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Internship @ Genpact Analytics

<Feasibility Analysis for GE


Wind Power Projects in
Croatia & Poland

CDM Prospective

2007
Feasibility Analysis for GE Wind Power Projects in Untapped Market: CDM Prospective

1. Introduction
1.1 Background
Growing concern for the environmental degradation has led to the world's interest in renewable
energy resources. Wind is commercially and operationally the most viable renewable energy
resource and accordingly, emerging as one of the largest source in terms of the renewable energy
sector.

Wind Energy - What is it?


Wind is the natural movement of air across the land or sea. Wind is caused by uneven heating
and cooling of the earth's surface and by the earth's rotation. Land and water areas absorb and
release different amount of heat received from the sun. As warm air rises, cooler air rushes in to
take its place, causing local winds. The rotation of the earth changes the direction of the flow of
air.

Basic technology
Wind electric generator converts kinetic energy available in wind to electrical energy by using
rotor, gearbox and generator.

The Basic Process:


The wind turns the blades of a windmill-like machine. The rotating blades turn the shaft to which
they are attached. The turning shaft typically can either power a pump or turn a generator, which
produces electricity.
Most wind machines have blades attached to a horizontal shaft. This shaft transmits power
through a series of gears, which provide power to a water pump or electric generator. These are
called horizontal axis wind turbines.
There are also vertical axis machines, such as the Darrieus wind machine, which has two, three,
or four long curved blades on a vertical shaft and resembles a giant eggbeater in shape.
The amount of energy produced by a wind machine depends upon the wind speed and the size of
the blades in the machine. In general, when the wind speed doubles, the power produced
increases eight times. Larger blades capture more wind. As the diameter of the circle formed by
the blades doubles, the power increases four times.

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1.2 Why Wind Energy?


• The project is environment friendly.
• Good wind potential to harness wind energy.
• A permanent shield against ever increasing power prices. The cost per kwh reduces
over a period of time as against rising cost for conventional power projects.
• The cheapest source of electrical energy. (on a leveled cost over 20 years.)
• Least equity participation required, as well as low cost debt is easily available to wind
energy projects.
• A project with the fastest payback period.
• A real fast track power project, with the lowest gestation period; and a modular
concept.
• Operation and Maintenance (O&M) costs are low.
• No marketing risks, as the product is electrical energy.
• A project with no investment in manpower.

Components of wind electric generator:

1 Tower
2 Nacelle
3 Rotor
4 Gearbox
5 Generator
6 Braking System
7 Yaw System
8 Controllers
9 Sensors

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Essential requirements for a wind farm


An area where a number of wind electric generators are installed is known as a wind farm. The
essential requirements for establishment of a wind farm for optimal exploitation of the wind are:

1 High wind resource at particular site


2 Adequate land availability
3 Suitable terrain and good soil condition
4 Proper approach to site
5 Suitable power grid nearby
6 Techno-economic selection of WEGs
7 Scientifically prepared layout

The main advantages of power generation from wind energy are:


1 The capital cost is comparable with conventional power plants. For a wind farm, the capital
cost ranges between 4.5 crores to 5.5 crores, depending on site and the wind electric
generator selected for installation.
2 Construction time is less.
3 Fuel cost is zero.
4 O & M cost is very low.
5 Capacity addition can be in modular form.
6 There is no adverse effect on global environment. The whole system is pollution free and
environment friendly.

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The pollution saving from a WEG having an average output of 4,00,0.00 kWh per year has
been estimated as:
Sulphur dioxide (SO2): 2 to 3.2 tonnes
Nitrogen oxide (NO): 1.2 to 2.4 tonnes
Carbon dioxide (CO2): 300 to 500 tonnes
Particulates: 150 to 280 kg.

Limitation
1 Wind machines must be located where strong, dependable winds are available most of the time.
2 Because winds do not blow strongly enough to produce power all the time, energy from wind
machines is considered "intermittent," that is, it comes and goes. Therefore, electricity from wind
machines must have a back-up supply from another source.
3 As wind power is "intermittent," utility companies can use it for only part of their total energy needs.
4 Wind towers and turbine blades are subject to damage from high winds and lighting. Rotating parts,
which are located high off the ground can be difficult and expensive to repair.
5 Electricity produced by wind power sometimes fluctuates in voltage and power factor, which can
cause difficulties in linking its power to a utility system.
6 The noise made by rotating wind machine blades can be annoying to nearby neighbors.
7 People have complained about aesthetics of and avian mortality from wind machines.

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1.3 Social costs of traditional fuels:


These are costs for cleaning waterways, costs caused by air pollution and costs for disposing
radioactive waste as well as costs to maintain the safety of the nuclear power industry.
They are covered with the following amounts:
- coal: 0.21 - 0.31 € per kWh
- natural gas: 0.21 - 0.31 € per kWh
- natural oil: 0.21 - 0.31 € per kWh
- nuclear energy: 0.02 - 0.13 € per kWh
... social costs of wind energy 0.005 € per kWh.

The finitude of traditional fuels:


The resources of the world are not endless and much smaller than we are thinking.
- coal will last until approx. 2180
- uranium will last until approx. 2100
- natural gas will last until approx. 2045
- natural oil will last until approx. 2100
... And wind is always blowing.

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2. Purpose of Study
Purpose of the study is to assess the wind power potential in various countries and provide
Genpact Analytics with prospective countries for GE wind Power Projects and conduct a detailed
research on two countries.
Genpact Analytics is targeting Europe as Future Avenue of investment for GE Energy and
provides wind farm developers with additional revenue advantage during Kyoto Protocol
commitment period 2008-2012.
The study should be based on European market scenario, global wind energy markets, and scope
of benefits from EU-ETS, CDM and JI, which ever is applicable in that particular country.
Area that should be covered:
• Current size of carbon market.
• Projected growth for next 5 – 10 years.
• Future prices of CERs and other instruments in various exchanges.
• Which countries represent majority CER sellers?
• What is technical potential for setting up wind farms in key countries?
• Suggest countries to be focused based on this analysis along with reasons.
• Are these countries already in Genpact’s pricing model?
• If no, then provide all requisite information.
• Integrate all information and logic obtained in Genpact’s pricing model.
• Conduct SWOT analysis and Economic Analysis.

3. Objectives of Study
Objective of study is:

• Identification of High Potential Regions Based on the Key factors like: Carbon Emission
Benefits, Competition, Policy Mechanism and Technical Potential.
• The Analysis Shall Provide GE a Platform to Identify Business Opportunities in
Prospective Markets for Expansion of its Wind Power Business.

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4. About Company
4.1 Corporate Overview
Genpact manages business processes for companies around the world. Genpact combine its
process expertise, information technology and analytical capabilities with operational insight
derived from experience in diverse industries to provide a wide range of services using its global
delivery platform.
Genpact provides a wide range of services, including Finance & Accounting, Collections and
Customer Service, Insurance, Supply Chain & Procurement, Analytics, Enterprise Application,
IT Infrastructure and Management.
Genpact’s goal is to help its clients improve the ways in which they do business by continuously
improving their business processes through Six Sigma and Lean principles and by the innovative
use of technology. As a service provider, Genpact strive to be a seamless extension of its clients’
operations.
Genpact manages complex processes in multiple geographic regions, delivering its services from
a global network of more than 30 operations centers in nine countries. Genpact’s global delivery
centers are located in India, China, Hungary, Mexico, the Philippines, the Netherlands, Romania,
Spain and the United States.
Genpact has a unique heritage. It builds its business by meeting the demands of the leaders of the
General Electric Company (GE) to increase the productivity of their businesses. Genpact began
in 1997 as the India-based business process services operation of GE Capital.
Genpact’s leadership team, processes and culture have been deeply influenced by Genpact’s
eight years as a captive operation of GE. Many elements of GE’s success-the rigorous use of
metrics and analytics, the relentless focus on improvement, a strong emphasis on the client and
innovative human resources practices-are the foundations of Genpact’s business.
Genpact became an independent company in 2005 and, since then, Genpact has grown rapidly,
continued to expand its range of services and diversified its client base.

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4.2 History
Genpact has a unique heritage. Genpact builds its business by meeting the demands of the
leaders of the General Electric Company to increase the productivity of their businesses.

Genpact began in 1997 as GE Capital International Services (GECIS) - the India-based business
process services operations of GE Capital. During the eight years that followed, Genpact took on
a wide range of complex and critical processes and became a provider to many of GE’s financial-
services and manufacturing businesses.

In 2005, we became an independent company, changing its name to Genpact, which conveys its
desire to generate value and business impact for Genpact’s clients. Since then Genpact has
grown rapidly, significantly expanding its range of services and diversifying its client base.

Ten Years of Growth


1997 Genpact founded as GE Capital’s operations center in Gurgaon, India
1998 Acquires E.D.M. starts operations in Mexico
1999 Genpact opens center in Hyderabad, India
2000 Genpact opens center in Dalian, China
2001 Genpact opens center in Bangalore, India
2002 Genpact opens center in Budapest, Hungary
2003 Genpact opens center in Jaipur, India CMMi Level 5 achieved
2004 Genpact opens center Kolkata, India General Atlantic and Oak Hill Capital acquire 60%
stake
2005 Genpact opens centers in Bucharest, Romania and Delhi, India Acquires Creditek, USA
2006 Genpact opens centers in Changchun and Shanghai, China and Manila, Philippines
Acquires Money line, USA Starts NGEN – a Media Process JV with NDTV, India
2007 Acquires ICE Enterprise Solutions, Netherlands Acquires Axis Risk Consulting, India
Genpact goes public – lists on NYSE

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5. Literature Review
There was a vast literature available for the reference for the project. Extensive usage has been
made of all the available literature for the information. Report from European Union website,
UNFCCC needs special mention as that has been extensively used.
Also for the understanding of the concept many research papers both international as well as
national were studied. These research papers have been of helpful as these brought the clarity
about the subject of the topics. They helped in showing the correct direction for the project work
and how one shall proceed with it.
Over the study of different research papers, it has been found that every paper has different
aspect to work out, as the papers are written on problems faced by wind power plant
developers, wind turbine manufacturing companies, PDD & PIN service providers, specially
for Croatia wind power potential data was very limited and aged, so on going research reports
were a great help in such scenario.
Authors of each paper have adopted different methodology and obtained empirical results.
All the authors have concluded their papers with desired results over the approach of
graphical presentation and forecasted figures.
From all research papers following terminologies have been used in this report. To understand
the research and analysis the knowledge of these terminologies will be a great help:

5.1 Terminologies (Alphabetically arranged):

Additionality principle: The principle that a project should only be able to earn credits if the
GHG emission reductions produced by the project are additional to what would have happened
in the absence of the carbon credit component.

Additionality tool: Guidelines elaborated by the CDM Executive Board to help assess whether a
project is additional or not.

Afforestation and Reforestation (A/R) Projects: Afforestation and reforestation (A/R) projects
involve the growing of forest on land that has not been forested for a period of at least 50 years
(afforestation) or on non-forested land (reforestation) through planting, seeding and/or the
promotion of natural seed sources.

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Allocation: The distribution of allowances to participants in an emission trading scheme or other


entities. Allocation can be done for free or by selling the allowances (see auctioning). Principles
for free allocation include grandfathering, benchmarking and projections.

Allowance: Legally defined unit (EUAs, AAUs, RGAs, NZUs and others) that entitles the
holder to emit one tonne of CO2e or another quantity of greenhouses gases. Also known as
emission allowance or emission permits.

Annex I Countries: Include the industrialized OECD countries and countries with economies in
transition listed in Annex I of the UNFCCC. Belarus and Turkey are listed in Annex I but not in
Annex B; and Croatia, Liechtenstein, Monaco and Slovenia are listed in Annex B but not in
Annex I. In practice, however, Annex I of the UNFCCC and Annex B of the Kyoto Protocol are
often used interchangeably.

Annex II Countries: Annex II of the UNFCCC includes all original OECD member countries,
but not the countries with economies in transition. Annex II countries are required to provide
financial resources enabling developing countries to undertake emissions reductions.

Approved Consolidated Methodology (ACM): Large-scale methodology to calculate emission


reductions for a project, approved for use by the Executive Board of the CDM. Consolidated
from a number of approved methodologies (AMs).

Approved Methodology (AM): Methodology approved by the CDM Executive Board to


calculate emission reductions for a CDM project that is not small-scale and not an A/R project
(see below).

Assigned Amount (AA) and Assigned Amount Units (AAUs): The assigned amount is the
total volume of greenhouse gases that each Annex B country is allowed to emit during the first
commitment period (see explanation below) of the Kyoto Protocol. An Assigned Amount Unit
(AAU) is a tradable unit of 1 tonne CO2e.

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Baseline and Baseline Scenario: The baseline represents forecasted emissions under a business-
as-usual scenario, often referred to as the 'baseline scenario', i.e. expected emissions if the
emission reduction activities were not implemented.

Cap and Trade: A design for emissions trading systems under which total emissions are limited
or 'capped'. Tradable emission allowances corresponding to the total allowed emission volume
are allocated to participants for free or through auctioning. Contrasts with baseline-and-credit
approaches where only deviations from a baseline are tradable. Examples are the EU ETS,
international emissions trading under the Kyoto Protocol and the proposed emissions trading
scheme in the Climate Security Act of Senators Lieberman and Warner.

Carbon Dioxide Equivalent (CO2e): Measurement unit used to indicate the global warming
potential (GWP) of greenhouse gases. Carbon dioxide is the reference gas against which other
greenhouse gases are measured. See Global Warming Potential for conversion rates.

Carbon leakage: Carbon leakage occurs when production of goods is moved to countries with
less strict climate policy (e.g. India and China) than the original country (e.g. EU).

Carbon Neutrality: The practice of purchasing and retiring emission credits or allowances
corresponding to the amount of GHG emissions from for instance an activity, company or
country.

Carbon Sink: Natural or human-made systems that absorb carbon dioxide from the atmosphere
and store them. Forests are the most common form of sink, in addition to soils, peat, permafrost,
ocean water and carbonate deposits in the deep ocean.

CERs: Certified Emission Reductions are carbon credits created by CDM projects which can be
used for compliance in Annex 1 countries. A number of countries and companies will make use
of project based carbon credits from CDM to be in compliance with their Kyoto targets.
Reducing emissions outside one's own site or country ("external abatement") can be a cost-
effective alternative to internal abatement.

Clean Development Mechanism (CDM): The CDM is a mechanism for project-based emission
reduction activities in developing countries (non-Annex B countries). Carbon credits (CERs) are

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generated from projects that lead to certifiable emissions reductions that would otherwise not
occur.

Clean Development Mechanism Executive Board (CDM EB): Body that registers validated
project activities as CDM projects, issues certified emission reductions (CERs) to relevant
projects participants, and manages series of technical panels and working groups meetings (see
Methodologies Panel). The CDM EB is accountable to the Conference of the Parties to the Kyoto
Protocol.

Commitment Period: The five-year Kyoto Protocol Commitment Period is scheduled to run
from calendar year 2008 to calendar year-end 2012.

Compliance: The act, specific to cap-and trade schemes, of surrendering the required amount of
allowances, or some combination of allowances and offsets, to cover an entity’s emissions.
Achievement by a Party in meeting its quantified emission limitation and reduction commitments
under the Kyoto Protocol.

Designated National Authority (DNA): The official body representing the government of the
host country for CDM/JI projects. For JI host countries, the national authority approves the
projects and issues the emission reduction units (ERUs). For CDM host countries, the designated
national authority issues a non-objection letter necessary for the project approval, if it agrees that
a project is in line with its sustainable development objectives. The DNA also issues the Letter of
Approval (LoA) needed for the registration of a CDM project. A project will need both a host
country approval as well as investor country approval.

Designated Operational Entity (DOE), see also Accredited Independent Entity (AIE): A
domestic legal entity or an international organization accredited and designated by the CDM EB.
The DOE validates and requests registration of a proposed CDM projects activity as well as
verifies emission reductions of a registered CDM project activity.

Double Counting: Potential problem with JI projects in sectors covered by the EU ETS. See
also JI reserve.

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Downstream Cap: A "downstream" cap and trade system is one in which where the entities
emitting carbon dioxide are required to surrender allowances.

ERUs: Joint Implementation projects are to be undertaken in countries that have quantitative
emissions targets under the Kyoto Protocol, i.e. industrialized countries (Annex 1). These
countries can contribute to their greenhouse gas emission reduction targets by investing in
emission reduction projects in other industrialized countries and receiving credits called ERUs.
Emission Reduction Units are carbon credits created by JI projects which can be used for
compliance in Annex 1 countries.

EU ETS: The EU Emission Trading Scheme was launched in January 2005 as part of the Kyoto
Protocol on Climate Change. As the world's first international emission trading scheme, it works
on a cap-and-trade basis, forcing companies to emit less carbon dioxide than their Kyoto target
allows or to buy carbon permits from elsewhere (CERs and ERUs). The Phase I (2005 - 2007)
has received much criticism due to oversupply of allowances and the distribution method of
allowances (via grandfathering rather than auctioning); Phase II (2008-2012) links the ETS to
other countries participating in the Kyoto trading system.

EUA: EU Emission Allowances are issued to installations which have a cap on their emissions
under the EU ETS. An installation must hold and surrender EU Emission Allowances and/or
project based carbon credits equal to its monitored carbon dioxide emissions by the annual EU
ETS reconciliation date. EU allowances are also the main unit which will be traded in the EU
ETS. One EU Emission Allowance = 1 t CO e (CO equivalent).
2 2

European Union: The European Union (EU) is a political and economic union of twenty-seven
member states, located primarily in Europe. It was established by the Treaty of Maastricht in
1993 upon the foundations of the pre-existing European Community. With almost 500 million
citizens, the EU combined generates an estimated 30% share of the world's nominal gross
domestic product (US$16.8 trillion in 2007).

The European Union is composed of 27 independent sovereign countries which are known as
member states: Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia,

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Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg,
Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the
United Kingdom.

There are three official candidate countries, Croatia, the former Yugoslav Republic of
Macedonia, and Turkey; the western Balkan countries of Albania, Bosnia and Herzegovina,
Montenegro, and Serbia are officially recognised as potential candidates. Kosovo has been
granted similar status.

Fuel Switching: The process of moving from a higher carbon content fuel, such as coal, to a
lower carbon content fuel, such as natural gas, in power generation and industrial process for
purposes of reducing carbon emissions.

Global Warming Potential (GWP): The global warming potential is the impact a greenhouse
gas (GHG) has on global warming. By definition, CO2 is used as reference case; hence it always
has the GWP of 1. GWP changes with time, and the IPCC has suggested using 100-year GWP
for comparison purposes. Below is a list of 100-year GWPs used in the Kyoto Protocol for the
six Kyoto gases:

Carbon dioxide (CO2) GWP: 1


Methane (CH4) GWP: 21
Nitrous oxide (N2O) GWP: 310
Hydrofluorcarbons (HFCs) GWP: GWP: 150 – 11,700
Perfluorcarbons (PFCs) GWP: 6,500 – 9,200
Sulphur hexafluoride (SF6) GWP: 23,900

Grandfathering: Method for allocation of emissions credits/allowances to companies or other


legal entities, usually free of charge, on the basis of their historic emissions.

Greenhouse gases (GHGs): Greenhouse gases (GHGs) are trace gases that control energy flows
in the Earth's atmosphere by absorbing infra-red radiation. Some GHGs occur naturally in the
atmosphere, while others result from human activities. There are six GHGs covered under the
Kyoto Protocol - carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), Hydrofluorcarbons
(HFCs), Perfluorcarbons (PFCs) and sulphur hexafluoride (SF6). CO2 is the most important GHG
released by human activities.

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Linking Directive (LD): LD formally is not a directive on its own but rather an amendment to
the EU Emissions Trading Directive 2003/87/EC that permits companies to use carbon credits
from CDM/JI projects for compliance with their targets under the EU ETS. It provides
provisions relating to project approval processes and authorisation to participate in the flexible
mechanisms, and contains additional provisions relating to the establishment of the national
emissions inventory.

Land Use, Land Use Change and Forestry (LULUCF): The land-use, land-use change and
forestry (LULUCF) sector was included under the Kyoto Protocol to take into consideration
certain human-induced activities that remove greenhouse gases from the atmosphere, also known
as carbon "sinks". The following activities referred to in Article 3, paragraphs 3 and 4 of the
Kyoto Protocol, as defined in paragraph 1 of the annex to decision 16/CMP.1: Afforestation,
reforestation, deforestation, revegetation, forest management, cropland management, grazing
land management.

