Recession helps reshape India carbon deals

NEW DELHI Thu Jul 30, 2009 4:42pm IST

NEW DELHI (Reuters) - The recession and falling prices of U.N.-backed carbon credits are changing the way carbon deals are structured in India, project developers and consultants say, with more players seeking partners to spread financial risks.

India is the second top source of carbon offsets under the U.N.'s Clean Development Mechanism, or CDM, and until recently clean-energy projects were developed by Indian investors by themselves. Most usually hung on to the credits hoping for higher prices.

But with prices of the offsets called certified emissions reductions (CERs) falling and the number of credit buyers and investors declining, project developers are looking to find partners, such as utilities in rich nations or investment banks.

"There's this kind of a shift. More and more developers are looking to get the CDM costs funded through the buyer and then try to do a forward transaction," said Aseem Chaturvedi, senior consultant at Emergent Ventures India.

Emergent ranks among the top 5 CDM developers and consultants in India, with 28 registered projects and more than 200 others in the pipeline.

"The traditional Indian model is you develop it yourself, get it registered and sell it on the spot market. Now there's more interest in forward deals," Chaturvedi told Reuters.

At present, such forward purchase deals represented between 85 to 95 percent of the price of exchange traded CERs as of a certain date. This would be locked in for the entire contract, he said.

CERs traded on the European Climate Exchange were trading around 12.40 euros ($17.40) Thursday.

Under the CDM, governments and companies in rich nations can invest in clean-energy projects such as wind farms and small hydro plants and earn CERs in return to meet emissions reduction targets or to sell for profit.

According to U.N. data, India had 1,233 CDM projects formally approved by the U.N. or being validated as of July 1. A third were biomass projects and nearly 40 percent were wind farms.

China had 1,759 projects with hydro comprising 50 percent of projects and 22 percent for wind.

FUTURE DEMAND

Project developers say the market is also weighed down by concerns over the shape of the CDM after 2012. The scheme is part of the Kyoto Protocol, whose first phase ends in 2012.

The U.N. hopes to seal a broader post-Kyoto climate pact at a meeting in December but some CER buyers are worried about the flow of credits from new projects if global climate talks stall.

Others point to the European emissions trading scheme, as well as others likely to emerge in the United States, Japan and Australia as providing long-term demand for offsets.

"Recently we're seen a lot more interest on the post-2012 kind of forward deals so there's a few we're negotiating now with some buyers," said Chaturvedi.

Ashutosh Pandey, Emergent's CEO for carbon advisory business, said uncertainty around 2012 was affecting new projects.

"If I'm setting up a new project which has a gestation period of the next 3-4 years, I'm very close to 2012," he said.

"New buyers are coming who are willing to buy (credits) beyond 2012 and they are providing long-term finance. But still, the market is very thin."

The recession has also made Indian project developers cautious in terms of financing, said Pamposh Bhat, who helped set up India's CDM market in 2003 and worked with German agency GTZ in a key advisory role until last month.

"Of the 400-plus projects registered in India, they are all unilateral projects. But now some bilateral projects are happening," said Bhat, who heads carbon consultancy EFCON.

"Things have changed. Now the developers are looking for foreign investment, it suits the parties, it's sharing the risks."

She also said project owners were turning to the voluntary carbon market (VCM) as a source of revenue. Credits under the VCM are typically cheaper than CERs and rules are less stringent.

"If there are no buyers coming and they have already prepared a CDM project, why not cater to the VCM?"

(Editing by Sugita Katyal)

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