Carbon firm hopes India project to be funding model

* Says grouping projects together helps attract investors

* Seeking funding on limited recourse basis

KUALA LUMPUR, June 23 (Reuters) - A European-based carbon offset developer has grouped more than a dozen biomass projects in India in a deal it hopes will serve as a model to attract greater funding for clean-energy projects.

Funding for carbon offset projects has become increasingly tougher because of the financial crisis and uncertainty over the future of the Kyoto Protocol's Clean Development Mechanism beyond 2012, when Kyoto's first phase ends.

Project developers say many banks, particularly in developing countries, do not fully understand how the CDM works and that investors prefer large-scale projects.

"One of the issues we face in this market is the size of projects," said Sudhir Bhat, director of project finance for Asia and North America for Swiss-based First Climate.

"If you're looking at it from an investment perspective, particularly foreign investment, third-party equity and debt financing, a lot of these individual projects are fairly small.

"So to attract mainstream investors you've got to put them together," Bhat told Reuters at a carbon conference in Malaysia.

He said First Climate was working on a deal that grouped 14 biomass projects in India at various stages of development, with combined generating capacity of 170 MW once all the projects were completed around the end of 2011.

He said First Climate was looking to raise between 120 million euros ($166.3 million) to 130 million euros and hoped to close the deal by the end of this year.

He said First Climate was acting as financial arranger and investor and looking to finance through a combination of third party equity and senior debt from domestic and foreign banks.

"We've taken it to a number of banks and we are at this time firming up the equity side of things."

He estimated the combined projects, which were in different areas of India, would produce about 600,000 certified emission reductions (CERs), or carbon credits, a year. Each CER represents a tonne of CO2-equivalent saved from being emitted.

LIMITED RECOURSE FUNDING

Under the Kyoto Protocol, rich nations can invest in clean-energy projects in developing countries and earn tradeable CERs in return. On Tuesday, CERs CEREZ9 from registered CDM projects were trading on the European Climate Exchange at 11.35 euros ($15.90) per tonne.

"What we're trying to do is get the banks to start looking at these projects on a limited recourse basis -- getting them comfortable with CERs, comfortable with project promoters, third-party investors," Bhat said.

Limited-recourse funding reduces the level of guarantees that banks require from the main promoters, such as personal guarantees or property collateral.

Bhat said a key part of the deal was to diversity the risks by using different feedstock, such as rice husks, sugar bagasse and coconut wood chips.

While a large portion of revenue from power sales would come from power purchase agreements, a sizeable percentage would come from selling on the open market to try to get a higher price.

"Right now banks are not willing to put in all the effort that we're putting in to put the whole deal together," Bhat said.

"Banks don't particularly like to take the lead because they are debt providers. They want the equity players and promoters to take the lead because that gives them confidence," he said. (Reporting by David Fogarty; editing by James Jukwey)