Long-term Certified Emission Reductions (lCERs): Credits issued for an afforestation or


reforestation project activity that expires at the end of its crediting period. lCERs are issued for
the net anthropogenic greenhouse gas removals by sinks achieved by the project activity during
each verification period.

Non-Annex I countries: Countries that have ratified or acceded to the UNFCCC, but not
included in Annex I and have no emission reduction targets. Annex I is an Annex in the
UNFCCC listing those countries that are signatories to the Convention and committed to
emission reductions.

Offset credits or offsets: Emission reduction credits from project-based activities that can be
used to meet compliance or corporate objectives as a supplement or alternative to reducing one’s
own emissions. In a cap-and-trade scheme, offsets may be used instead of allowances, sometimes
up to a limit (see credit limit). CERs and ERUs are types of offset credits

Over the Counter (OTC) market: Trades arranged by brokers, as opposed to trades on
exchanges or bilateral (direct) trades.

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Operational Entity: An independent entity, accredited by the CDM Executive Board, which
validates CDM project activities, verifies and certified emission reductions generated by such
projects.

Project Design Document (PDD): Document describing the characteristics of a CDM or JI


project, completed by project developers in order to register their project. The draft JI PDD form
shall be applied provisionally until the COP/MOP has adopted it in accordance with the JI
guidelines.

Project Idea Note (PIN): This is a short form of project description (about 6 pages) that
provides such basic information about the project as type, size and location of the project;
estimation of the anticipated total amount of Greenhouse Gas (GHG), reduction compared to the
"business-as-usual" scenario, etc.

Pre-Certified Emission Reductions (pre-CERs): A Units of GHG emission reduction that has
been verified by an independent auditor but has not yet undergone the procedures and may not
yet have met the requirements for registration, verification, certification and issuance of CERs or
ERUs.

Secondary Market: The Secondary Market signifies the second transaction or trading of
Certified Emissions Reductions (CERs) related to CDM projects or Emission Reduction Units
(ERUs) from JI projects.

Sinks: The removal of greenhouse gases (GHGs) from the atmosphere through land management
and forestry activities that may be subtracted from a country's allowable level of emissions.

Small scale CDM projects: There is a simplified process for small scale CDM projects that will
generate less emissions reductions. They are defined as: renewable energy projects under 15
MW, energy efficiency projects that reduce energy consumption by up to 60 GWh per year; or
project activities which emit less than 60 kilotonnes CO2 equivalent per year.

Temporary Certified Emission Reductions (tCERs): Credits issued for an afforestation or


reforestation project activity under the CDM that expires at the end of the commitment period

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following the one during which it was issued. tCERs are issued for the net anthropogenic
greenhouse gas removals by sinks achieved by the project activity since the project start date.

Umbrella group: An informal group of industrialised countries that do not belong to the EU but
occasionally acts as a negotiating bloc on specific issues. The group was formed after the
adoption of the Kyoto Protocol, and consists of Japan, USA, Canada, Australia, Norway, New
Zealand, Iceland, the Russian Federation and Ukraine.

United Nations Framework Convention on Climate Change (UNFCCC): The UNFCCC was
established 1992 at the Rio Earth Summit. It is the overall framework guiding the international
climate negotiations. Its main objective is "stabilisation of greenhouse gas concentrations in the
atmosphere at a level that would prevent dangerous anthropogenic (man-made) interference with
the climate system".

Upstream Cap: An "upstream" cap and trade system is one in which the entities supplying or
importing carbon-rich fuels into the market would be required to surrender allowances.

Verified Emission Reductions (VERs): VERs are generated by carbon reduction projects that
are assessed and verified by third party organisations rather than through the UNFCCC.

Voluntary carbon market: The sum of all transaction of carbon credits in non-compliance
markets. The generation of non-compliance credits — or voluntary offset credit supply —
comprises the reduction of GHG emissions for the purpose of selling them to voluntary end users
and not to compliance buyers. Voluntary markets for emissions reductions include generation
and transaction of carbon credits in non-compliance markets. The voluntary market permits the
use of credits such as verified emission reductions (VERs), non-verified emission reductions
(ERs) and prospective emission reductions (PERs), as well as the non-compliance use of CERs,
ERUs, EUAs and other credits and allowances generated for the compliance market.

Voluntary standard: Any standard that aims to ensure the quality of carbon credits in the
voluntary carbon market. It sets various requirements for project developers, such as third-party
verification and measures to avoid double counting of carbon offsets, e.g. the use of registries.

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Voluntary Offset Standard or VOS: VOS was launched in June 2007 and is based on the
existing standards promoted by the UNFCCC, bringing voluntary market to the level of the
regulated and standardized procedures of the compliance market. VOS endorses the existing gold
standard methodology.

5.2 Participants to the Kyoto Protocol

The map shows various categories of participants to the Kyoto Protocol. We distinguish between
EU-15 countries, European countries with economies in transition, other countries with emission
targets, Annex 1-countries that have not ratified the Kyoto Protocol and non-Annex 1 countries:

Figure: 5.2.1 World Map as per Kyoto Protocol Participation.

Explanation to Map

1. The European Union (EU) (EU-15)

All EU members are Annex I countries, and the EU-15 has taken on a common commitment to
reduce their average greenhouse gas emissions by 8 % in the first Kyoto commitment period
(2008-2012) compared to 1990 level. EU-15 emitted around 23 % of the global greenhouse gases
in 1990. Their emissions reduction commitment is shared differently between each member state.
In the carbon market, these countries are usually net buyers of emission permits.

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On 01.01.2005, the EU Emission Trading Scheme (EU ETS) entered into force, making it the
largest carbon trading scheme in the world. It currently covers around 45 % of the total EU GHG
emissions. EU countries having ratified the Kyoto Protocol and their percentage of total global
greenhouse gas emissions in 1990:

Austria 0.4

Belgium 0.8

Denmark 0.4

Finland 0.4

France 2.7

Germany 7.4

Greece 0.6

Ireland 0.2

Italy 3.1

Luxembourg 0.1

Netherlands 1.2

Portugal 0.3

Spain 1.9

Sweden 0.4

United Kingdom 4.3

2. Countries undergoing the process of transition to a market economy

These countries have emission caps and are usually net sellers in the carbon market. JI projects
are hosted mostly in these countries. All of these countries, except Russia, Ukraine and Croatia,
are members of the European Union and thus are part of the EU ETS. These countries emitted
around 31 % of the global GHG in 1990.

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Economies in transition that have ratified the Kyoto Protocol and their percentage of total global
greenhouse gas emissions in 1990:

Bulgaria 0.6

Croatia 0.2

Czech Republic 1.2

Estonia 0.3

Hungary 0.5

Latvia 0.3

Poland 3.0

Romania 1.2

Russian Federation 17.4

Slovakia 0.4

Slovenia 0.1

Ukraine 5.4

3. Annex II non-EU countries that ratified the Kyoto Protocol

These countries have ratified the Kyoto Protocol, have compliance targets, but are not part of the
EU or are not economies in transition. GHG emissions from these countries were nearly 15 % of
the total global emissions in 1990. Australia was the last country to ratify the Protocol, in
December 2007.

Annex I countries outside the EU that have ratified the Kyoto Protocol and their percentage of
total global greenhouse gas emissions in 1990:

Canada 3.3

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Australia 2.1

Japan 8.5

Monaco 0.0

Iceland 0.0

New Zealand 0.2

Norway 0.3

Switzerland 0.3

Liechtenshtein 0.0

4. Annex I parties not ratified

Among the Annex 1 countries that signed the Kyoto Protocol in 1997, only the USA has not
ratified it. In 1990, the USA emitted 36.4 % of the total GHGs in the world.

5. Non-Annex I countries having ratified the Kyoto Protocol

The non-Annex countries do not have emission caps and are potential host countries of Clean
Development Mechanism (CDM) projects.

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A-C D-L M-P P-Y

Antigua and
Djibouti Madagascar Phillipines
Barbuda

Argentina Dominican Republic Malawi Republic of Korea

Armenia Ecuador Malaysia Republic of Moldova

Azerbaijan El Salvador Maldives Rwanda

Bahamas Equatorial Guinea Mali Saint Lucia

Bangladesh Fiji Malta Saint Vincent and the Grenadines

Barbados Gambia Marshall Islands Samoa

Belize Georgia Mauritius Senegal

Bhutan Ghana Mexico Seychelles

Benin Grenada Micronesia Solomon Islands

Bolivia Guatemala Mongolia South Africa

Botswana Guinea Morocco Sri Lanka

Brazil Guyana Myanmar Sudan

Burundi Honduras Namibia Thailand

Cambodia India Nauru Togo

Cameroon Israel Nicaragua Trinidad and Tobago

Chile Jamaica Niger Tunisia

China Jordan Niue Turkmenistan

Colombia Kiribati Palau Tuvalo

Cook Islands Kyrgyzstan Panama Uganda

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Lao Democratic United Republic


Costa Rica Papua New Guinea
People’s Republic of Tanzania

Cuba Lesotho Paraguay Uruguay

Cyprus Liberia Peru Uzbekistan

Vanuatu

Viet Nam

Yemen

5.3 Project Cycle


The time it takes for a project to go through the entire Carbon Finance Unit (CFU) project cycle
varies greatly, reflecting the variety of project types, their novelty, sizes, circumstances, and
countries, and the complexities of establishing a baseline as well as the preparedness of the
sponsor and project.

However, the CFU is now beginning to see some repetition in project types and baselines,
monitoring and other project cycle issues. It has also developed a better understanding of
concepts and procedures, which leads to a more rapid drafting of project documents and a faster
overall processing of such projects.

Project Idea Note (PIN) - Project sponsors/proponents submit potential projects for
consideration to the CFU in the form of a Project Idea Note (PIN). This is a short form (about 6
pages) that provides the basic information about the project. A financial analysis model is
requested from the project sponsor. This PIN is quickly evaluated and if it falls within the project
eligibility criteria, the CFU will contact the project sponsor for further information.

Early Notification and Letter of Endorsement (LoE) - If the PIN was submitted by a third-
party project sponsor, and the CFU decides to develop it further, the Host Country (e.g. the
UNFCCC National Focal Point) will be notified of the project. The CFU will ask the Host
Country for a letter of endorsement for the project, to ensure that the Host Country approves of
the project and understands its follow-up responsibilities under the Kyoto Protocol.

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Host Country Committee Memorandum of Understanding (HCC MOU) - If a Host Country


becomes interested in learning about and participating in the CFU, it may sign a MOU with the
CFU and become a member of the HCC. This will allow the Host Country representatives to
attend meetings of the HCC.

Carbon Finance Document (CFD) - CFU experts will investigate further and evaluate
particular aspects of the project in discussions with the project proponent and prepare a CFD,
formerly known as the Project Concept Note (PCN). The CFD is an intermediate document that
provides enough information on the project to allow the Fund Management Committee (FMC)
(and the Participants Committee (PC) if required) to review and clear the project and its further
development. The CFD notes areas that need further study after clearance.

Letter of Intent (LoI) - The CFU formally signals its intention to purchase emission reductions
generated by a specific project under terms agreed in return for the exclusive right to contract for
the purchase of emission reductions. By signing this letter the project entity commits itself to
repay project preparation costs if it decides not to proceed to negotiate an Emission Reductions
Purchase Agreement with the CFU Trustee in relation to the project.

World Bank Due Diligence - All projects must comply with World Bank Group Operational
Policies and Procedures, including those on environmental assessment. An Integrated Safeguard
Policies review and Environmental Assessment (EA) is performed as a standard part of the
appraisal of World Bank Group projects.

Baseline Study (BLS) and Monitoring Plan (MP) - Once the CFU has decided to include the
project in the Portfolio, it will commission a Baseline Study and Monitoring Plan, if the project
is not applying an approved methodology. The Baseline Study investigates the project-based
creation of ERs and explains how those ERs are 'additional' to what would have happened
'anyway' without the project. First, it defines the 'without project' scenario as the baseline. Next,
it quantifies the number and timing of ERs created by the project. The MP defines how project

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operation will be monitored, how achieved ERs are calculated, and how the ERs will be
independently verified on a periodic basis throughout the project operational phase.

Letter of Approval (LoA) - With the issuance of a Letter of Approval the Host Country
formally approves the project for the purposes of Article 6 or 12 of the Kyoto Protocol, and
confirms that the project assists the Host Country in achieving sustainable development. A Letter
of Approval is a requirement for all JI and CDM activities under the Kyoto Protocol and is
therefore a prerequisite for the signing of an ERPA with the CFU Trustee.

Project Design Document (PDD) - A project-specific document required under the CDM which
will enable the Operational Entity (OE) to determine whether the project (i) has been approved
by the parties involved in a project, (ii) would result in reductions of greenhouse gas emissions
that are additional, (iii) has an appropriate Baseline and Monitoring Plan. The PDD is prepared
by the CFU and project sponsor.

Validation - After the BLS, MP, and PDD have been satisfactorily developed, the CFU engages
an Independent Validator (Designated Operational Entity, DOE) to validate them. This means
that the Validator agrees that the ERs are additional to the baseline, the MP is sufficient, and that
the ERs have a high chance of being certified under the Kyoto Protocol.

Registration - The Designated Operational Entity (DOE) contracted to undertake validation,


upon the request of the CFU, submits the validation report and validation opinion to the
Executive Board, along with a request for registration, together with the PDD, Baseline Study,
MP, stakeholder consultation documentation and LoA, plus any other appropriate supporting
documentation.

Pre-Negotiations Workshop / Consultations - At about the time of validation, the CFU team
may arrange a Pre-Negotiations Workshop and/or intensive Consultations on the project. This
event brings together the project sponsor(s), the Host Country representatives, and the CFU team
assigned to that project. The workshop is an instrument to ensure fairness in the process of
negotiating and concluding. During the Workshop, the Host Country representatives are apprised

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of all important issues which might affect their position in negotiating a Host Country
Agreement and an Emissions Reduction Purchase Agreement (ERPA) with the CFU.

Negotiations / Host Country Agreement / ERPA - After the Workshop or Consultations, the
CFU legal team prepares a 'term sheet' and/or a draft ERPA for further discussion with the Host
Country representatives. During the negotiations, the final terms of the ERPA are agreed
between the CFU, the project sponsor, and the Host Country. The project sponsor signs the
ERPA and the Host Country signs the parallel Host Country Agreement.

Post-Negotiations Workshop - If the finalized CF project is unique and the project preparation
process has been a 'best practice' experience, the CFU may share the lessons learned from this
project with a wider audience of CFU constituents. Host Country representatives from the region
or from countries with similar technology barriers are invited for presentations by the Project
Host Country, project sponsor, and the CFU. Discussion of lessons learned is encouraged.

Initial Verification / project commissioning - After the project's construction and before its
commissioning to produce ERs, the CFU contracts an Independent Third Party (a Verifier) for
the project (different from the Validator). The Verifier will establish contact with the project and
undertake an Initial Verification, which should confirm that the project is ready to generate
verifiable and certifiable ERs. This will trigger the CFU acceptance of ERs from the project.

Monitoring - As part of project implementation, the project operator must implement the MP,
which provides a methodology and a tool for measuring and calculating the emission reductions
generated by the project. Once the project starts to generate emission reductions, the project
entity monitors the project in accordance with the MP.

Verification and Certification - Verification and certification of the emission reductions will be
undertaken periodically in accordance with the MP and other applicable guidelines by an
Independent Third Party (the Verifier), who is contracted for the project by the CFU. The verifier
will issue a certificate, which will confirm that the ERs have been achieved in the verification
period in compliance with applicable CDM/JI rules.

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Transfer of emission reductions - Once the ERs are certified, the CFU will pay for the amount
of ERs as agreed in the ERPA and the ERs are transferred to Participants in accordance with the
ERPA and/or Host Country Agreement and applicable UNFCCC or other rules.

5.4 Sources of Error

The data collected from the secondary sources has the possibility of errors. All the technical
terms are defined using respective sources so definitions of terms are highly accurate, all graphs
and tables are a copy from respective sources, data to support the figure is not an open source,
and hence analysis of available information is done on the on basis of intellectual skills and
perceptions. Look a like figure from the model are used. The actual figures are not used so as to
maintain business confidentiality and being abide by code of conduct.

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6 Research Methodology
The research problem is going to be studied by using Descriptive research. Descriptive research
is used to obtain information concerning the current status of the phenomena to describe "what
exists" with respect to variables or conditions in a situation. The methods involved range from
the survey which describes the status, the correlation study which investigates the relationship
between variables, to developmental studies which seek to determine changes over time. For
research no hypothesis has been created and I will be discussing about the present scenario and
the challenges before the wind power plant developers, wind turbine manufacturers, etc.

Data Sources
Primary Data: Some primary data was collected from a financial model used for pricing of
WTG.
Secondary Data: The secondary data was collected by visiting various Internet sites such as
ministry of petroleum and natural gas, various global energy exchange websites, Wind energy
associations, chamber of commerce, national statistical organisations of respective countries,
Google search etc. but Wikipedia is not used as source, because it is not considered a reliable
source of information by Genpact Analytics.

Data processing
The data is collected from various sources as stated above. All the primary data has been
processed is using pricing model and Micro Soft Excel. The secondary data collected is analyzed
and processed to produce the result for the study. Look a like figure from the model are used.
The actual figures are not used so as to maintain business confidentiality and being abide by code
of conduct.

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7. Research & Analysis


7.1 Current Carbon Market:
The Kyoto Protocol established emissions limitation commitments for industrialized country
(Parties included in Annex B to the Kyoto Protocol or Annex B Parties) Parties for the period
2008 – 2012 and established three mechanisms – the CDM, JI and International Emissions
Trading – they can use to help meet those commitments. Most Annex B Parties plan to use
emissions trading systems to regulate the emissions of fossil-fired electricity generators and large
industrial emitters to help comply with their Kyoto Protocol commitments for the period 2008 –
2012. Those emissions trading systems are already operational in the Member States of the EU
and Norway. The United Kingdom of Great Britain and Northern Ireland has sources that
participate in the emissions trading scheme (ETS of the EU) and that participate in a domestic
scheme.
The EU ETS is by far the largest market in terms of number of participants and trading activity.
Trading activity is shifting from allowances that can be used for compliance during Phase I
(2005 – 2007) to allowances that can be used for compliance during Phase II (2008 – 2012).
Credits created by CDM projects (certified emissions reductions or CERs) are the second largest
market. The CDM was the first of the three Kyoto mechanisms to be implemented.
Emissions trading systems are also operating in Australia (the New South Wales–Australian
Capital Territory GHG abatement scheme) and the United States (the Chicago Climate
Exchange). The quantities traded in the markets established by these systems and the voluntary
market is much smaller than those in the EU ETS and the CDM market.
KYOTO PROTOCOL MARKETS: Annex B Parties can meet their Kyoto Protocol
commitments for the period 2008 – 2012 through a combination of domestic emission reduction
and sink enhancement actions and purchases of various allowances and credits from other
countries, through the three Kyoto mechanisms. Each of these mechanisms creates a market for
specific units (allowances/credits).
These markets are at different stages of development, with the CDM market being the most
advanced.

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7.2 Carbon Market Structure:

Figure7.2.1: Carbon Market Structure

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7.3 Main Exchanges in Carbon Emission Market:


7.3.1 European Energy Exchange (EEX):
EEX offers spot and derivatives trading on power, natural gas and emission rights. In addition,
the exchange lists financial coal derivatives contracts. Secure settlement of the transactions is
ensured by an independent Clearing House - the EEX subsidiary ECC AG.
With more than 200 trading participants from 20 countries, the European Energy Exchange is the
fastest growing and most important energy exchange in continental Europe today. It is a fully
regulated and a truly European exchange, since a large majority of its trading participants are
based outside of Germany. The full regulation of EEX ensures the highest possible degree of
transparency, which in turn allows for calculation of reference prices for Germany and the rest of
Europe.
In order to protect and further expand its position as leading exchange for energy and related
products in continental Europe, EEX continuously expands its product offering for European
market players and is open to European partnerships and financial investments. The 2007 spin-
off of the power spot market into EEX Power Spot GmbH clearly shows its readiness to enter
into new partnerships, which are intended to guarantee more flexibility, volume and higher
market coverage in the long run. In 2008, all power derivatives market products will be spun off
into EEX Power Derivatives Markets GmbH. Once both spin-offs fully implemented, the two
independent subsidiaries, at first wholly owned by EEX, will search for appropriate co-
operations, investments and partnerships.

