projects, with the potential to attract significant carbon revenues in addition to project-based revenues. Encouraging equitable distribution of CDM projects was on the agenda at the recently held 12th Conference of the Parties to the UN Framework Convention on Climate Change and the Second Meeting of the Parties to the Kyoto Protocol (COP 12 and COP/MOP 2). Dubbed "the Africa COP", one success includes a $60m UN capacity-building initiative, to ensure African countries can access their fair share of CDM projects.
But attracting private sector backers remains the problem. "Without private investment, there can be no CDM, no matter how many consultants are thrown at the problem, capacity-building workshops are held or awareness-raising projects funded," says Stephen Mutimba, Managing Director of ESDA, an energy consulting firm based in Nairobi.
Only a few local experts, such as Tom Owino, have had the opportunity to learn by doing, through initiatives such as the Pembina Institute for Appropriate Development (Canadian NGO) Small Projects Facility, which has supported CDM project development in Kenya, Nigeria and India. The Mumias project, as well as the World Banksupported CDM project development for Kenya’s main electricity generator, Kengen, will do much to address the private sector’s lack of awareness and current scepticism.
The private sector has low awareness about CDM because past capacity-building activities have focused on governments and NGOs. Many have erroneously thought that CDM is more a source of donor funding than a market-based mechanism. This lack of understanding has worked against CDM project development in Africa and discouraged the active participation of the private sector. By contrast, countries such as China, India and Brazil have seen CDM as a business opportunity, rather than development aid, and as a result there are far more CDM projects and much more private sector involvement in these countries than in sub-Saharan Africa.
During the COP, African NGOs called for a $800m "Africa adaptation fund" to give climate change a helping hand. But African governments should work harder towards creating the right conditions for CDM to work throughout the continent, rather than reaching for the begging bowl. Bess compares the prospect of an $800m adaptation fund with revenues generated by Nigeria’s recently CDM-approved project that captures gas that would otherwise be flared for power generation, which will generate $600m in carbon revenues over its lifetime.
"It’s not inconceivable that many more projects of a similar scale can be developed across the continent," says Bess. "Setting aside a portion of the carbon finance revenues generated for the purposes of adaptation and other critical needs is a more sustainable way of generating more funds for a longer term. It’s just that more effort has to be made upfront in order to realise that potential."
Bess’s company, ESD, and its international partners ESDA, Camco International, Greenergy and ESD Ventures, ran a series of parallel side events to the COP/MOP meetings with the theme of "Making the CDM work for Africa". The events were unique because they were the first time the private sector in Kenya, represented by the Chairman of the Kenya Association of Manufacturers, Stephen G Smith (MD Eveready EA), and the Chairman of the Association of Cement Producers, Michel Puchercos (MD Bamburi Cement), collectively expressed their desire to tap into the CDM as an additional source of investment towards cleaner production and new technologies. The local private sector was supported in their statements by key international figures in the CDM, voluntary off-set sectors and an encouraging presence by senior figures in the Kenya Government.
One of the outcomes was a call to target at least a hundred projects to be developed in 2007, and for major international support to be put towards this. Mutimba called for developed countries to follow the example of Austria, by committing to purchase a certain percentage of its CERs exclusively from African countries.
"Such initiatives can lead to a win-win situation" says Michael Schlup, Director of the Gold Standard, an international quality label for CDM projects. "Most projects in Africa have very high potential in bringing about environmental and social sustainable development benefits that are the cornerstones of the Gold Standard certification criteria". Achieving Gold Standard certification, which takes only a little more effort during project development, means that projects are able to sell premium quality carbon credits that can attract a price premium of up to 25 per cent with additional financial benefits for the developer, for example, in project pre-financing. Tapping into the Gold Standard can help to address risk and build more confidence in African generated CERs.
Were a hundred projects to average a level of 100,000 tonnes of CERs each a year, then, with a current market price of $10.3 per tonne of CERs - discounted for risk but escalated for a Gold Standard premium - an estimated $100m a year in carbon revenues could potentially be generated, significantly boosting current levels of project financing on the continent. This could translate to more than a billion dollars in carbon revenues over the typical CDM crediting periods, ranging from seven to twelve years. India, China and countries in Latin America are already capitalising on the opportunities. It’s Africa’s turn.
Anjali Saini is a Kenya-based consultant specialising in environmental management. She is also a director of Integrated Energy Solutions, Kenya’s first Energy Service Company (ESCO)
This article appeared in Africa Investor, January 2007