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Table 7.3.1 Price of Future Contracts on EEX:

Second Period European Carbon Futures (as on 07/01/2008)

Name Best Best No. ofLast Last Last Settle. Vol. Vol. OTCOpen
Bid Ask Contr. Price Time Vol. Price Clearing Interest
2008 29.25 29.27 263 29.35 15:30 10,000 29.27 263,000 - 10,601

2009 30.43 30.63 - - - - 30.48 - - 2,154

2010 - - - - - - 31.55 - - 2,606

2011 - - - - - - 32.65 - - 125

2012 - - - - - - 34.25 - - 200

Total 263,000 0 15,686

Certified Emission Reductions Futures (as on 07/01/2008)

Name Best Best No. ofLast Last Last Settle. Vol. Vol. OTCOpen
Bid Ask Contr. Price Time Vol. Price Clearing Interest
2008 21.79 21.95 10 21.85 16:47 5,000 21.85 10,000 - 83
2009 - - - - - - 22.65 - - 125

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2010 - - - - - - 23.10 - - -
2011 - - - - - - 23.80 - - -
2012 - - - - - - 24.65 - - -
Total 10,000 0 208

Total 273,000 0 15,894


Source: EEX, 10 July, 2008

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7.3.2 The European Climate Exchange (ECX):


ECX manages the marketing and product development for ECX Carbon Financial Instruments
(ECX CFIs), listed and admitted to trading on the ICE Futures Europe's electronic platform.
ECX / ICE Futures Europe is the most liquid platform for carbon emissions trading, attracting
over 85% of the exchange-traded volume in the European carbon market. ECX CFI Contract
includes standardised futures and options based on EU Allowances (EUAs) and Certified
Emission Reductions (CERs). More than 90 leading businesses have signed up for membership
to trade ECX products. In addition, several thousand ICE clients can access the emissions market
daily via banks and brokers.
ECX volumes for EUA and CER Contracts are experiencing increasing growth. Since launch in
April 2005, the ECX EUA Futures Contract alone has seen over 2 billion tones CO2 trade on the
platform with an underlying market value of €24 bn. The cash value of carbon traded worldwide
grew from USD $33 billion in 2006 to USD $60 billion in 2007 (Source: Point Carbon).
ECX is a member of the Climate Exchange Plc group of companies. Other member companies
include the Chicago Climate Exchange (CCX) and the Chicago Climate Futures Exchange
(CCFE). Climate Exchange Plc (CLE) is listed on the AIM market of the London Stock
Exchange.
• All quotes delayed by 10 minutes
• Prices (First, Last, High, Low) are expressed in Euros per tonne.
• Volumes are expressed in number of contracts. One contract represents 1,000 tonnes
of CO2 EU Allowances / Certified Emissions Reduction units (EUAs / CERs). By
way of example, 50 contracts are equal to 50,000 tonnes.
• The Settlement (Sett) Price is calculated as a volume-weighted average of trades
during the daily settlement period 16:00- 16:15 hours UK local time and will be
published at approximately 17:30 UK local time. Click here to find about
the Settlement Price methodology.
• Total Volume is the sum of EFP, EFS, blocks and screen-traded volume.
• EFP (Exchange for Physical) and EFS (Exchange for Swap) are off-screen bilateral
trades registered on the Exchange as futures contracts.

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• Open Interest (Open Int.) will be published between 11:00 -12:00 hours UK local
time for the Previous Business Day.
Table 7.3.2: Price of Future Contracts on ECX:

Source: ECX, 14 July, 2008

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7.3.3 Multi Commodity Exchange (M.C.X.)


Headquartered in the financial capital of India, Mumbai, MCX (www.mcxindia.com) is a
demutualised nationwide electronic multi commodity futures exchange set up by Financial
Technologies with permanent recognition from Government of India for facilitating online
trading, clearing & settlement operations for futures market across the country. The exchange
started operations in November 2003.
Apart from being accredited with ISO 9001:2000 for quality standards, MCX offers futures
trading in over 60 commodities as on May 31, 2008, defined in terms of the type of contracts
offered, from various market segments including bullion, energy, ferrous and non-ferrous metals,
oils and oil seeds, cereals, pulses, plantations, spices, plastics and fibers. The exchange strives to
be at the forefront of developments in the commodities futures industry and has forged ten
strategic alliances across the world, including with Tokyo Commodity Exchange, Chicago
Climate Exchange, London Metal Exchange, New York Mercantile Exchange, New York Board
of Trade and Bursa Malaysia Derivatives, Berhad.
Table 7.3.3: Commodity-wise Month-wise Turnover for the year 2008-2009
(April-June 2008)

Month 2008 April May June Total

Commodity Value (Rs.) Value (Rs.) Value (Rs.) Value (Rs.)

CFI 21,216,700 38,815,800 17,739,200 77,771,700


Carbon Credits -- -- 6 ,694,881,500 6,694,881,500
Source: MCX, 10 July, 2008

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7.3.4 National Commodity & Derivatives Exchange Limited (NCDEX):


NCDEX is a professionally managed on-line multi commodity exchange. NCDEX is the only
commodity exchange in the country promoted by national level institutions. This unique
parentage enables it to offer a bouquet of benefits, which are currently in short supply in the
commodity markets. The institutional promoters and shareholders of NCDEX are prominent
players in their respective fields and bring with them institutional building experience, trust,
nationwide reach, technology and risk management skills.
NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act,
1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It commenced
its operations on December 15, 2003.
NCDEX is a nation-level, technology driven de-mutualised on-line commodity exchange with an
independent Board of Directors and professional management - both not having any vested
interest in commodity markets. It is committed to provide a world-class commodity exchange
platform for market participants to trade in a wide spectrum of commodity derivatives driven by
best global practices, professionalism and transparency.
NCDEX is regulated by Forward Markets Commission. NCDEX is subjected to various laws of
the land like the Forward Contracts (Regulation) Act, Companies Act, Stamp Act, Contract Act
and various other legislations. NCDEX is located in Mumbai and offers facilities to its members
about 550 centers throughout India. The reach will gradually be expanded to more centers.
Table 7.3.4 Exchange Traded Volume as on 10th July, 2008

Month Year Commodity Volume (Rs. In Lakhs)

April 2008 Carbon Credits 20447


May 2008 Carbon Credits 32379
June 2008 Carbon Credits 18371
Source: NCDEX, 10 July, 2008

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7.3.5 Chicago Climate Exchange (CCX):


CCX, launched in 2003, is the world’s first and North America’s only active voluntary, legally
binding integrated trading system to reduce emissions of all six major greenhouse gases (GHGs),
with offset projects worldwide.
CCX Members are leaders in greenhouse gas (GHG) management and represent all sectors of the
global economy, as well as public sector innovators. Reductions achieved through CCX are the
only reductions made in North America through a legally binding compliance regime, providing
independent, third party verification by the Financial Industry Regulatory Authority (FINRA,
formerly NASD). The founder, Chairman and CEO of CCX is economist and financial innovator
Dr. Richard L. Sandor, who was named a Hero of the Planet by Time Magazine in 2002 for
founding CCX and in 2007 as the "father of carbon trading."
CCX emitting Members make a voluntary but legally binding commitment to meet annual GHG
emission reduction targets. Those who reduce below the targets have surplus allowances to sell
or bank; those who emit above the targets comply by purchasing CCX Carbon Financial
Instrument® (CFI®) contracts.
CFI Contracts, the CCX Tradable Commodity:
The commodity traded at CCX is the CFI contract, each of which represents 100 metric tons of
CO2 equivalents. CFI contracts are comprised of Exchange Allowances and Exchange Offsets.
Exchange Allowances are issued to emitting Members in accordance with their emission baseline
and the CCX Emission Reduction Schedule. Exchange Offsets are generated by qualifying
offset projects.

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Table 7.3.5 Carbon Financial Instruments - Jul 11, 2008


Product Vintage Open High Low Close Change Volume
Total Electronically Traded Volume 1,103,500
CFI 2003 $4.00 $4.00 $4.00 $4.00 - 1,000
CFI 2004 $4.00 $4.00 $4.00 $4.00 - 2,000
CFI 2005 $4.00 $4.10 $4.00 $4.10 0.10 107,000
CFI 2006 $4.00 $4.10 $4.00 $4.00 - 107,000
CFI 2007 $4.05 $4.15 $4.00 $4.00 - 255,000
CFI 2008 $4.05 $4.10 $4.00 $4.00 - 216,500
CFI 2009 $4.05 $4.10 $4.00 $4.00 - 257,000
CFI 2010 $4.05 $4.10 $4.00 $4.00 - 158,000
Price and volume reported in metric tons CO2
Change based on previous day's closing price

Figure7.3.5

Source: CCX, 10 July, 2008

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7.4 Current Carbon Market Size

Global carbon markets worth €40 billion in 2007, up by 80 percent from 2006. The total traded
volume increased by 64 percent from 1.6 Gt (1.6 billion tones) in 2006 to 2.7 Gt in 2007.
The EU emissions trading scheme saw a traded volume in 2007 of 1.6 Gt and a value of €28
billion. This represents a volume growth of 62 percent and a value growth of 55 percent from
2006. The EU ETS now holds 62 percent of the physical global carbon market and 70 percent of
the financial market.

The CDM market increased to 947 Mt and €12bn in 2007. This is an increase of 68 percent in
volume terms, and a staggering 200 percent in value terms from 2006, constituting 35 percent of
the physical market and 29 percent of the financial market.

The market for secondary trading of CDM credits is the fastest growing segment. From limited
activity at the start of the year, over 2007 the market saw around 300 Mt of sCER trades, much
of this related to EUA-sCER swaps.

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Table: 7.4.1: Country wise list of CER units

Country CERs Country CERs Country CERs


Argentina 330,919 India 42,910,159 Republic of Korea 27,290,818

Bhutan 474 Indonesia 80,967 South Africa 35,130

Bolivia 725,875 Israel 20,849 Sri Lanka 173,107

Brazil 21,799,122 Jamaica 127,580 Thailand 100,678

Chile 2,408,757 Malaysia 570,496 Viet Nam 4,486,500

China 45,464,852 Mexico 3,831,294

Colombia 201,434 Morocco 26,213

Ecuador 275,444 Nicaragua 262,645

Egypt 1,587,967 Pakistan 295,204

El Salvador 182,206 Papua New Guinea 215,424

Fiji 18,176 Peru 104,693

Guatemala 197,928 Philippines 27,807

Honduras 109,528 Total 152,374,728


Till June 17, 2008; As per UNFCCC website updates.

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Table 7.4.2: Number of Approved Methodologies available to obtain CERs. :


Number
Of Methodologies*
S. Scope ( Large-scale ( Small-scale ( Consolidated
Total
No. (AM, AR-AM) ) (AMS, AR-AMS) ) (ACM) )

Energy industries
1 23 7 7 37
(renewable - / non-
renewable sources)
2 Energy distribution 1 1 0 2

3 Energy demand 6 4 0 10
Manufacturing
4 9 7 5 21
industries
5 Chemical industries 10 3 0 13

6 Construction 0 0 0 0

7 Transport 1 3 0 4
Mining/mineral
8 production 0 0 1 1

9 Metal production 6 0 0 6
Fugitive emissions
10 from fuels (solid, oil 5 0 1 6
and gas)
Fugitive emissions
from production and
11 consumption of 3 0 0 3
halocarbons and
sulphur hexafluoride.
12 Solvent use 0 0 0 0
Waste handling and
13 3 6 3 12
disposal
Afforestation and
14 11 3 1 15
reforestation
15 Agriculture 0 3 1 4
Total 78 37 19 134
* A methodology can be linked to more than one scope

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7.5 Carbon Market Potential:


The Kyoto Protocol established emissions limitation commitments for industrialized country
(Parties included in Annex B to the Kyoto Protocol or Annex B Parties) Parties for the period
2008 – 2012 and established three mechanisms – the CDM, JI and International Emissions
Trading – they can use to help meet those commitments. Most Annex B Parties plan to use
emissions trading systems to regulate the emissions of fossil-fired electricity generators and large
industrial emitters to help comply with their Kyoto Protocol commitments for the period 2008 –
2012. Those emissions trading systems are already operational in the Member States of the EU
and Norway.
The United Kingdom of Great Britain and Northern Ireland has sources that participate in the
emissions trading scheme (ETS of the EU) and that participate in a domestic scheme. The EU
ETS is by far the largest market in terms of number of participants and trading activity. Trading
activity is shifting from allowances that can be used for compliance during Phase I (2005 – 2007)
to allowances that can be used for compliance during Phase II (2008 – 2012). Credits created by
CDM projects (certified emissions reductions or CERs) are the second largest market.
The CDM was the first of the three Kyoto mechanisms to be implemented. Emissions trading
systems are also operating in Australia (the New South Wales–Australian Capital Territory GHG
abatement scheme) and the United States (the Chicago Climate Exchange). The quantities traded
in the markets established by these systems and the voluntary markets are much smaller than
those in the EU ETS and the CDM market.
The buyer purchases emission credits from a project that reduces GHG emissions compared with
what would have happened otherwise. Some project-based transactions are conducted to meet
voluntary targets, but most are ultimately intended for compliance with the Kyoto Protocol or
other regulatory regimes.
In cap-and-trade regimes, project-based transactions allow for the creation of new assets that can
be used for compliance, above and beyond the initial supply of allowances. For example, ERUs
created through JI projects and CERs created through CDM projects can both be used to meet
obligations under the Kyoto Protocol, in addition to AAUs. There is thus no fundamental
difference in quality between allowances and project-based credits, once the latter are issued.

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In 2007, buyers continued to show strong interest in the CDM and JI, and this was supported by
higher flows of capital into the carbon arena. While transacted volumes grew slightly to 634
MtCO2e for finalized primary project-based transactions (up 8% from 2006), the value of all
primary carbon purchase transactions was much higher, at US$8.2 billion (€6.0 billion), up 34%
from 2006, a sign of the intense competition and activity in the market.
Figure 7.5.1: Annual Volumes (MtCO2e) of Project-based Emission Reductions
Transactions (vintages up to 2012)

Source: World Bank ‘State and Trends of the Carbon Market’ Report 2008

CDM accounts for most of the project-based market activity (at 87% of volumes and 91% of
value transacted). JI and the voluntary market as a whole each experienced a doubling of
transacted volumes and a tripling of transacted values. The dynamic of the project-based market
changed in early 2008, as buyers became more cautious in response to a combination of
mounting delivery and issuance challenges, higher perceived credit risks amid the generally
bearish sentiment in the financial markets, as well as continuing uncertainty about the role of and
demand for CDM and JI in the post-2012 climate regime(s). These market trends, as well as the
limits to demand from the EU ETS have the potential to leave behind, in particular, projects in
poorer countries which have only just begun to take advantage of the carbon compliance market.
Many of these sellers have begun to look increasingly toward voluntary and pre-compliance
markets for buyers.

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JI projects, as stated, are valid only for developed economies whereas CDM projects are
applicable in case of developing countries.

The following table shows registered CDM projects and annual average and expected CERs until
end of 2012:
Table 7.5.1: UNFCCC CERs Issuance:
Expected CERs until end of
Annual Average CERs*
2012**
CDM project pipeline: > 3000 of
N/A > 2,700,000,000
which:
--- 1058 are registered 214,677,457 > 1,270,000,000
--- 55 are requesting registration 10,159,967 > 40,000,000
* Assumption: All activities deliver simultaneously their expected annual average emission
reductions
** Assumption: No renewal of crediting periods
Source: UNFCCC

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The following figure shows the potential CER supply to 2012, observed CER issuance and its
contracted volumes in different types of CDM projects:
Figure 7.5.2: CER Potential Supply to 2012, Observed Issuance and Contracted Volumes

Source: World Bank ‘State and Trends of the Carbon Market’ Report 2008

Prices for primary forward CERs ramped up throughout 2007 and early 2008, with the vast
majority of transactions in the range between €8-13, with an average contracted price of
US$13.60 or €9.90 (up 24% from 2006). The two main market benchmarks for price were the
tacit price floor in China (reportedly evolving from €8 to €9 through 2007) and the observed
price on the secondary market, which effectively played the role of a price ceiling. Also a
reflection of sustained interest in CDM and increased competition during 2007, the minimum
price for CERs (except for temporary CERs and long-term CERs from forestry projects) rose to
US$9 (€6.5) in 2007 from US$7 (€5.6) the year before (a 26% increase). ERUs traded at an
average price of US$12.2 or €8.9 (up 38% from 2006), catching up further with CERs in 2007,
although they remained cheaper on average.

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7.6 CDM and JI Buyers & Sellers:


7.6.1 CDM and JI Buyers
Europe:
European buyers dominated the CDM and JI market for compliance and at the close of 2007,
their market share reached almost 90% (up from 2006). Private companies have been the most
active buyers, with 79% of volume transacted in 2007, up slightly from 77% in 2006. The most
active buyers (large European compliance buyers with installations in several countries, project
developers and aggregators as well as financial institutions with an eye to the booming secondary
markets largely operate or are administered out of London, which, at 59%, is still considered the
carbon finance hub of the world (up from 54% in 2006).

Japan:
Japan is back in the carbon compliance market with its 2007 market share nearly doubling from
6% to 11% market, with both public and private sector intensifying their activity. The
Government of Japan has been regularly increasing its funding to the Kyoto Mechanisms Credit
Acquisition Program since its inception in April 2006, roughly doubling its budget every fiscal
year. For FY08, the amount committed for purchases of Kyoto credits through 2008-12 now
exceeds JPY80 billion or US$815 million (€490 million). In April 2008, Japan’s New Energy
and Industrial Technology Development Organization (NEDO) announced that about 23 millions
CERs had been contracted since FY06, an important marker toward the minimum 100 MtCO2e
target. Expectations of Japan’s 2010 GHG emissions are likely to be revised upward to include
an additional 19-34 MtCO2e per year (95-170 MtCO2e over the whole Kyoto period),
suggesting the likelihood of higher purchases, including from the Japanese private sector. A key
towards the achievement of the Kyoto target by Japan is the coordination between the
Government’s Kyoto Protocol Target Achievement Plan and the Keidanren Voluntary Action
Plan, a voluntary commitment by major industries to stabilize CO2 emissions from fuel
combustion and industrial process at 1990 level by 2010. In late 2007, major industries
announced that they would tighten their targets under the Keidanren Voluntary Action Plan,
thereby assuming responsibility for 45 to 76% of the additional Kyoto gap. Part of these
additional efforts could also translate into extra demand for Kyoto units, including CDM and JI.

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The JI market had long been thought to be the quasi-exclusive domain of sovereign buyers such
as the Netherlands, Denmark and Austria. However, it saw the emergence of private sector
buyers for the first time in 2007. As JI regulatory uncertainties appeared to decline in 2007, a
good-sized JI pipeline emerged and the Japanese private sector, in particular, made some
important purchases in Eastern Europe.
The following figure shows the share of primary CDM and JI buyers:
Figure 7.6.1.1 Primary CDM & JI Buyers (as shares of volumes purchased, vintages up to
2012)
(Overall volume in 2007 - 592 MtCO2e)

Source: World Bank ‘State and Trends of the Carbon Market’ Report 2008

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7.6.2 CDM and JI Sellers:

China (CDM)
China was the world leader in CDM supply with a 72% market share in terms of 2007 transacted
volume (compared to 54% market share in 2006). Buyers generally report the ability to close
primary forward carbon transactions in the range of €8-11, with one or two notable transactions
at above €13 in the last few months. China consolidated its position as the pre-eminent carbon
supplier, by quadrupling its number of projects in the pipeline from January 2007 to March 2008.

Others (CDM)
Brazil and India, at 6% market share each, transacted the highest volumes after China, although
this represented a drop in volumes for each from 2006 levels. Africa followed with 5% of the
market. Compared to their position in the CDM pipeline, India and Brazil have a relatively low
market share of transactions. Market participants repeatedly cited high price expectations in
these two countries, and reported that project sponsors focused on transacting issued CERs at
attractive prices in the range of €15-16.50 instead of selling (riskier and therefore less
remunerative) forward CER streams. With CER issuances gradually ramping up and the market
infrastructure for spot CER transactions being operational; one could reasonably expect higher
volumes of spot primary transactions reaching the market in the coming years.
A number of countries entered the project pipeline for the first time, particularly in Sub Saharan
Africa and Central Asia and transacted volumes grew several-fold in a number of other
countries, most notably in Malaysia and Indonesia. Although they account for a much smaller
share of the primary CDM market, some countries in Africa (Kenya, Uganda, Nigeria), Asia
(Malaysia, Philippines, Thailand) as well as in Eastern Europe and Central Asia (Uzbekistan),
reported sharp increases in transaction volumes. Projects in Africa have contracted to supply
about 50 MtCO2e to the market so far, with more than 20 MtCO2e transacted in 2007 alone.

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Figure 7.6.2.1: CDM Project Locations

Source: World Bank ‘State and Trends of the Carbon Market’ Report 2008

Russia and Ukraine (JI)


The near-tripling in transactions volumes through 2007 seems to confirm the market’s interest in
JI potential, after years of hesitation. Market’s focus moved from Eastern Europe to Russia and
Ukraine, with roughly one-third of market share each. The EU decision on double counting has
substantially restricted the potential of JI largely to projects outside the scope of EU ETS,
thereby limiting the growth of the pipeline in the newer EU Member States. Therefore the
dynamic growth in the JI pipeline occurred almost entirely in Russia and Ukraine, which now
account for 69% and 21% respectively of the project pipeline of expected 2012 supply. The
number of track II projects nearly quadrupled from 34 projects in January 2007 to 129 projects in
the pipeline as end of March 2008. If approved, these 129 projects are expected to deliver 240
million ERUs by 2012, which is almost four times the 66 million ERUs that were expected from
the pipeline back in January 2007.

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Figure 7.6.2.2: Location of JI Projects

Source: World Bank ‘State and Trends of the Carbon Market’ Report 2008

With the establishment of JI procedures in a number of countries, especially in Ukraine and


Russia - the two biggest suppliers, regulatory uncertainties would appear to have been
substantially reduced. However, procedural bottlenecks continue to hamper JI potential.
Launched officially in October 2006, the Track II JI project approval process has so far decided
on only two projects out of 129 submitted, approving one project in April 2007 (energy
efficiency at a cement plant in Ukraine) and rejecting one in February 2008 (hydro rehabilitation
in Bulgaria). With more Parties expected to gain eligibility in the coming months, one may
wonder to what extent project sponsors will contemplate shifting their projects from track II to
track I (including early movers) to speed up process – in spite of the reputation risk mentioned
by some market participants.

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7.7 Project Types (CDM):

Clean Energy
Volumes transacted from clean energy projects (renewable energy, fuel switching and energy
efficiency) reached 358 MtCO2e in 2007 (or a 64% market share, compared to just 33% in 2006
and 14% in 2005). Energy efficiency projects at large industrial facilities account for the most of
these emission reduction transactions.

HFC
The share of HFC-23 decomposition projects continued to decrease from their 2005 peak,
reflecting the exhaustion of existing opportunities under the current methodology and persistent
questions regarding the inclusion of new HCFC-22 facilities under the CDM. Acknowledging
the increase in demand for refrigeration around the world; a UNEP report recommended the
inclusion of new plants under the CDM with a number of amendments.

N2O
Projects abating N2O entered the CDM pipeline by mid 2005, offering large volumes along with
low performance risk, limited requirements for investment and short lead times, all attractive
characteristics for buyers. After HFC-23 decomposition projects, this asset class has been
competitively pursued globally and contracted in the last two years. At 250 million CERs
expected by 2012, most of these projects have already been transacted on forward contract or
identified for spot transactions.

Methane
Emissions from waste currently account for about 4% of global GHG emissions and emissions
from municipal waste account for a large share of methane emissions. Methane reduction from
waste management is back in favour, although concern about expected performance yields has
resulted in Emission Reduction Purchase Agreements (ERPAs) that substantially discount the
expected volumes in contracts.
Buyers conduct enhanced due diligence during project design and selection and exercise some
influence on technology selection, commissioning and operation. While the current pipeline

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suggests potential supply of up to 245 million CERs by 2012, only about a third of that volume
(90 million CERs) have been contracted so far, a discount corresponding to the observed yield of
these projects.

LFG
In addition to low performance yields, other barriers to landfill gas (LFG) projects include the
lack of awareness and capacity of municipalities and the absence of appropriate regulatory
frameworks. A more systematic approach to solid waste management through local
programmatic carbon finance activities, such as composting waste in the hundreds of African
cities with no sanitary landfills at all, could be one way to help create an incentive for better
waste management practices.

Fugitive
Projects targeting fugitive methane emissions account for an 8% market share of transacted
volumes, with coal mine methane (CMM) projects decreasing slightly from 2006, now at a 5%
market share. Forty-nine projects are in the pipeline and 40 of these are still at validation stage.
Seven projects have been registered and two have only just requested registration. Only two
D.O.Es (Designated Operational Entities) are accredited to validate and verify mining projects
and this explains why there is a backlog of projects in this project type. Projects to reduce gas
flaring also emerged in the transaction data, with a 3% market share.

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Figure 7.7.1 CDM Project Types

Source: World Bank ‘State and Trends of the Carbon Market’ Report 2008

Project Types (JI)


The project types transacted under JI during 2007 is quite different from the CDM, with a suite
of projects targeting methane leading with 47% market share, followed by clean energy projects
at 37% and N2O abatement projects at 23%. This is a change from project types transacted in
2006, which had clean energy at two-thirds of transacted volumes. Figure 7.7.2 JI Project
Types

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Source: World Bank ‘State and Trends of the Carbon Market’ Report 2008

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Table 7.7.1: Incremental impact of the CER price on the internal rate of
return (IRR) of the project (percentage per purchase period):

In the above table the estimation of incremental impact of the CER price on the internal rate of
return (IRR) of the project is done by World Bank. The estimation is done for four prices of CER
units viz. 5, 10, 15 and 20. For renewable energy IRR is rising for all price cases, but for solid
waste and HFC/23 IRR is (almost) constant for all projects beyond Kyoto commitment period.
As a result impact per unit MWh (in USD) is almost nil.

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Figure 7.7.3

Source: UNFCCC

The Russian Federation, Ukraine and some eastern European countries will have surplus AAUs
they can sell to other Annex B Parties. Some of these countries are establishing green investment
schemes, which use the revenue from the sale of AAUs to fund emission reduction measures.
ICF International assumes that only AAUs from green investment schemes will be purchased by
other Annex B Parties. Point Carbon and Capoor and Ambrosi estimate the surplus AAUs
available, but do not assume they will be sold. In summary, the analyses suggest the supply will
be abundant relative to the demand. Demand for the period 2008 – 2012 is unlikely to change
significantly, but the supply of Kyoto units could increase substantially.
The supply of CERs and ERUs will be affected by several factors over the next few years,
including:
• Uncertainty about the post-2012 regime: The value of emission reductions after 2012 is
uncertain, so projects with longer payback periods become progressively less attractive, reducing
the flow of new projects;
• Administrative uncertainty: Inconsistent decisions, possible review upon registration, and
possible review on issuance present relatively small risks for project developers. Owing to the
relative lack of experience, the risks are higher for JI projects than for CDM projects;

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• Market liquidity: The secondary market for CERs is still small so accurate price information is
not readily available. This should change over the coming year as the number of issued CERs
rises. The secondary market for ERUs will lag by a year or more;

• Possible changes to the rules: The rules for the CDM could be changed to generate a wider
geographic distribution of projects and/or to favour projects that have more development
benefits.
Figure 7.7.4 Expected Price of EUA, under EU-ETS, estimated by Point Carbon:

The above figure shows the price expectations for EU allowances in 2010 and 2020 of
participants in an online survey conducted early in 2007. For 2010 the average is EUR 17.40,
with a roughly symmetrical distribution ranging from less than EUR 5 to over EUR 35.

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Figure 7.7.5 Demand Estimates by various agencies, given to UNFCCC:

The results correspond to the maximum demand for the mitigation scenario. Current Annex I
and/or Annex B Parties, including Australia and the United States, are assumed to have
commitments that induce them to purchase all cost-effective emission reductions available in
Non-Annex I Parties: Rules for credit creation, transaction costs, and other considerations would
prevent all cost-effective reductions estimated by the models being realized in practice. Failure
of some Annex I and/or Annex B Parties to ratify the agreement in place in 2030, or adopt
equivalent commitments, would reduce the demand. Adoption of targets by some current non-
Annex I Parties would reduce the estimated supply and hence the maximum demand.
The results vary enormously due to differences in the reference scenario, marginal abatement
costs and model structure. Estimates of the annual sales range from less than 2000 USD 1 billion
to over USD 1,850 billion and estimates of the price range from less than USD 1 to over USD
100 per t CO eq. The low estimate is due to both a small quantity and a low price, indicating that
2

the reference scenario and mitigation scenario emissions are very similar. The high estimate is
due to a reference scenario that has much higher emissions than the mitigation scenario, leading
to a high marginal abatement cost and large purchases. The high estimate implies a commitment
of Annex I and/or Annex B Parties greater than their 1990 emissions.
Because the EMF 21 scenarios exclude the Kyoto Protocol, emission reductions and marginal
abatement costs rise gradually from 2000. The 2020 marginal abatement cost (price) – 2000
USD 6.50 per tCO2 eq is lower than both the current and projected 2010 price. Given the bias

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introduced by the scenarios, the best assumption is that prices remain roughly constant from
2010 through 2030 at 2000 USD 23.60 (range USD 13.50 – 33.75).
ICF International projects the average demand of Annex I and/or Annex B Parties for the period
2013 – 2017 at 2,600 Mt CO2 eq. per year (1,200 to 3,100 Mt CO2 eq. per year) (ICF
International, 2007). The high demand case includes additional demand of 4,400 Mt CO 2 eq. per
year by non-Annex I Parties that adopt Sectoral targets. ICF International projects the 2013 to
2017 price at 2006 EUR 30 per t CO2 eq. (range EUR 18 – 40 per t CO2 eq.). The implied annual
purchases by Annex I and/or Annex B Parties are about 2006 EUR 75 billion (range EUR 2 –120
billion).
The estimates cover only purchase credits by Annex I and/or Annex B Parties from non-Annex I
Parties. The estimates do not include trades between Annex I and/ or Annex B Parties, such as JI
and international emissions trading. To estimate the size of those mechanisms requires arbitrary
assumptions about the commitments of different Annex I and/or Annex B Parties. The estimates
assume that all cost effective emission reductions in Annex I and/or Annex B Parties are
implemented as domestic actions or for sale to other Annex I and/or Annex B Parties through JI
or international emissions trading.
Each estimate spans a wide range. The low end of the ranges suggests that the demand remains
in the range of 2006 USD 5 – 25 billion per year indicates that CDM transactions during 2006
were a little over USD 5 billion and the demand estimated for 2010 is USD 10 –15 billion with a
range 2006 USD 5 to USD 25 billion per year. The value of credit purchases by Annex I and/or
Annex B Parties from non-Annex I Parties could remain in that range through 2050.
The high demand assumes commitments 30 per cent below 1990 by 2030 and 60 – 80 per cent
below by 2050 by all current Annex I and/or Annex B Parties including Australia and the United
States, no commitments of any type by any current non-Annex I Party, and purchase of all cost
effective emission reductions available in non-Annex I Parties.

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Figure 7.7.6 Supply Estimates by UNFCCC:

It appears that the current flow of projects under the CDM would be sufficient to meet the low
demand estimate for 2030 although with some changes in the mix of projects. The high demand
would require credits for a large fraction of the potential emission reductions, from existing and
some new categories of project types. To process the volume of emission reductions cost-
effectively is likely to require new mechanisms, such as “no lose” targets, Sectoral targets and
policy CDM, in addition to the current types of CDM projects. The high demand is about ten
times higher; some 4,000 – 6,000 Mt CO2 eq. per year in 2030. The estimates indicate that
current non-Annex I Parties could supply the high demand if a large fraction, 50 – 75 per cent, of
the maximum potential is realized and additional categories of emission reductions, reduced
deforestation and CCS, are included. Currently the average CDM project estimates an annual
emission reduction of 165,000 t CO2 eq. per year. Annual reductions of 4,000 – 6,000 Mt CO2
eq. per year would require 25,000 – 35,000 registered projects. Roughly 1,000 projects entered
the pipeline during 2006. To have 25,000 – 35,000 registered projects would mean a four to five-
fold increase in the flow of registration and renewal requests.

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7.8 OUTLOOK
Price Differentiation
Stronger price differentiation across project-based assets and contracts will occur, for example:
Between issued and forward C.E.Rs, with a higher spread for projects earlier in the regulatory
process. The authors do not predict future prices in the market. A tiered CDM market is likely to
emerge, providing risk management and arbitrage opportunities. These include:

- Private buyers (primarily EU-based power companies, banks, Japanese utilities and
trading houses) will likely compete and offer the highest prices for the finite number of
issued C.E.Rs. (Currently priced around €16-17) until the registration/issuance backlog is
cleared.

- Project aggregators will likely transact the most secure tranches of their portfolios as
secondary guaranteed C.E.Rs on exchanges or through their bankers (to European
industrials and the Japanese private sector) at a slight nominal discount to issued C.E.Rs
(currently trading forward at around €16 at future settlement). There will also be
continued interest, especially from the financials, in trading gCERs on exchanges and
offering them as compliance instruments.

- Private buyers and sovereign buyers will likely offer slightly lower prices for early
delivery forward CER contracts (currently around €12-13) from high-yielding project
types offered by credit-worthy and experienced project developers.

- Hedge funds will likely buy across the line, including some post-2012 vintages, as well as
partially guaranteed CER contracts, at a discount (currently around €11-13 based on the
seller’s credit risk and assessment of regulatory risk across portfolio) to the gCER.

- Sovereign buyers, pre-compliance buyers expecting regulation beyond 2012 and


voluntary market buyers will likely continue to support purchases from more complex
projects with strong sustainable development attributes or from countries not well
represented in the market (currently €8-13).

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- A CER or VER produced under reputable standards such as the Gold Standard will likely
command the highest prices (currently €10-15), followed by pre-CDM VERs (€6-8) and
CCX (currently €4).

- Sovereign buyers, who also have the option to contract and bank AAUs, and this
potential competition, could have the effect of influencing primary CER prices generally
lower.

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7.9 Global Wind Energy


The increasingly mature and global industry installed close to 20,000 MW of clean, emissions
free wind energy capacity in the course of the year, representing about € 25 billion (about $US
37 billion) of investment, and by the time this publication is released, the total global capacity
will no doubt have passed the 100,000 MW mark. With the price of oil well over $US 100 per
barrel, and the price of coal and gas at historically high levels, the advantages of an energy
source independent from the vagaries of the international commodities markets has never been
clearer. ‘Resource depletion’ will never be a problem for wind power. We have only just begun
to scratch the surface of its potential. This is good news not only for energy planners, seeking to
achieve security of supply, but also for politicians and diplomats searching for solutions to the
global crisis of human-induced climate change. As governments frantically negotiate a new
agreement for the period after 2012, the wind industry stands ready to make a very substantial
contribution to solving what most now acknowledge is the greatest long term threat to our
civilization. While the power sector is far from being the only culprit when it comes to climate
change, it is the largest single source of emissions, accounting for about 38% of CO2 emissions,
and about 25% of overall emissions. Our options for making major emissions reductions in the
power sector between now and 2020 are basically three: energy efficiency and conservation;
fuel switching from coal to gas; and renewable energy, primarily wind power. As policy makers
become more aware of this reality, they appreciate more and more wind power’s technological
maturity, widespread availability, speed of deployment, and the fact that there is a robust,
growing industry becoming more and more global with every passing year. The wind industry is
ready, willing and able to fulfill these growing expectations and responsibilities.
The top five countries in terms of installed capacity are:
• Germany (22.3 GW),
• US (16.8 GW),
• Spain (15.1 GW),
• India (7.8 GW)
• People’s Republic of China (5.9 GW).
In terms of economic value, the global wind market in 2007 was worth about 25bn EUR or 37bn
US$ in new generating equipment.

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Figure 7.9.1: Global Wind Power Scenario

Source: Global Wind Energy Association report, 2008

By the end of 2007 USA, number 3 of 2006, moved up to second place in terms of installed wind
power potential with 17.9% share of total global installed wind potential. Denmark was
superseded by China. In terms of new installation Denmark is out of top 10. It is possibly
because Danish markets are approaching to its maximum capacities. China’s installed capacity at
the end of 2007 (5906 MW) in contrast to that in 2006 (2599 MW) was more than two times. In
near future it is quite possible that China will surpass India in terms of installed capacity. Canada
who was nowhere the leading 10 list entered in top 10 new installations with 9.1% share of
global new installations. India is fourth on both the lists but growth rate of India is far below to
that of China despite of several incentives made available by MNRE (Ministry of New and
Renewable Energy). Germany leads the chart in total installations, but for new installations it is

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at fifth place. Here, again like Denmark the wind market is reaching its saturation point hence the
growth rate is declining.
Figure 7.9.2:

Source: Global Wind Energy Association report, 2008

2007 was yet another banner year for the wind industry, with a 27% increase in installed
capacity, bringing the global total to 93,900 MW. The last few years have witnessed a sea
change in both the scale and extent of the international wind industry’s operations. Individual
wind farms have grown in size from a few dozen megawatts capacity up to several hundred. Out
at sea, giant wind parks of 1,000 MW capacities or more are now waiting for construction.
Successful wind turbine models are pouring out from manufacturing facilities much like other
mass produced hardware. And the continued growth in demand for clean, emissions-free wind
power has outstripped the available supply, creating a demand for very large investments in
manufacturing capacity, long term equipment purchase arrangements and project development.

The structural changes which have accompanied this expansion have concentrated around two
key trends. One has been the involvement in the business of companies from outside the
traditional wind turbine manufacturing and project development community. The other has been
the spread of the wind power market well beyond its core geographical centres of Europe and the
United States. Significantly, the two trends have overlapped with each other. Increasing
involvement of new players in the market is in part a reflection of wind power’s success. This is
now a business from which it is clearly possible to make a secure and profitable return. In most

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countries where the technology has been successful there is a structural framework in place
which supports renewable energy because of the environmental benefits it brings, especially in
the battle against climate change. They also help counter the effects of the massive subsidies
over many decades to conventional energy generation. These frameworks have in some cases
stood the test of time over a number of years. An additional factor is the pressure from some
national governments to place an obligation on energy producers to source an increasing
percentage of their electricity from renewables. This is the case for instance in the United
Kingdom, with its Renewables Obligation, and in the United States, with its state by state
Renewable Portfolio Standards. At an international level, the European Union has led the way by
introducing a legally binding target for 20% of the region’s energy to come from renewable
sources by 2020. These twin encouragements have generated a surge of interest in renewable
energy, and particularly wind power, from companies whose previous investment portfolio had
been mainly concentrated in fossil fuels or nuclear or even outside the energy sector. Most
importantly, these newer entrants have both the advantage of the available balance sheet to
consider large investments and the incentive to diversify away from increasingly uncertain
traditional power sources.

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Table 7.9.1

Source: Global Wind Energy Association report, 2008

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Figure7.9.4: Market Forecasts of Wind Power till 2012:

Source: Global Wind Energy Association report, 2008

The average growth rates during this five year period in terms of total installed capacity are
expected to be 20.7%, compared with 23.4% during 2003-2007. In 2012, Europe will continue to
host the largest wind energy capacity, with the total reaching 102 GW, followed by Asia with 66
GW and North America with 61.3 GW. The additions in installed capacity every year are
predicted to grow from 19.9 GW in 2007 to 36.1 MW in 2012, with an average growth rate of
12.7%. Considering that annual markets have been increasing by an average of 24.7% over the
last 5 years, growth could be much stronger also in the future, were it not for continuing supply
chain difficulties which considerably limit the growth of annual markets for the next two years.
This problem should be overcome by 2010, and along with the development of the offshore
market, growth rates are expected to recover in the next decade.

Asia is predicted to overtake Europe as the biggest annual market, with as much as 12.5 GW of
new wind generating capacity installed during the year 2012, up from 5.2 GW in 2007. This
growth will be mainly led by PR China, which has since 2004 doubled its total capacity every
year, thereby consistently exceeding even the most optimistic predictions.
By 2010, PR China is expected to be the biggest national annual market globally. This
development is underpinned by a rapidly growing number of domestic manufacturers operating
in the Chinese market, delivering home made turbines to large scale wind energy projects.
Already in 2007, 40 domestic suppliers supplied 56% of the new installations in the domestic

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market, up from 41% in 2006. While PR China will emerge as the continental leader in Asia,
sustained growth is also foreseen in India, while other markets such as Japan, South Korea and
Taiwan will also contribute to the development of wind energy on the continent.

The European market will by 2012 have fallen to third place in terms of annual installations
(10.3 GW), behind North America (10.5 GW). Overall, this means that over 71% of new
installations will occur outside of Europe in 2012, up from 28% in 2004 and 57% in 2007. While
in terms of total installed capacity, Europe will continue to be the biggest regional market; its
share will have fallen to 42.4%. The large scale development of offshore wind energy is further
delayed and will only start to have a significant impact on European market growth towards the
end of the time period under consideration. However, it is expected that offshore development
will lend new momentum to growth in Europe during the next decade. In Europe, Germany and
Spain will remain the leading markets, but their relative weight will decrease as a larger number
of national markets emerge on the scene. While the spectacular growth of the Spanish market in
2007 with over 3.5 GW of new installations will not be sustained, a stable pace of 2-2.5 GW per
year on average can be expected, enabling Spain to reach the government’s 2010 target of 20
GW. The size of the German annual market will continue to decrease, but it will remain the
second strongest European market for the 2008-2012, and the biggest in terms of total installed
capacity. By 2010, offshore developments will give new impetus to the German market, resulting
in stronger growth. Other important markets in Europe will be France and the United Kingdom,
each increasing by an average of 1 GW per year.

The North American market will grow even stronger than previously thought, led by significant
growth in the US, as well as sustained development of the Canadian market. In total, North
America will see an addition of 42.6 GW in the next five years, reaching 61.3 GW of total
capacity in 2012. This represents an average of 8.5 GW of new capacity added every year, the
bulk of which will be in the US. These figures assume that the US Production Tax Credit (PTC)
will continue to be renewed in time for the current strong growth to continue. Moreover, high
level engagement of an increasing number of US states, 26 of which have already introduced
Renewable Portfolio Standards, will also assure sustained growth. A change in US
administration may further underpin this development.

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Latin America is expected to contribute to the global total in a more substantial way in the future,
mainly driven by Brazil, Mexico and Chile. By 2012, the total installed capacity in Latin
America and the Caribbean will increase 8-fold to reach 4.5 GW, with an annual market of 1.4
GW. However, despite its tremendous potential, Latin America is likely to remain a small market
until the end of the period under consideration, progressing towards more significant
development in the next decade. The Pacific region will see around 2.3 GW of new installations
in 2008-2012, bringing the total up to 3.5 GW.

While in Australia, wind energy development slowed down considerably in 2006 and 2007, the
outlook for the future is more optimistic, mainly thanks to the change in federal government at
the end of 2007, the ratification of the Kyoto Protocol and the pledge to implement a new target
for 20% of electricity to come from renewables by 2020. New Zealand, however, got new
impetus with 151 MW of new installations, and many more projects are at various stages of
development.

Africa and the Middle East will remain the region with the smallest wind energy development,
with a total installed capacity of 3 GW by 2012, up from 500 MW in 2007. However, it is
expected that market growth will pick up in the coming five years, with annual additions
reaching around 800 MW by 2012. This development will be driven by Egypt and Morocco,
with some development also predicted in other North African and Middle Eastern countries.

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Table 7.9.2

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Table 7.9.2: World Cumulative Installed Wind Power Capacity and Net
Annual Additions, 1980-2007
Year Cumulative Net Annual Annual Growth
Installed Capacity Addition Rate
(Megawatts) (Megawatts) (Percentage)
1980 10
1981 25 15 150
1982 90 65 260
1983 210 120 133.3
1984 600 390 185.7
1985 1,020 420 70
1986 1,270 250 24.5
1987 1,450 180 14.2
1988 1,580 130 9
1989 1,730 150 9.5
1990 1,930 200 11.6
1991 2,170 240 12.4
1992 2,510 340 15.7
1993 2,990 480 19.1
1994 3,488 498 16.7
1995 4,800 1,312 37.6
1996 6,100 1,300 27.1
1997 7,600 1,500 24.6
1998 10,200 2,600 34.2
1999 13,600 3,400 33.3
2000 17,400 3,800 27.9
2001 23,900 6,500 37.4
2002 31,100 7,200 30.1
2003 39,431 8,331 26.8
2004 47,620 8,189 20.8
2005 59,091 11,471 24.1
2006 74,133 15,042 25.5
2007 94,122 19,989 27
Source: Compiled by Earth Policy Institute with 1980-1994 data from World watch Institute, Signposts 2004,
CDROM (Washington, DC: 2004); 1995 data from Global Wind Energy Council (GWEC), Global Wind 2006
Report (Brussels: 2007); 1996-2007 data from GWEC, "U.S., China, & Spain Lead World Wind Power Market
in 2007," press release (Brussels: 6 February 2008).

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Figure7.9.3: Global Wind Power Capacity

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Table 7.9.3: Cumulative Installed Wind Power Capacity by Selected Country and
World, 1980-2007
Year Germany Denmark U.S. Spain India China Other World

Megawatts
1980 0 8 0 0 n.a. 5 0
1981 0 18 0 0 n.a. 7 0
1982 0 84 0 0 n.a. 12 0
1983 0 254 0 0 n.a. 20 0
1984 0 653 0 0 n.a. 27 0
1985 0 945 0 0 n.a. 50 25
1986 0 1,265 0 0 n.a. 82 0
1987 5 1,333 0 0 n.a. 115 0
1988 15 1,231 0 0 n.a. 197 137
1989 27 1,332 0 0 n.a. 262 109
1990 62 1,484 0 0 n.a. 343 41
1991 112 1,709 5 39 n.a. 413 0
1992 180 1,680 50 39 n.a. 458 103
1993 335 1,635 60 79 n.a. 487 394
1994 643 1,663 70 185 n.a. 539 390
1995 1,130 1,612 140 576 38 637 647
1996 1,548 1,614 230 820 79 835 974
1997 2,080 1,611 512 940 170 1,120 1,167
1998 2,870 1,837 830 1,015 224 1,428 1,996
1999 4,445 2,490 1,584 1,077 268 1,718 2,018
2000 6,104 2,578 2,235 1,220 346 2,300 2,617
2001 8,754 4,275 3,337 1,456 402 2,417 3,259
2002 11,994 4,685 4,825 1,702 469 2,880 4,545
2003 14,609 6,372 6,203 2,125 567 3,110 6,445
2004 16,629 6,725 8,263 3,000 764 3,117 9,122
2005 18,415 9,149 10,027 4,430 1,260 3,128 12,682
2006 20,622 11,575 11,623 6,270 2,604 3,136 18,303
2007 22,247 16,818 15,145 8,000 6,050 3,125 22,737
Note: n.a. = data not available. The sum of individual country totals may not match world total since data are from different
sources.
Source: Compiled by Earth Policy Institute, 1980-1995 world data from Janet L. Sawin, "Wind Power Still Soaring," in
World watch Institute, Vital Signs 2007-2008 (New York: W. W. Norton & Company, 2007); 1980-1999 data from World
watch Institute, Signposts 2001, CD-ROM (Washington, DC: 2001); 1995-1999 China data from Li Junfeng et al., 2007
China Wind Power Report (Beijing: Chinese Renewable Energy Industry Association, 2007); 2000-2004 Denmark data
from American Wind Energy Association, Global Wind Energy Market Report (Washington, DC: 2002-2005); 2000-2005
country data (Denmark 2005) from Global Wind Energy Council (GWEC), Global Wind 2006 Report (Brussels: 2007);
2006-2007 country and 1996-2007 world data from GWEC, "U.S., China & Spain Lead World Wind Power Market in
2007," press release (Brussels: 6 February 2008).

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Figure7.9.5: Global Wind Power Capacity by Country

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7.10 Kyoto and Wind Energy:


In direct terms, Kyoto has not done as much as hoped to foster the renewables industry. But
energy policies in Europe, North America, and Asia have all responded, albeit in different ways,
to the first attempts to control greenhouse gases globally. Europe, Japan, and New Zealand have
responded with support measures directly designed to assist in reaching emission reduction
goals. U.S. and Australian states and Canadian provinces have responded to the failure of their
federal governments to live up to their commitments. With overwhelming public support, they
have taken matters into their own hands and taken bold steps in the arena usually reserved for
federal governments. In PR China and India, Kyoto’s Clean Development Mechanism (CDM)
has provided a boost to renewable energy in general and to wind power in particular. There are
now more than 15,000 megawatts of wind power in the CDM ‘pipeline’, mostly in PR China and
India. But all of this is just a prelude to the much greater effort that will almost inevitably result
from the current round of climate negotiations. The Kyoto reduction targets were an aggregate
reduction of 5.2% for industrialized countries. The ‘indicative range’ being discussed now is an
order of magnitude larger, from 25-40% by 2020. New mechanisms will build upon the
successes and learn from the failures of the CDM, seeking to broaden the reach of the carbon
markets to all emerging economies, as well as to help provide funding to assist the victims of the
early ravages of climate change, most of which are among the poorest of the poor. The power
sector has a crucial role to play in reducing CO 2 emissions, and the large-scale deployment of
renewable energy is the only way to make substantial reductions on the supply side in the short
to medium term.

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7.11 Croatia
About Croatia
The Republic of Croatia is a parliamentary democracy, like most countries in Western and
Central Europe. After its Constitution was amended in November 2000, the semi-presidential
system was transformed into a pure parliamentary system.
The Government, headed by the Prime Minister, is politically responsible only to the Croatian
Parliament (Sabor), which is comprised of the House of Representatives (Zastupnicki Dom).
Members of the House of Representatives serve four-year terms.
The President of the Republic is the Head of State, directly elected for a term of five years. The
President is also Commander in Chief of the Armed Forces, and represents the Republic of
Croatia.
Table 7.11.1: About Croatia
Official name Republic of Croatia (Republika Hrvatska)
Capital Zagreb
Population 4.443 million
Area 56,594 km²
Density 78 inhabitants per km²
Distribution 53.3% urban population, 46.7% rural population (2002)
Bosnia and Herzegovina (border- 932 km), Hungary (329 km), Serbia
Neighbours
(241 km), Montenegro (25 km), Slovenia (670 km)
Croat 89.6%, Serb 4.5%, Bosniac 0.47%, Italian 0.44%, Hungarian
Population profile
0.37%, Albanian 0.34%, Slovene 0.3%, Roma 0.21% 1
Languages Croatian (official), Serbian and other minority languages
Roman Catholic 87.8%, Orthodox 4.4%, Muslim 1.3%, Protestant
Religion
0.3%, others and unknown 6.2% 1
Life expectancy Average: 74 years, 70 years (male), 78 years (female) (2001 Census)

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7.11.1 Economic Profile of Croatia:


Table 7.11.1: About Croatia
GDP per capita 50% of the EU25 average
Economic growth: 5.3% in 2003; 3.8% in 2004; 4.3% in 2005; 4.8% in 2006
Inflation rate: 2.9% annual average in 2007
Unemployment rate: 9.1% (LFS 2007)
1 Kuna or HRK = 100 Lipa; 1 Euro = HRK 7.28
Currency:
(rate March 2008)
Current account balance: - 7.7% of GDP (September 2007, four quarter moving average).
Gross external debt 88.4% of GDP (end-2007)
Exports to the EU: 64.3% of the total; Imports from the EU:
Trade with EU (2006)
67.2% of the total

Croatia's economy registered strong and accelerated growth. Macroeconomic stability, including
low inflation, was maintained. However, external imbalances may affect macroeconomic
stability. Fiscal consolidation continued and needs to be further pursued. Structural reforms as
well as privatisation moved forward slowly. The overall business environment improved but
inefficiencies in public administration and the judiciary continued to hamper private sector
development.

As regards economic criteria, Croatia is a functioning market economy. It should be able to cope
with competitive pressures and market forces within the Union in the medium term, provided
that it implements its comprehensive reform programme with determination in order to reduce
structural weaknesses.

Broad political consensus on the fundamentals of a market economy has been maintained.
Stability-oriented macroeconomic policies have contributed to low inflation, exchange rate
stability and a significant reduction of the general government deficit. Economic performance
remained strong and private investment picked up further. Employment rose and unemployment,
though still high, declined. The business environment improved and some important privatisation
deals were prepared or concluded. The government's capacity to design medium-term economic
policy frameworks was further strengthened. New prudential regulations led to a stronger
recapitalisation of banks, conducive to financial sector stability. Further progress was made in

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enhancing competition in the telecommunication sector. Reforms of the loss-making railway


system continued. Croatia's economy is well integrated with the EU.

However, economic policy coordination remained weak. Rising external imbalances imply
potential risks to macroeconomic stability and the need for stronger fiscal consolidation. The
benign economic environment and strong revenues were not fully used to reduce the budget
deficits, but led to an expansion of spending instead. Subsidies to loss-making enterprises and a
high level of current spending continued to slow down structural change and to put a strain on
public finances. Progress on the restructuring of the enterprise sector was uneven and state
intervention remained significant. Private sector initiative was hampered by inefficiencies in
public administration and the judiciary, partly undermining market entry and exit procedures and
the enforcement of property and creditor rights. Labour mobility remained limited. In order to
improve prospects for sustained growth and real convergence, Croatia needs to reinforce and
deepen structural reforms.

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7.11.2 RES Targets

The cost benefit analyses carried out for renewable energy sources in Croatia have shown that it
is economically justified to promote the use of renewable energy sources up to a certain level,
and thus to avoid costs of environmental damages and damages to public health, which would
occur if the same amount of energy was generated from fossil power plants. This level will be set
by the Government of the Republic of Croatia on the basis of the Law on Electricity Market.

Thereby, the draft Decree on minimum share of RES and cogeneration, prepared during 2005
defines renewables obligation of 1100 GWh until 2010 for the suppliers of electricity consumers,
excluding electric energy produced in hydro power plants larger then 10 MW. The proposed
quantity of 1100 GWh, according to projected future consumption, would represent a share of
approx. 5.8% of total electricity consumption in 2010. The current share of renewables in Croatia
(excluding large hydro) is around 0.7%.

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Specific risks related to institutional and contractual relationships of the market operator with
other stakeholders in the wind business.
Table 7.11.2: Specific risks, Wind Business Croatia
Target Risk Impact Probability
National targets met in 2010 Contractual arrangements High Medium
between market operator and
suppliers missing or not
effectuated
Stable growth of wind energy Balancing of the system not Medium Low
carried out by system operator
Stable growth of wind energy Market operator doesn’t have a Medium Medium
buyer for surplus renewable
electricity
Wind developers active and Wind generators cannot settle High Medium
enter in contractual relationship debts, market operator not
with market operator covered with guarantees
Support system effective Payment discipline affects filling High Low
of the mechanism for
incremental cost distribution
Support system effective Renewables fee not amended in High Medium
accordance with the dynamics of
RES-E implementation

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7.11.3 Region Wise Climate and wind speeds at hub height of 10mts:
• The Pannonian and Peri-Pannonian area comprises the lowland and hilly parts of
eastern and northwestern Croatia; mountains higher than 500 m are rare and of an insular
character. Most of this area is being used for farming and livestock breading. Slavonija
and Baranja in the east are the most suitable for growing cereals; the humid valleys and
the hills are richly afforested while the northwestern part, which gravitates to Zagreb, is
industrially the most developed.
Climate Range: Winter temperatures range from -1 to 30°C in the continental region
Summer temperatures range from 22 to 26 °C in the continental region
Wind Speed: 4 - 5.8 m/s
• The hilly and mountainous area, which separates Pannonian Croatia from its coastal
part, is less developed. Its future development will be based on its transit importance, the
growth of the already existing wood and timber industry, and the still underexploited
potential for the production of healthy food, and winter and rural tourism.
Climate Range: Winters Temperature range: -5 to 0 °C in the mountain region
Summer Temperature range: 15 to 20 °C in the mountain region
Wind Speed: Around 2 m/s.
• The Adriatic Area includes the narrow coastal belt separated from the hinterland by high
mountains. This is predominantly a karst area with very dry summers. The few streams
mainly follow narrow gorges in breaking their way through to the sea. The Croatian
coastal area may further be divided into the northern (Istria and Kvarner) and southern
part (Dalmatia). It also lends itself to a longitudinal division into the islands, the coast
proper and the immediate hinterland. The Croatian Adriatic coast is one of the most
indented in the world: it has 1246 islands and islets with a total coastline of 4058 km, the
total length of the mainland coast being 1777 km. The largest island is Cres; other large
islands include Krk, Brac, Hvar, Pag and Korcula. The largest peninsulas are Istria and
Peljesac, and the largest bay is Kvarner Bay.
Climate Range: Winter temperature range: 5 to 10 °C in the coastal region.
Summer Temperature range: 26 to 30 °C in the coastal region.
Wind Speed: Northern Part: 2 - 5.1 m/s
Southern Part: 2.5 - 4.6 m/s

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7.11.4 National Energy Programme:


The project of a National Energy Program was initiated within PROHES: Program of
Development and Organisation of the Croatian Energy Sector. It was launched to develop an
energy management framework that will promote clean technologies, shift to fuels with lower
carbon contents (natural gas), diversification of energy resources, higher EE&RES utilisation
demand side management, energy savings development of energy market and environmental
protection.
The following programs have been set up:
 KUENzgrada (Energy efficiency in building construction)
The basic goal of energy efficiency within the program KUENzgrada is the reduction of
energy needs during design, construction and utilisation of buildings and settlements, and
during the restoration of the existing buildings as well as the creation of suitable
microclimatic parameters in areas around the buildings with the decrease of environmental
impact. This programme includes the changes of existing legislation, building physics,
energy audits in buildings, passive solar architecture, renewable energy sources in buildings,
promotion of energy efficiency and pilot projects.
 MIEE (Industrial energy efficiency network)
Within the MIEE program, consumers in industry and service sectors, as well as in the public
sector are encouraged to increase energy efficiency through an organised structure. The
direct communication between large energy consumers, energy producers, expert and
consulting bodies, and government institutions has to be enforced. It is also important to
involve the consumers in the industry, commercial and public sector as well as to involve the
designers in informing campaigns and training programs and in decision making. The
Cooperation between scientific and expert institutions from diverse sectors on energy issues
and the cooperation with similar institutions and energy programs have to be enlarged.
 KOGEN (Cogeneration program)
In cogeneration (KOGEN) the main goal is to promote construction and utilisation of
cogeneration plants in all buildings where they are technologically and economically
justified. The realisation of this program includes the establishment of a legislative, financial
and technological framework for cogeneration plant construction.

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 KUENcts (Centralized thermal systems’ energy efficiency program)


For centralised thermal systems (KUENcts) in Croatia it is necessary to encourage
development and enhancement of centralised thermal systems in areas with a large density of
heat consumers or combined electric energy and heat consumers. It is also important to
enhance efficiency of the existing systems. Progress can be seen in:
o Preparation of a legislative framework for the heat sector and heat tariff
development
o Preparation of the Handbook of energy management in CTS (DH/CHP, HOB)
o Realisation of existing pilot projects and establishment of new ones
o Least-cost energy planning for DH systems
o Promotion, education and capacity building.
 TRANCRO (Transport energy program)
Energy efficiency in the transportation sector is tried to be increased through different
measurements:
o "Cost - benefit analysis" of various measures (projects) for sustainable transport
system development
o Necessary legislation - measures – subsidies
o Action plan - for Croatian Government
o Pilot projects and marketing
 BIOEN (Biomass and waste energy use program)
According to the National Energy Sector Development Strategy, the project has shown that
electric energy generation from biomass and waste could meet up to 15 percent of the total
primary energy consumption until 2020, which is a realistic assumption when compared to
Austria, Finland and Denmark. BIOEN program includes sub-program BIODIZEL, the goal
of which is to develop steady biodiesel production and to spread use of biodiesel in Croatian
transport and energy sector.
 SUNEN (Solar energy use program)
The program for solar energy use SUNEN has shown that solar energy utilisation combined
with LPG and/or natural gas is a technologically and ecologically acceptable solution for the
Croatian coastline. The hybrid combination of solar energy, wind energy and LPG can help

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solve the problem of energy infrastructure on islands and also start the development of
traditional island activities with the engagement of local resources in accordance with the
strategic development of Croatian islands.
Solar radiation measurements were initiated:
o Multipyranometer Array Measurement of Solar Radiation Components in Zagreb
and Split (cooperation with University of Split)
o CARDS National Action Program Croatia 2003 project Assessment of Wind and
Solar Energy Resource in a Pilot Croatian Region
o Solar Radiation Atlas of Croatia.
 ENWIND (Wind energy use program)
For wind energy utilisation by new generation wind turbines, the program for wind energy
use, ENWIND, has been started. The program includes the assumptions for an economical
wind energy use. Preliminary wind resource in Croatia estimates 1300 MW and 3
TWh/annum, notably on the coast. There doesn’t exist a wind atlas of Croatia but within the
program a number of projects are in progress to overcome the lack of data:
o Program of continuous wind monitoring in Croatia
o Development of Pre-commercial Wind Turbine
o Assessment of Wind and Solar Energy Resource in Pilot Croatian Region (EC
CARDS Program)
 MAHE (Small hydro plant construction program)
The basic goal of the MAHE program is planning the construction of small power plants,
removing all barriers and obtaining conditions for a rapid construction of small power plants
in Croatia. Croatia has a long tradition of using hydroelectric power with an estimated
potential for small HPPs (<10 MW) of approx. 180 MW, 560 GWh. The environmental and
planning constraints significantly reduce the potential. Some pilot projects were implemented
through the cooperation with country authorities. A limited commercial interest can be
noticed and the highest interest is shown by SHPP’s which is owned by HEP.

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7.11.5 Support Mechanisms and Feed-In Conditions for Electricity from


Renewable Energy Sources:
The Croatian government has started to reform the energy sector, in order to push the share of
renewable energy sources from presently 1 % to 5.8 % until 2010. The present Croatian energy
law has been supplemented by five regulations, which are defined for the coming 12 years. They
entered into force as from July 1st 2007.
The feed-in tariffs for electricity from RES are set according to the energy source it is generated
from. Green electricity producers which have signed a contract with the market regulator are
eligible for these tariffs.
Table 7.11.5: Wind Power Tariffs, Croatia

The second regulation is dealing with subsidies for electricity from RES and cogeneration units.
It is defining the amount of the subsidy and how it has to be accounted, raised and allocated.
Green-electricity subsidies granted for:
2008: 0.0198 kn/KWh (~0.0027€)
2009: 0.0271 kn/KWh (~0.0037€)
2010: 0.0350 kn/KWh (~0.0048€)
1€ is approx. 7.2773 HRK (as of Oct. 1st 2007, according to OeNB)

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7.11.6 Proposal of organisational arrangements for grid-connected renewable

electricity generators:
Figure 7.11.6:

The players on the stage are renewable generators, the market operator (entitled by the law to
ensure purchase of renewable electricity), supply companies (obliged by the law to include a
certain quantity of renewables in their energy mix), and electricity buyers. The renewable
producer bills the market operator for delivered electricity, the market operator bills all supply
companies for the belonging amount of renewable electricity (according to their market share),
and suppliers bill the final buyers (electricity consumers). In the backward direction, the money
flows from buyers to renewable generators via electricity suppliers and the market operator.
When buyers pay their bill, part of the money, equal to renewable charge multiplied by total
consumption, automatically goes to the Mechanism for incremental cost distribution. From this
mechanism, renewable generators receive a bonus for each kWh they produce. The bonus could
be interpreted as a kind of remuneration for the "green" component of renewable electricity. The
main part of the remuneration actually comes from the payment for electricity – this payment per
kWh is a compensation that should reflect the “naked” market value of electricity.
It is obvious that the system must be backed up by an effective information and communication
system that enables the market operator to get the relevant data on time. The information on total
electricity supply at, say, monthly base, must be known to the market operator quickly after the

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month passed, in order to enable billing of renewable charges that are tied to the total electricity
consumption. Although simple, the system will probably need months to brake-in and quite a lot
exercise to become effective.

7.11.7 Wind Power (Croatia):


In 2005, almost 2 GWh of electricity were produced by wind power plants in Croatia. This first
wind farm was installed on the island of Pag in August 2004 by Adria Wind Power, and
construction for another wind farm in Trtar-Krtolin near Sibenik by EnerSys started in December
2005 and entered operation. 14 wind power generators (Enercon E-48) with an installed capacity
of 14 MW are scheduled to produce 30,000 MWh/yr. The total investment costs were 12.8
million Euro, the project is financed through loans by Bank Austria Creditanstalt and Zagrebacka
banka with a loan repayment period of 14 years. The electricity will be purchased by HEP at the
contracted price of 61 Euro per MWh. The agreement on electricity off-taking is settled for 15
years.
Till Dec. 2007 just 17.8 MW was installed and Croatian power system can support upto 360
MW.
Table 7.11.7: Wind Power Projects (Croatia):
Project Title Capacity MW Status Sponsor Turbine Supplier

Ravne1 Wind Project 5.95 Operating Adria Wind Power Vestas


Trtar-Krtolin
11.2 Operating EnerSys Enercon
Wind Project
Vratarusa 66 Operating Valalta Vestas
Orlice Wind Project 9.6 Operating EnerSys
Dubrovnik Wind 52 Planned Adria Wind Power
Cicarija 80 Planned Valalta
Prutna 10 Planned Adria Wind Power
Rudine 45 Planned Adria Wind Power
Sibenik 12 Planned EnerSys
Komorovac 5.6 Planned Adria Wind Power

Business Case (‘Live’):


Wind farm Senj, Croatia: Project Summary.

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Investment volume wind farm/


84 Mio. Euro
transformer station:
Upon approval and advance notice of the
Prospective installation:
building permit 2007
Launch of operation: May 2008
Equity = 20 % of the investment

This wind farm project was designed and constructed as well as operated by the Wallenborn
Group.

Technical data:
Wind farm: 22 wind turbines
Capacity: 66 MW
Power generation: 180,000,000 kWh / per annum
Emission reduction: 200,000 t CO2 / per annum
Plant model: Vestas V 90, 3 MW
Hub height: 80 m
The wind farm supplies electricity to approx. 45.000 households of 4 people.

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7.11.8 Croatia’s National Allocation Plan

• It will be based on EU-ETS principles; Croatia’s draft NAP will be assessed by the
European Commission
• It will include approx. 50 installations
• It will cover approx. 35-40% of Croatia’s emissions
• Croatia’s level of greenhouse gas emission in 1990 amounted to 31.7 MtCO2-eq.
• Croatia’s baseline emissions were set at 34.6 MtCO2-eq. => Croatia’s obligation is a
reduction of -/- 5% => Croatia’s target for year 2010 is 32.9 MtCO2-eq.
Table 7.11.8.1:

• The mentioned measures cannot be implemented without special incentives and an


adequate energy policy. Implementation of concerned measures is adopted through
Energy Sector Development Strategy (policy document adopted by Parliament).
• The secondary regulation for introduction of renewable energy sources (wind, small
hydro, bio-energy and geothermal) will stipulate connections of these sources to the
grid by providing energy subsidies.
• Every power supplier will be obliged to have certain proportion of renewable energy
in its portfolio, and revenue for subsidies will be collected through energy taxation.

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Table 7.11.8.2:

Source: “PROJECTIONS OF GREENHOUSE GAS EMISSIONS of Croatia”, REPUBLIC OF CROATIA MINISTRY OF


ENVIRONMENTAL PROTECTION, PHYSICAL PLANNING AND CONSTRUCTION.

• In “With additional measures” scenarios, about 300 MW installed capacity of


renewable power plants in wind power plants, small hydro plants and biomass
cogeneration plants is assumed.
• Those plants should produce 878 GWh of electricity in 2010. Accordingly, 690 Gg of
equivalent CO2 emissions will be avoided.
• This scenario estimates that 576 GWh of electricity will be come from wind farms, in
2010 as compared to 570 GWh from Hydro.
• In 1990 the specific emission per KWh of electric power supplied in the public
network amounted to 0.250 kgCO2-eq/KWh

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7.11.9 Croatia in Kyoto Protocol Commitment:

• Emissions base year (incl. 3.5 Mt CO2 eq.) 34.6 Mt


• Emissions 2005 29.7 Mt
• Emissions base year (for projections) (incl. 3.5 Mt CO2 eq.) 35.2 Mt
• Projections 2010 with existing measures 35.3 Mt
• Projections 2010 with additional measures 31.4 Mt
• Kyoto target (absolute) 32.9 Mt
• Kyoto target (% from base year) -5.0 %
• Change base year to 2005 -14.1 %
• Change 2004–05 +1.6 %
• Change base year to 2010 with existing measures +0.4 %
• Change base year to 2010 with additional measures -10.8 %
• Distance to linear target path 2005 -10.4 index points

Figure 7.11.9: Greenhouse gas emission trends and projections in Croatia 2007
Source: Greenhouse gas emission trends and projections in Europe 2007 – Country profile, EU.

According to the projections in the Second, Third and Fourth National Communication,
Croatia is projected to its Kyoto Protocol target of a 5%
reduction in base year emissions by 2010. Greenhouse gas emissions are projected to exceed
the Kyoto commitment by 5.22 MtCO2eq in the “with measures” scenario and by 1.3
MtCO2eq in the “with additional measures” scenario. Strong economic growth is foreseen for
period until 2012. Significant growth of tertiary sector – tourism, resulting into strong

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increase of emissions from transport and air-conditioning. Except for hydropower, renewable
energy is in its early phases (solar, wind, biomass)

7.11.10 Will new energy regulations help wind industry to emerge in Croatia?
One would conclude: yes, if minimum:
• The proposed draft regulation is adopted;
• The market operator is assured by the guarantor/state;
• The market operator has access to payment assurance instruments;
• The market operator is entitled to make decisions on the amount of the renewables fee;
• The system operator provides balancing services and is paid through a network fee;
• Suppliers are obliged to resell total renewables generation to final consumers regardless
of year-to-year variations;
• Large hydro projects are not eligible producers.

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7.12 Poland
Table 7.12.1: Country Summary Table:

Demographical Information
Population, millions (2003) 38.3
Land area, thousand Ha (2002) 31,269
Macroeconomic Information (2003)
GDP, billion US$ 209.5
Real GDP growth rate, percent 3.70
Foreign direct investment (net), million US$ 3,950
Electricity sector
Electricity tariff, US¢/kWh (2002) 8.8
Collection rate, percent (2002) 90
Load utilization factor, percent (2000) NA
Current Feed-In (Euro/kWh) 0.080
Renewable Target (2010) 10.14%
Electricity disposition, billion kWh (2003)
Generation 141.25
Consumption 121.26
Exports 15.10
Imports 5.00
Sources: European Bank for Reconstruction and Development, U.S. Energy
Information Administration, Food and Agriculture Organization of the United

Nations.

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7.12.2 Energy Policy, Barriers and Incentives

The Development Strategy of Renewable Energy Sector was adopted by the Parliament of the
Republic of Poland in August 2001.
The strategic objective is the increase the share of energy from renewable sources in Poland's
primary energy balance to 7.5 percent in 2010 and to 14 percent in 2020.
The Minister of Economy may, in the way of an ordinance impose on the energy enterprises
dealing with trade of electric energy and heat, the obligation to purchase electric energy and heat
produced by unconventional sources including renewable sources, and determines the detailed
scope of this obligation.
Recently, new regulations from the Ministry of Economy oblige power utilities and energy
turnover companies to buy energy from renewable sources. This year the limit is set at 2.5
percent of total produced and sold energy. To catch up with the European Union standards
Poland needs to install more than 1,000MW.

7.12.3 Wind Conditions in Poland.


Due to excellent wind conditions and legal regulations, Poland is one of the most promising wind
energy markets in Europe. The country possesses plenty of potentially profitable locations and
great development possibilities.
Much of Poland has favorable conditions for wind energy production. The average wind speed in
Poland varies between 5.5 and 7.0 m/s at a height of 50 meters. Assessed productivity of one 2
MW machine may be equal to as much as 5,000 MWh per year.
A country wide wind-atlas is available. According to this atlas there is one area in the northwest
with wind speeds above 6 m/s at 10m. The Baltic coast, one large central area and an area to the
north show wind speeds of 5 m/s.
There is an industry association and two local companies which manufacture Polish wind
turbines. These are a 160 kW unit developed in 1993, and produced at the NOWOMAG Factory
and the new approach of the KOMAG center aiming at a development of the prototype of state
of the art wind turbine of 1MW according to the original technical concept, which is a
compromise between present multi-gear and gearless solutions in wind turbines.

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Poland has a good technical potential for wind energy development and local manufacturing. The
best sites are in the southern mountainous region and along the Baltic coast. The wind resources
range from more than 1,000 kW/m2/year near the Baltic coast to less than 400 kW/m2/year in the
center of the country. In the mountain range some sites are said to have high average wind
velocities (10 m/s) due to local conditions.
Recently, the Risoe National Laboratory from Denmark widened the geographical scope of wind
estimates in the European Wind Atlas to now include Poland. Risoe’s estimates indicate that
wind conditions along the Pomeranian Coastline are similar to those in Denmark and the
Netherlands. In Central Poland, wind resources are very similar to those found in Germany.

Figure 7.12.3.1 Wind Atlas of Poland

Source: Polish Wind Energy Association

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Figure 7.12.3.2:

7.12.4 Poland Areas/Projects with High Potential for Wind Energy


The installed capacity in Poland is ~280 MW (on 29.01.2008).
Table 7.12.4: Polish Wind Power Projects

Projects: Completed Capacity Turbines Sponsor


Elektrownie Wiatrowe
Barzowice 5.1 MW 6 x (Vestas 850kW)
S.A.
Cisowo 18 MW 9 x (Vestas 2MW) Energia Eco
Zagórze 30 MW 15 x (Vestas- 2MW ) EPA, ELSAM
Lisewo 10.8 MW Enercon Euro wind S.A.
Tymien 50 MW 25 x (Vestas- 2MW) Energia Eco
Puck 22 MW 11 x (Gamesa- 2MW) EPA
Iberdrola Energia
Kisielice 40.5 MW 27 x (GE-1.5 MW)
Odnawialna
Elektrownie Wiatrowe
Kamieńsk 30 MW Enercon
S.A.
Jagniątkowo 30.6 MW
24 x (Vestas-2MW)
North Polish Wind Farm 48 MW Mitsui, J-Power
turbines
Projects:
Capacity Turbines Sponsor
Under-Construction
Karścino 69 MW
Iberdrola Energia
Malbork 18 MW 12 X (GE- 1.5 MW)
Odnawialna

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There are also single turbines or groups of a number of small turbines distributed among the
whole country. In total in Poland there are 142 wind turbines of various capacities. The average
capacity of a wind turbine located in Poland is approximately 1.52 MW.
Wind energy density in Poland is one of the smallest in Europe. Installed capacity per capita is
0.0037 kW, whereas per km2 of land area the figure amounts to 0.45 kW.
Production of Wind Energy
- 2004: 142.3 GWh,
- 2005: 135.3 GWh,
- 2006: 245.5 GWh* (* the amount of energy covered by certificates of origin issued
before 07.03.2007; the amount may increase as there is no statutory deadline for
submitting applications for certificates of origin to the Energy Regulatory Office),
- First half of 2007: 196.9 GWh* (* on the basis of issued certificates of origin of energy
from RES as of 30.06.2007).
Share of wind generation in domestic consumption of electric energy:
- 2004: 0.1% (142 GWh/ 144 TWh),
- 2005: 0.09% (135 GWh/ 145 TWh),
- 2006: 0.16% (245.5GWh/ 149TWh).
Government plans for year 2010:
- 2000 MW of installed capacity,
- 2.3% share of wind generation in domestic energy consumption,
- Power growth required in the period 2006 - 2010: over 1800 MW, i.e. approximately 450
MW of new installations per year.

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The share of the amount of the electric energy produced by non-conventional and
renewable sources in the total electric energy sales amount in particular year for the
particular company is no less than:
• 2.4% in 2001
• 2.5% in 2002
• 2.65% in 2003
• 2.85% in 2004
• 3.1% in 2005
• 3.6% in 2006
• 4.2% in 2007
• 5.0% in 2008
• 6.0% in 2009
• 7.5% in 2010 and the following years.

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7.12.5 Estimation of safe wind energy capacity in the NPS in accordance with
power penetration factor:
Assumed indices for 2020
In the study data for year 2020 discussed in Paragraph 2 were assumed as the basis. The base
year is 2005.
I) Assumed energy consumption in 2020 – 267 TWh
Linear growth of system generation, proportional to increase in energy consumption, is assumed.
Due to the fact that today’s energy production is based mainly on conventional /thermal/
generation, the amount given in Item II corresponds to approximated power of total generation
dominated by conventional sources operating with approximately 50% efficiency.

II) Equivalent /without regard to displacing part of conventional sources by wind / total
generation capacity in conventional sources in year 2020 – 62 000 MW

Assumptions
III) Generation efficiency for wind turbines – 20 to 35 %
For further calculations 25% efficiency for wind turbines is assumed.
IV) Maximum wind capacity penetration in the NPS in 2020 – 20 %
Calculations
Assuming that in 2020
• Efficiency of conventional sources in the system will be 50 %,
• Efficiency of wind sources will be 25 %,
• Wind capacity penetration will be 20 %,
Then:
V) Capacity of wind generation in the system by 2020 may amount to approx.: 13,600 MW
VI) Total capacity of conventional generation by 2020 may amount to approx.: 54,000 MW
VII) Total generation capacity by 2020 may amount to (VI+VII) approx.: 67 600 MW

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Discussion of results
Most important simplifications in the above calculations include:
- Assuming linear growth of energy consumption and system capacity. Available documents
assume construction of new capacity in the order of 21 to 23 thousand MW by 2020; however,
these studies do not consider increasing wind energy potential,
- Assuming that total effectiveness of conventional generation in 2020 will be at the level of base
data (today approximately 50%). Assuming conventional sources efficiency at the level of
approximately 60 %v wind capacity fore assumed penetration level decreases by approximately
2000 MW. Comparing the results with installed capacity in Germany or Spain and wind energy
development plans in the USA or Great Britain one may deem them completely accurate and
feasible.
Determination of amount of electricity generated in wind turbines by 2020
On the basis of amounts calculated in Item VI and assuming 25% generation efficiency in wind
turbines one may determine:
IX) Amount of energy generated in wind turbines in 2020 approx. -30 TWh.

Conclusion
For assumed wind energy capacity penetration in the system (20%) total installed capacity in
wind turbines may reach the level of approximately 13 600 MW. With these values the amount
of electricity generated by wind turbines in 2020 will amount to 30 TWh.

Comparative assessment of potential of wind turbine:


• The area of arable land in Germany amounts to - approx. 17 million ha
• The area of arable land in Poland amounts to - approx. 15.9 million ha
• Current number if wind farms in Germany - approx. 20 000.
• Average size of the turbines installed in Germany - approx. 1 MW
• Average size of the turbines which will be installed in Poland - approx. 1.5- 2.0 MW
• Capacity of wind farms possible to be installed in Poland indicated on the basis of the
index of land used for the turbine from the German market - 18,800 MW.

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7.12.6 Poland in Carbon Market:


• Emissions base year (initial report) 586.9 MtCO2eq
• Emissions 2005 399.0 MtCO2eq
• Emissions base year (for projections) 586.9 MtCO2eq
• Projections 2010 with existing measures 420.0 MtCO2eq
• Kyoto target (absolute) 551.7 MtCO2eq
• Kyoto target (% from base year) - 6.0 %
• Change base year to 2005 - 32.0 %
• Change 2004–05 + 0.6 %
• Change base year to 2010 with existing measures - 28.4 %
• Emission Reduction till 2006 - 28.9%
Figure 7.12.6: Poland in Carbon Market

Source: Greenhouse gas emission trends and projections in Europe 2007 – Country profile, EU.

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Joint Implementation Project: Skrobotowo Wind Park


This is an example of the first Polish Joint Implementation Project in framework of the Dutch-
Polish Memorandum of Understanding. The project concerns a 60 MW wind farm located in the
Northwestern part of Poland in the Karnice Municipality, financed partly by Dutch government
in exchange for Emission Reduction Units, ERUs. The wind farm will consist of 30 wind
turbines of 2 MW each. Nuon International Projects, based in Arnhem, and EPA, based in
Szczecin, Poland, jointly collaborate in the development and operation of this wind farm. Nuon,
one of the largest multi-utility companies in The Netherlands will be the main shareholder in the
Special Purpose Company (SPC) to be founded for realisation and exploitation of the plant. EPA
will primarily develop the project depending on acquisition of the necessary permits. The main
turnkey contractor will be Vestas, realizing the project up to the start of operations. Moreover,
Vestas will support the operations and maintenance by providing warranties to the project, and
train EPA staff to perform maintenance. Also the National Fund for Environmental Protection
and Water Management is interested to take an equity share in the project. The wind farm is
expected to generate 125,000 MWh per year, and has an assumed operation lifetime of 20 years.
Without implementation of this project the electricity demands of 125,000 MWh would be
satisfied by coal and gas fired plants. Furthermore, through implementation of this project know-
how of wind energy will be transferred to Poland. It can pave the way for follow-up projects.

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Projected ERUs:
The amount of avoided Green House Gases, GHG emission will be calculated on the basis of
coal consumption needed, in the theoretical power plant, to produce the same amount of
electricity that wind farm will do (baseline). The amount of ERU's (Emission Reduction Units),
transfer to the Dutch side will result from the amount of net electrical power production, sold to
Polish Power Grid Companies, during the commitment period. During the years 2008 - 2012, the
Dutch side will receive over 580 of ERUs as recompense of financing the project. In the project,
scenario “Continuation of the current situation” was selected as the most likely baseline to be
used for this study. According to EUROPROG 26th 1998, the average electricity produced in
Poland in 2008-2012 amounts to 188.70 TWh/year. In the same time CO2 equivalent emissions
will be at the 178,600 kton/year level. NOx and SO2 emissions are estimated adequately at 290
and 600 kton. It follows that the average emission factor used to calculate the total CO2 emission
is 0.94648 kton/TWh for the budget period. As mentioned above the farm is expected to
generate approximately 125.078 GWh/year. The own electricity use of the project will be 1.787
GWh/year. Thus, the net output of the project is calculated at 123.291 GWh/year and the annual
emission reduction 116.7 kton per year (116,700 ERUs) or 583.5 kton CO2 for the budget period
(583,500 ERUs). Assuming that the price per ERU will be 9 Euro, the total ERU’s will amount
to 5,251,500 Euro in the budget period.

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7.13 Kyoto Protocol and EU-ETS:


Table: 7.13

EU
Change in greenhouse gas Kyoto Protocol
Assigned
Country Emissions (1990-2004) excluding Obligation 2008-
Objective
LULUCF 2012
for 2012
Germany -17% -21% -8%
Spain 49% 15% -8%
France -0.80% 0% -8%
Greece 27% 25% -8%
United
-14% -12.50% -8%
Kingdom
Portugal 41% 27% -8%
Ireland 23% 13% -8%
Croatia -5.40% -5% -8%
Poland -32% -6% -8%

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7.14 Linking project credits to the EU emissions trading scheme:


Joint Implementation (JI) and Clean Development Mechanisms (CDM) are:
• Primarily designed to provide flexibility to Parties
• Some Member States already prepare their use (Dutch ERUPT/CERUPT, Austria,
Finland)
• But mainly driven by the private sector
• Project-based instruments governed by International Law
EU Emissions Trading Scheme (EU ETS) is:
• Designed as an entity-based domestic cap and trade emissions allowance programme
• Governed by Community Law specifying specific conditions for trading between entities
and using a special unit of trade – allowances – within the EU
• Compatible with international emissions trading under the KP and contribute towards
achievement of KP target entity-based domestic cap and trade allowance scheme
Timing
• three-year mandatory “warm-up” phase from 2005 to 2007
• five-year mandatory Kyoto phase from 2008 to 2012
Coverage
– Five major downstream sectors with thresholds
– start with carbon dioxide
Allocation
– Member States may auction up to 5% for 2005 to 2007 and up to 10% for 2008 to 2012
– Each Member State draws up an ex-ante national allocation plan
 Transparency and comments by the public
 Scrutiny by the Commission
– Member States observe common allocation criteria
Monitoring and reporting
• Companies will monitor and report emissions following the monitoring and reporting
guidelines adopted pursuant to the Directive
• Emission reports will be subject to independent verification

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Registries
• Member States and the Community must establish and maintain electronic registries to
track allowances.
• At Community level a transaction log will be developed and maintained
Sanctions
• For every ton of emissions that is not covered by an allowance a company will have to
pay a penalty of 40 Euro in 2005 to 2007 and 100 Euro thereafter.
• Companies will also have to surrender a compensating amount of allowances in the
subsequent year.
What does “linking” mean?
Linking JI/CDM to the EU ETS
• Linking JI/CDM to the EU ETS means creating a direct link to provide more flexibility
and certainty to legal entities.
• In concrete terms, linking means that JI/CDM credits can be used by operators to fulfill
their obligations under the EU ETS.
• Linking implies the recognition of JI/CDM credits as equivalent to allowances from an
environmental and economic point of view.
Creating a bridge to Kyoto
Linking JI/CDM to EU ETS implies a bridge between two different frameworks:
Community Cap and Trade / Kyoto Project Mechanisms
• Different nature: cap and trade of direct emissions (ex-ante allocation) / baseline and
credit (ex-post verification)
• Different regulatory context and institutions involved
• Different timing
• Different unit of trade: allowances / ERUs and CERs
• Different level of certainty: EU ETS final / ratification of Kyoto Protocol necessary for
implementation of JI/CDM
Elements to be taken into consideration
There is urgent need to preserve the architecture and the environmental integrity of the
Community emissions trading scheme.

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It is necessary to have compatibility with the Kyoto Protocol and the Marrakech Accords for the
issuance and transfer of JI and CDM credits.
JI can happen within the EU, particularly in an enlarged EU: the importance of the Acquis
Communautaire:
• Baseline JI project
• EU ETS is part of the Acquis: interface with JI

Desirability of linking JI/CDM


• Increase of compliance options for entities
• Reduction in allowance price and compliance costs
• Increase liquidity of the EU emissions trading market
• Stimulate demand for JI/CDM credits
• Contribution to host countries’ Sustainable Development
• Promotion of the transfer of environmentally sound technologies to third countries
• Drive environmental policy integration in EU external policies and contribute to the EU
Strategy on Sustainable Development.
Key elements of the proposal
How to link?
• Conversion of JI/CDM credits into allowances = maintain a single currency within the
EU ETS.
• Participant in EU ETS delivers project credit to national authority and gets issued an
allowance in exchange for it.
When to link?
As of the second trading period in the EU ETS (2008 to 2012) no JI before 2008 available
therefore companies can accrue CDM credits before 2008 and convert them in 2008.
What projects to link with?
All types of credits allowed for conversion except:
• Pursuant the Marrakesh Accords no JI or CDM credits from nuclear facilities
• No credits from carbon sink enhancement projects

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• No issuance of credits for intra-EU projects that would result in double counting
of emission reductions.
How much to link?
As soon as credits amounting to 6 % of initially allocated allowances have been converted the
Commission must undertake a review and decide whether a quantitative limit of for example 8 %
should be introduced.

Double counting
1 ton of emission reduction could be rewarded twice in the carbon market there by,
• Creating a surplus allowance
• Generating a JI credit (ERU)
Activities falling under the scope of the EU ETS as listed in Annex I or “opted-in”
• Example: fuel switching in a district heating plant
Other project activities which directly or indirectly affect emissions from installations covered by
the EU ETS:
• Example 1: hydro power plant
• Example 2: demand side management project (energy efficient light bulbs or double
glazing)
Choice of transitional period for on-going JI projects or immediate switch to ET
Consequences of linking:
More flexibility and certainty for entities and operators:
• If projects fit with objective criteria, entities will have full certainty upon conversion they
can use credits for EU ETS compliance
• Newly issued allowances can be used as any other “original” allowance
• No further restriction on use and banking or other obligations arising from
Kyoto/Marrakech
More control for Member States:
• To check – at the moment of conversion – against objective criteria what project credits
“come in” and if they are compatible with national climate strategy + national JI/CDM
programmes

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• To implement Kyoto Protocol requirements on banking of JI/CDM credits, commitment


period reserve and supplementary

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7.15 The value of carbon transactions in the absence of the Kyoto Protocol
U.S. withdrawal and Russian delays in ratifying the Kyoto Protocol has led many actors to
question the value of engaging in the Protocols project based mechanisms. Whilst the Carbon
Finance Business (CFB) at the World Bank is still confident that Russia will ratify the Protocol,
the CFB also maintains that engaging the Protocols project based mechanisms and purchasing
high quality emission reductions is of considerable value even in the absence of the Protocol.
If the Kyoto Protocol does not come into force the problem of climate change will not disappear.
Regional and national trading systems to tackle the problem are already under development, and
in the absence of the Protocol another international system will inevitably emerge. There is a
push within the EU to include project based mechanisms within the EU Emissions Trading
Scheme before the Kyoto Protocol enters into force, and it is likely that any international system
will include both emission trading and project based mechanisms involving projects in
developing countries and countries in transition to a market economy.
Delivery of emission reductions (ERs) under World Bank Emission Reductions Purchase
Agreements is independent of the Protocol coming into force, which means ERs that may be of
value in other binding or voluntary national or regional systems can still be delivered irrespective
of the Protocol coming into force. Operating Trust Funds and Trust Funds currently under
development will tailor the products delivered to participants to reflect developments in the
carbon market. As noted above, there is already pressure in Europe to de-link the linking
directive from the Protocol coming into force. If it occurs, this alone ensures a market for Kyoto
compliant ERUs in the absence of the Protocol.
Should the Protocol come into force, the market demand for ERUs and CERs will significantly
outpace supply. Market demand for CERs is expected to total two billion tonnes cumulative by
2012, but delivery capacity from all sources will not exceed 400 million tonnes under the most
optimistic projections.
Aside from this direct economic value, those who purchase emission reductions now gain
valuable knowledge and experience in project based mechanisms. This knowledge, experience,
access to experts and network of carbon finance players will be extremely valuable in
negotiating, and participating in subsequent regional or international systems.
Finally, the CDM and JI mechanisms directly support and promote sustainable development in
countries that need it most. CDM projects provide financing for clean technology investments

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and rural development, and represent an unprecedented incentive for channeling private capital
and technology investment from developed to developing countries. This is key to engaging
developing countries in climate change mitigation and ensuring their ongoing participation in
measures to arrest climate change. Emission trading with developing countries is also important
for keeping costs of compliance acceptably low for developed countries and demonstrates that
addressing climate change is economically and politically viable. This in turn demonstrates to the
global community the value of incorporating private sector initiatives, rather than traditional
command and control techniques, into solutions for environmental problems.

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7.16 The World Bank Carbon Market Pricing Policy

What is the current World Bank pricing policy?

To help determine fair market price, the World Bank has set up a bank-wide pricing
committee, and through that and dialogue with fund participants and host countries, and its
own market research (e.g. annual State of the Carbon Market report) the World Bank has
developed an approach by which it will seek to establish transparent, fair and consistent
pricing. The approach is expected to achieve three objectives:
• Offer project sponsors a fair price for their emission reductions;
• Improve transparency in the market for greenhouse gas emission reductions, thereby
contributing to the second strategic objective outlined in the Carbon Finance
Approach Paper—assisting in building, sustaining and expanding the international
market for greenhouse gas emission reductions; and
• Seek to attain the Bank’s objective of fully committing the resources placed in our
trust by carbon fund Participants.
The World Bank buys either Certified Emission Reductions (CERs) or Verified Emission
Reductions (VERs) using the same pricing approach of offering fair and coherent prices that
ensure equitable benefit sharing between buyers and sellers. In addition to offer fair prices,
the process needs to be transparent to ensure credibility from the Host Countries’ perspective
and to promote durability of the ERPA contracts.
Prices are defined taking into consideration the different allocation of risks assumed by the
Bank and the sellers.
With the carbon market yet to mature into a regular competitive market, imperfections in
supply and demand are pervasive. In the absence of a well-informed market, the World Bank
proposes to develop a proxy for “market” price for each transaction by pricing off a
benchmark (or reference price) adjusted for risk. The representative “benchmark” transaction
is identified as one for which the market has relatively complete information regarding the
key determinants of price, notably the riskiness of the underlying project, the eligibility of the
emission reductions under the Kyoto Protocol and the EU ETS, and the structure of the

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Emission Reductions Purchase Agreement contract. The World Bank will review the price
benchmarks and spreads periodically.

What factors are considered when setting the price?


Price is adjusted for the following risks:
• Project risk is related to the riskiness of the underlying project and the likelihood that
the project will be constructed on time and will remain fully operational during the
contract period;
• Risk associated with the registration of the project: these are risks related to project
validation and registration, including risks associated with CDM regulatory risks;
• Risk associated with the issuance of the CERs: this risk includes the verification risks,
including possible clarifications regarding the methodology, monitoring and ability to
properly verify the achieved ERs, and potential delays regarding the issuance of the
CERs into purchasers’ accounts;
Please note, the above mentioned three risks explain the big difference between the prices of
CERs and VERs.
• Crediting renewal risk: this risk addresses the robustness of the project’s baseline
after the first period of generation of emission credits (crediting period, typically 7
years) and the likelihood that the crediting period is renewed and, if so, the risk that
future volumes of emission may decrease with future crediting periods;
• Additional community and/or environmental benefits presented by the project and of
buyer’s interest;
• Market premium/discount for technology, region, country: the market has higher
willingness to pay for certain classes of projects;
• Upfront payments: if part of the ERPA contract is paid in advance, the buyer is
assuming project sponsor’s credit risk in case the project is not completed and does
not deliver any emission reductions. The value of assuming such risk is a function of
the riskiness of the project and any guarantees provided by the sponsor or other
guarantor;
• Costs and expenses: under normal circumstances, the World Bank’s carbon funds
recover preparation costs from carbon revenues. In contracts where the project

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sponsor wishes to accept a discount in return for not deducting the preparation cost,
the deduction in price is indicated based on contracted volume and the estimated
preparation costs;
• Purchase beyond 2012: with the first commitment period of the Kyoto Protocol
ending in 2012 there is little demand from buyers to purchase beyond 2012.
Currently, the Bank is the only buyer of emission reductions generated after 2012;
• Structured pricing or indexation: features such as seniority (e.g. receiving the first
tons delivered by a project) and price indexation (vis-à-vis a benchmark, or using
caps or collars)

What steps is the World Bank taking to move towards more transparent pricing in the
carbon market?
With the carbon market yet to mature, current market imperfections are pervasive.
Transactions are few (though increasing), heterogeneous, and usually private, so there is
limited transparency of information on the structure and terms of specific transactions and
their underlying projects.
Given the relatively early state of development of the carbon market and the high degree of
uncertainty, and given the World Bank’s role as a forerunner in the carbon market and its
mandate to help its developing country clients, it is important to explore all viable options for
pricing that will help move towards more transparent pricing in the carbon market. This
includes innovations such as the Umbrella Carbon Facility and the possibility of auctions for
carbon assets.

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What mechanisms does the World Bank use to minimize risks that funds’ participants
become exposed to by providing up-front payments if the project fails to generate the
necessary amount of emission reductions?
The World Bank mitigates the risk exposure of the Funds' participants: cap the amount of up-
front payment to be provided in each ERPA cap the period for up-front payment recovery
(with the equivalent emission reductions) reduce the price of the emission reductions
according to acceptable discount rates request an acceptable letter of guarantee to cover the
risk until the full recovery (with the equivalent emission reductions).

Does the World Bank have different pricing policies in different regions?
The market has higher willingness to pay for certain classes of projects. For instance, there is
currently a high demand for renewable energy projects in low-risk Latin-American countries,
implying the need to pay higher prices for emission reductions. Projects certain to be eligible
under the EU-ETS would also command a higher price. The initial premium ranges will be
assigned based on a confidential survey of current WB Carbon Fund participants’ preferences
or “willingness to pay”.
As market information becomes available and our own project portfolio evolves, the
resulting premia/discounts will be adjusted and refined through further analysis of project
experiences by the Policy and Methodology and by the Operations Teams within the CFU.

Why has the World Bank paid lower prices in the past?
The World Bank’s involvement in the carbon market predates the coming into force of the
Kyoto Protocol and the EU ETS by several years. The Bank was the forerunner in the carbon
market when there was no market and few other buyers. The Bank, with the participants in
the very first carbon fund, the Prototype Carbon Fund, was a market maker when there was
no market, and took the risk that the emission reductions the fund was buying would
eventually be certified as Kyoto compliant, and that there would even be a protocol in force.
The prices paid at that time reflected the uncertainty of the situation and the risk taken in the
pre-Kyoto time-frame. Historical prices for ERs have ranged broadly from pennies per
tCO2e in early deals in the voluntary market, to $10/tCO2e and higher in some more recent
trades. With both the European Union Emissions Trading Scheme which began on January 1,

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2005 and the Kyoto Protocol which came into force on February 16, 2005, carbon emission
reductions became international commitments by most industrialized countries thus driving
the demand for quality ERs, and therefore the current prices up.

Why does the World Bank pay fixed prices as opposed to market based prices?
The fixed prices protect host countries against the risk of prices going down in a market that
is still new and can be very unpredictable. The April 2006 price fluctuations on the EU ETS
carbon market have demonstrated how unstable the prices in the carbon market can be.
Additionally, the fixed price is a certainty that can help make the project bankable, as for
instance demonstrated by Abanico Hydro Plant project in Ecuador. The project sought
financing from the Inter-American Investment Corporation (IIC) but despite having strong
fundamentals, the power purchase agreements fell short of IIC’s investment criteria, which
required over 50 percent of sales to be under contract and assigned to the lender to secure the
loan’s deft service. With the involvement of the World Bank carbon financing, IIC agreed to
consider the proceeds of Hidroabanico’s CERs sales in its investment analysis, allowing the
borrowing to comply with the IIC’s covenant. Fixed prices give added confidence to the
financial institutions which funded the project.

If the market prices increase is it possible to renegotiate the existing ERPA?


No. An ERPA is a legally binding contract that fixes the price for the specified time.

Why is it not possible to renegotiate the existing ERPA?


The emission reductions purchase agreement is a legal contract. Any attempt to renegotiate
an ERPA would create too much uncertainty for buyers who might then be inclined to look
for their carbon reductions in a more reliable setting …in their own country.

Why are the CER/VER prices not the same as the EU Allowances (EUA) prices?
There are several key reasons for differing prices in the two markets:
EU Allowances traded in the EU Emissions Trading Scheme (EU ETS) do not carry delivery
risks unlike VERs or CERs – by virtue of them being issued by national governments under
a cap and trade system.

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CERs and ERUs are generated by projects that produce measurable reductions in greenhouse
gases. To qualify, these projects must be registered by the CDM Executive Board or the JI
Supervisory Committee, and ERs issued by the respective regulatory bodies. Unlike EU
Allowances, there is significant lead time, cost and uncertainty involved with the
generation of CERs/ERUs as projects need to be implemented, made operational and
continuously monitored. These risks relate to the fact that they involve the seller’s
commitment to deliver an asset that does not yet exist, so there is substantial risk that the
project will fail to actually deliver the expected CERs/ERUs.
Delivered CERs/ERUs eligible for crediting under the EU ETS are likely to trade at prices
competitive with EUAs. There remains significant uncertainty, however, with regard to the
eligibility of CERs/ERUs in the EU Emissions Trading Scheme, and their conditions for
transferability into the EU ETS, as many national governments have yet to clarify these
rules. Like CERs and ERUs, VERs are also project-based, but unlike CERs or ERUs, they
have not undergone registration (e.g. by the CDM Executive Board). Buyers of VERs
assume the same risks as those of CERs/ERUs, but in addition, they also assume “regulatory”
risks associated with the possibility that they may not be able to use the VERs against their
regulatory or international targets if they are deemed not to be in compliance with national or
international standards (i.e. if the VERs are not ultimately registered as CERs or ERUs).

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Why does the World Bank do up-front payments in some carbon finance projects?
One of the key constraints to implementation of CDM and JI projects is the lack of
underlying finance. The standard business practice of the World Bank is to pay on delivery
for emission reductions; however in some specific projects, an up-front payment may be
considered in order to relieve the financing constraint.

Does the World Bank use up-front payments to make their offer for emission
reductions more attractive?
Up-front payments are not used to make the Bank’s offers for emission reductions more
attractive, but to cover project's investment gaps. They usually represent the last source of
financing required for the project to reach its financial closure. Specific requirements and
guarantees may be requested by the CFU in order to provide up-front payments.

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7.17 Trend of CER prices in Carbon Markets:

The benchmark prices of Certified Emissions Reduction (CER) credits on the European
secondary market – for credits already issued - have cycled up and down between €15 and
€16.50 during March and finished the month slightly up on where they started.
Meanwhile, generally lower secondary market prices this year have put the squeeze on the
primary market – for CER credits not yet issued in projects under development – with the result
that CER deals are being struck in less numbers at the moment. Uncertainty over future demand
for CERs beyond 2012 is also a factor.
The benchmark secondary contract, for forward delivery in December 2008, closed at €15.55 on
the Nord Pool exchange on March 28. Prices dropped almost €1 in the last few days of the week.
The drop was confined to the benchmark contract with the later dated contracts hardly moving.
The forward price curve is currently very flat with prices at €15.30 for Dec `09 through Dec `11
delivery. Dec `12 closed at €15.80.
The discount to the equivalent Dec 08 EUA contract has widened to €6.00-€6.50 during the past
week. On the Chicago Climate Exchange, Dec 08 CERs last traded at $24.21 (€15.32) on March
28 and had followed the week’s European downturn.
In the primary market, project developers in a number of countries are still wanting the prices
they enjoyed in recent years. The price scales for CERs from projects at various stages of
development and various assignments of project delivery risk have not fallen as one might have
expected following the easing of prices in the secondary market. The exception as always is
China, where prices demanded tend be lower and a function of the €8 floor price set by the
Chinese government.
There are now 128 million CERs on issue with the rate of issuance by the CDM Executive Board
(CDM EB) increasing, helping to fuel activity in the secondary market. Buyers won’t be as
interested in primary market CERs with their attached risks while they can buy secondary market
CERs at prices not much higher and that are guaranteed of being delivered.

A survey of market participants in the primary CER market by IDEA carbon last month
provides a useful summary of current price expectations. Where the buyer accepts the main risks
for each stage of the project - methodology, third-party validation, CDM EB

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approval/registration and volume risk - and makes 50 per cent upfront payments to help project
financing, the survey suggests CER prices will average €6.30 per CER within a range of €3.50
and €9.
Where the seller takes the methodology and validation risk, and the buyer the registration and
volume risk, still making an upfront payment, expected prices averaged €8 and ranged from
€5.50 to €11. If the buyer takes just the volume risk and only pays on delivery, prices averaging
€11 per CER could be expected within a range of €9 and €13.50.
If the seller takes all the risks and pays on delivery, then an average price of €12.50 could be
expected, the survey suggests, with a minimum of €11 and a maximum of €15 per CER.
The ranges are much to do with the great variation in prices being paid across different
developing countries hosting CDM projects and the type of project activity involved, not covered
in the survey.

Projected CER prices for till July 2009 on trend basis of


April 2008 - June 2008, MCX prices

2500
2400
2300
2200
2100
2000
1900
1800
1700
1600
1500
1400
1300
1200
1100
1000
900
800
700
600
500
400
300
200
100
0

Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul-
08 08 08 08 08 08 08 08 08 09 09 09 09 09 09 09

Series1 Linear (Series1)

Figure: 7.17.1 Projection of CER prices, MCX.

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7.17.1 CERs trade at record prices:

Higher energy prices and doubts over the supply of Kyoto carbon credits up to 2012 have
pushed up prices in primary and secondary markets for Certified Emission Reductions
(CERs) through June and into July.
On July 3, the secondary trade in issued CERs saw the benchmark Dec 08 contract close at
€21.50 on the European Climate Exchange, adding almost €3.00 in all over the past month
and reaching new all-time highs. A temporary spike above €22 came on rumours of that
France would go it alone and connect to the UN’s transaction log (ITL), a long waited move
in all EU countries to facilitate full trading in issued CERs. The new levels found above €21
came despite the EU allowance (EUA) market shedding more than €1.80 to €27.45 in what
Reuters reports traders saying was overdue correction in that market.
This cut back the EUA-CER Dec 08 spread from around €7.50 to €6.15. But the movement
in the benchmark contract does not tell the whole story on price trends in the CER market.
Prices have moved up further in the longer-dated contracts to now be worth more than the
near-term contracts. CER Dec09 closed at €22.25, Dec10 at €22.92, Dec11 at €23.89 and
CER Dec12 at €24.93 – a more conventional forward price curve, as the technical analysts
would describe it.
The shift reflects both an easing of short-term supply concerns in Europe and the increase in
longer term supply worries closer to 2012. Short term, there is now less concern over when
the EU will connect to the ITL, only furthered by the French connection story. Delays in the
EU hook-up had created near-term supply worries in the EU ETS, but expectations are now
that it will be ready in advance of an April 2009 deadline for compliance buyers to settle up
on 2008 obligations.
Longer term, the market is still subject to the uncertainties over what total future supply of
CERs can be delivered up to 2012. Analysts’ estimates of total supply over the Kyoto
commitment period have been scaled back this year amid ongoing delays at the main stages
of CER creation – third-party project validation, official registration and credit issuance.
Estimates now around the 1.5 billion mark and this is one of the reasons behind the rise in
secondary CER prices this year.

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It now appears an increasing number of projects in the pipeline won’t pass the necessary
hurdles in time to deliver their forecast CERs by 2012. Bloomberg reports the CDM
Executive Board (CDM EB) last month demanded third-party validators – the so-called
designated operational entities – submit updates on any projects that have stalled for six
months or more at the validation stage.
Research by IDEA Carbon finds a strong relationship between the amount of time a project
takes to get up and running and how many, if any, of its forecast CERs it eventually delivers.
Projects take on average 300 days to go from the start of the validation process to registration
by the CDM EB. Not all the holds-ups are due to regulatory bottlenecks but, whatever the
causes, the longer the delay at each stage the less likely a project is to deliver CERs.
In the primary CER market, for CERs yet to be issued from projects under development,
prices look to have risen in response to the general climate of higher energy and carbon
prices. It’s always hard to gauge price trends in the purchase agreements that govern CER
pricing in this market given the individual variations in contract terms between projects.
However, IDEA Carbon’s price expectations survey of market participants suggests
significant rises over the past month or so, from a range of €8.40-€15.15 in late May to
€10.00-€16.60 in late June.
The range reflects the different sharing of the risks of non-delivery between buyer and seller
in the purchase agreements. The lower end reflects prices where the buyer takes on all the
risks - validation, registration and volumes delivered - while the upper end reflects the seller
taking all such risks.

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7.17.2 The surging world oil price may boost demand for CER carbon credits,
(According to analysis by Deutsche Bank.)
A surge in emission permit prices in the EU carbon market in the wake of spiralling oil, gas
and coal prices may force a rethink of the rules to prevent carbon compliance getting too
expensive, Deutsche analyst Mark Lewis says.
This would most likely mean a relaxing of the restrictions on the use of Kyoto offset credits,
particularly Certified Emissions Reductions (CERs) generated under the Clean Development
Mechanism (CDM).
CERs are can be used in place of the EUA permits handed out to European emitters and are
cheaper. But the EU Commission currently proposes there be no new allocation for such
substitution after 2013 beyond the limits already in place from 2008.
The proposal saw CER prices recede after it was announced earlier this year.
Although CER prices have recovered in the meantime, current record prices over €20 on the
European-dominated secondary market for the credits are still well below EUA prices.
With EUAs rising sharply and likely to trend higher, the easiest way for regulators to ease the
resulting cost burden would be reverse the current proposal and allow greater use of the
cheaper credits across Europe. Such a change would boost demand for CERs significantly
and would likely lead to higher prices.
“A more generous quota may have to be allowed … to cushion against the risk of an
excessive price spike,'' Bloomberg reports Lewis saying. Lewis forecasts benchmark EUA
prices to rise from their current €27 to €40 in 2008. Each EUA gives the holder the right to
emit one tonne of CO2.
Just such a move has been proposed by EU Parliament member Avril Doyle. Doyle says the
current limit of 1.4 billion CERs over the next 13 years should be increased to 1.7 billion, a
call that has won the support of industry lobby group International Carbon Investors &
Services.
Lewis says the technicalities of the Doyle proposal may mean it is not enough to lower prices
significantly but the use of UN credits is likely to be expanded in some way to cut costs and
to demonstrate to the rest of the world that emissions caps and trading is a viable way to
tackle climate change.

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7.17.3 EU carbon prices slip from highs

EU carbon emissions allowances, EUAs, have fallen sharply this week on the back of a pull-
back in the oil price, underscoring the high sensitivity of the carbon market to the dominant
fuel commodity. Generally, volatility has been the order of the day in July.
The benchmark Dec 08 contract closed at €26.02 on Wednesday July 9, about €1.70 below
last week’s closing levels and following a heavy slump on Tuesday. Later-dated EUA
forward delivery contracts felt the hit more keenly, dropping in the order of €2. Dec 09s
closed at €27.11 on July 9, Dec 12s at €30.51 and Dec 14s at €34.00.
But Wednesday’s close reflected a partial recovery from the seven-week lows posted the day
before. Again, volatile oil was the main driver, a lift in the oil price in turn lifting carbon. But
the ups and downs in EU carbon have been larger than those in oil, reflecting its heightened
sensitivity to energy prices in these difficult times.
The EU carbon market has always been heavily influenced by energy prices and their daily
fluctuations - gas, coal and electricity prices most directly. However, 2008 has seen the
market take a more direct day-to-day lead from the oil price in response to its soaring price
and impact it’s having on costs for business and industry.
Of course, much of oil’s impact still comes via the price of gas. Gas follows oil closely and,
when rising, it becomes cheaper for power companies to switch to burning coal. This requires
more emission permits for every unit of power produced, thus raising demand for EUAs. Of
note amidst all the recent volatility and lower EUA prices, is the how robust the prices for
secondary CERs have remained. After following the run-up in EUAs in recent months, CERs
have found a firm footing above €21 so far this month. On July 9, Dec 08 CERs closed at
€21.85, just 80 cents of a record high last week.
Growing confidence that the EU emissions registry will soon be linked to the UN’s
International Transaction Log (ITL), freeing up trade of issued CERs across Europe, appears
to be behind this solid performance. As a result, the spread between EUAs and CERs has
been slashed to around €4 this week from a range of €7-9 over the past three months. CERs
are directly substitutable one-for-one for EUAs in the EU emissions trading scheme.

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8 Findings and Recommendations


8.1 Case based Recommendations:
To give recommendations for Kyoto commitment period there can be two possible scenarios:
Case I: Using EUETS to trade EUAs:
Using EUAs to earn additional revenue under cap and trade mechanism: Poland has to cap
emission at 6 % and if Poland is able to reduce GHG emission that amount of CO 2eq is tradable
among European Union Member states and EU – ETS Member states.
For Croatia Cap limit is 5% and any reduction of GHG beyond this limit is tradable among EU-
ETS member states. Settlement price of EUA Dec.’14 contract at ECX on 23 rd July, 2008 was
32€/tCO2eq. following estimates can be made:

CROATIA:
Emission saved per MWh = 1.11 tCO2eq. (According to project report of Senj project)
Thus, taking an average price of EUA at 32 €/tCO2eq, the monetary value of 1MWh in Euro
comes to be 35.52 €. So this is the additional revenue for wind farm developer.
Minimum MW installed in Croatia is 17.8 MW so MWh generated in Croatia at wind speed of
4.5 at hub height 10mts. by an average wind turbine at height of 80 mts. = 2,953 MWh (Approx.)
So, Croatia will earn about 104,890.56 € at current installed capacity in business as usual
scenario.

POLAND:
Emission saved per MWh = 0.94648 tCO2eq.
Thus, taking an average price of EUA at 32 €/tCO2eq, the amount on Euro comes to be
30.29€/MWh. So this is the additional revenue for wind farm developer.
Minimum MW installed in Poland is 280 MW so MWh generated in Poland at wind speed of 5 at
hub height 10mts. by an average wind turbine at height of 80 mts. = 3,600 MWh (Approx.) So,
Poland will earn about 109,034.5 € at current installed capacity in business as usual scenario.

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Case II: Using Link Directive to trade in International Markets using CERs:
LD formally is not a directive on its own but rather an amendment to the EU Emissions Trading
Directive 2003/87/EC that permits companies to use carbon credits from CDM/JI projects for
compliance with their targets under the EU ETS. It provides provisions relating to project
approval processes and authorisation to participate in the flexible mechanisms, and contains
additional provisions relating to the establishment of the national emissions inventory.
For Croatia Cap limit is 5% and any reduction of GHG beyond this limit is tradable among EU –
ETS member states. But using Link Directives the additional reduction can be traded among EU-
members as well as with other nations.

CROATIA:
Emission saved per MWh = 1.11 tCO2eq. (According to project report of Senj project)
Thus, taking an average price of CER/ERU at 23 €/tCO2eq till 2012, the amount on Euro comes
to be 25.53 €/MWh. So this is the additional revenue for wind farm developer.
Minimum MW installed in Croatia is 17.8 MW so MWh generated in Croatia at wind speed of
4.5 at hub height 10mts. by an average wind turbine at height of 80 mts. = 2,953 MWh (Approx.)
So, Croatia will earn about 75,390.09 € at current installed capacity in business as usual scenario.

POLAND:
Emission saved per MWh = 0.94648 tCO2eq.
Thus, taking an average price of CER/ERU at 23 €/tCO2eq, the amount on Euro comes to be
21.77 €/MWh. So this is the additional revenue for wind farm developer.
Minimum MW installed in Poland is 280 MW so MWh generated in Poland at wind speed of 5 at
hub height 10mts. by an average wind turbine at height of 80 mts. = 3,600 MWh (Approx.)
So, Poland will earn about 78,368.54 € at current installed capacity in business as usual scenario.

Beyond 2012 this price of CER is expected to hover around 30 €/tCO 2eq. so in this case the
amount on Euro comes to be 33.33 €/MWh for Croatia and 28.40 €/MWh for Poland. So this is
the additional revenue for wind farm developer.
Minimum MW installed in Croatia is 17.8 MW so MWh generated in Croatia at wind speed of
4.5 at hub height 10mts. by an average wind turbine at height of 80 mts. = 2,953 MWh (Approx.)

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So, Croatia will earn about 98,432.49 € at current installed capacity in business as usual scenario.

Minimum MW installed in Poland is 280 MW so MWh generated in Poland at wind speed of 5 at


hub height 10mts. by an average wind turbine at height of 80 mts. = 3,600 MWh (Approx.)
So, Poland will earn about 102,240 € at current installed capacity in business as usual scenario.

Since both the countries have efficiently met their assigned targets so far, therefore if they
continue on business as usual basis or in other words if they stick to base line scenario, they will
be able to take complete advantage of this value. But the rate at which Croatia is polluting it
seems Croatia will not be able to meet its Kyoto targets in 2012, thus it has to help of available
additional measures to reduce its emission.

Croatia from EUA seller to EUA buyer:


Croatia has efficiently met its EU ETS targets in first phase till 2007. But during these years the
demand for fuels have grown at rapid rate during this phase because of which Croatia will not be
able to meet its commitments by 2012 which is reduction of pollution by 5% below 1990 level of
emission. During past few years significant growth has been noticed in Croatia. It has resulted in
growth of transportation sector thereby increasing consumption of fuels, and hence the pollution
has increased.
Since Croatia has signed EU-ETS treaty so it has to be abide by the terms of this scheme. In case
Croatia does not meet its targets, it will be penalized as per treaty terms. In second phase of EU-
ETS penalty is 100 Euros per tCO2eq. In Croatian currency this amount will be about 721.1319
Croatian Kuna per tCO2eq. as per exchange rates on 23/07/2008.

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8.2 Measurement of Emission Factor / Coefficient:

The emission coefficient is measured as kilograms of CO2 emitted per kWh. For the Operating
margin, the following two equations are used:
1. Total CO2 emission for operating margin plants =
Fuel consumption for plants (TJ) * CO2 emission factor (tCO2 /TJ) * Fraction Of Carbon
oxidized
Once the total CO2 emission for the operating margin is found, it is then plugged in the following
equation to get the CO2 emission factor for the operating margin:
2. CO2 emission factor for operating margin = Sum of CO2 emission for Operating Margin
(tCO2)/Total grid electricity generated by Operating Margin (MWh) = ________ tCO2 /MWh

For the Build margin, the total CO2 emissions for build margin plants = Fuel consumption for
plants (TJ) * CO2 emission factor (tCO2 /TJ) * Fraction of Carbon oxidized
CO2 emission coefficient for the Build Margin = Sum of CO2 emission for most recent 5 plants
(tCO2)/Total grid electricity generated by most recent five plants (MWh) = ________
tCO2/MWh
The equations require that the following data be obtained:
a. Fuel consumption for each plant per year.
b. Net calorific value for the fuel used in each power plant, which could be obtained from the
Ministry of Energy or other relevant local authority.
c. CO2 emissions factor (from IPCC Guidelines).
d. Fraction of carbon oxidized (from IPCC Guidelines).
To calculate the combined margin, use the following equation: CO2 emission coefficient for
Combined margin (tCO2/MWh) = [CO2 emission factor for the operating margin + CO2
emission factor for the build margin] / 2
Finally, the baseline is then calculated by multiplying the combined margin emission factor by
the annual production of electricity from the CDM project (say from the wind farm):
CO2 emission = Electricity produced and exported to the gird by the wind farm (MWh/year) *
CO2 emission factor (tCO2/MWh)

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8.3 Latest trends in European wind power sector

During 20
spend on
Figure: 8.3.1 Total investment during last two years in European wind power sector

2007 was a crucial year for wind power market. In this year (2007), few biggest deals of wind

Scan Energy
park business have taken place. As shown in picture 1.839 billion Euros have been spent on a
single deal, which is about 39.42% of total investment of 4.566 billion Euros for both years. The
same company International Power had maximum investment in last year as well. 2.406 billion

34 Mio €,
Euros out of 4.566 billion Euros. So its share is about 52.69% in total investment during last two
years.

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Feasibility Analysis for GE Wind Power Projects in Untapped Market: CDM Prospective

Poland:

Target for

Figure: 8.3.2 Target of Poland by 2010


Poland has a target of 2000 MW capacity by 2010. To achieve this target about 1800 MW new

 2.3% o
installation is required, which further means 450 MW per annum installation. This number is
bigger than its current cumulative installed capacity of 280 MW. Thus, there is tremendous scope
for wind farm development in Poland, thereby providing good opportunities for wind turbine
manufacturers in this region, so GE should strengthen its supply chain in this area to take

consum
advantage of this golden opportunity.

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Croatia
Share of Wind Energy in Renewable Structure (PJ)

2.5

2
Wind
1.5
Poly. (Wind)
1

0.5

0
2005 2010 2015 2020 2025 2030

Figure: 8.3.3: Share of Wind Energy in Renewable Structure (PJ)


1 GW = 0.000001 PJ/sec.
=> 1GWh = 0.0036 PJ/hr.
In 2005 first wind farm went operational which was of about 5.95 MW. It produced 2 GWh
approx. at that time. Now there is 17.8 MW installed capacity, so if power production is
escalated in same proportion then the power generation will be about 6 GWh or 0.0216 PJ.
The Croatian Government is planning to increase the share of wind from present 1.25% (approx.)
to 5.8% by 2010. For this purpose Green tariff subsidy is provided till 2010 at increasing rates. In
2010 it will be about 48¢€/MWh.
Now in order to meet EU-ETS commitments Croatian government will have to reframe this
Green tariff structure and make it more lucrative to attract more RES power generators.
The Croatian Adriatic coast is one of the most indented in the world: it has 1246 islands and
islets with a total coastline of 4058 km, the total length of the mainland coast being 1777 km. In
this region hybrid combinations of wind and solar can be used for power generation rather than
diesel based power plants.
Further CNG and other less polluting fuels should be promoted for transportation sector; use of
public transport should be encouraged. The power generated from RES can be used to electrify
routes of trains instead of using diesel engines.

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9 Conclusions
This report roughly coincides with the installation of the 100,000th megawatt of clean, emissions-
free wind power, and project that Wind power will reach the 200,000th MW by sometime in late
2011. But if the past is in fact a guide to the future, wind power will reach that next milestone
well ahead of time. Prognostication is a dangerous business. The failure to reauthorize the US
Production Tax Credit in the first half of this year, the global credit crisis and creeping recession
or other unforeseen events will undoubtedly mean that we will continue to live in ‘interesting
times’, in the Chinese sense, with rapid changes and discontinuities that no one could predict
from this vantage point.
However, it is clear that wind energy has hit the mainstream, and that it is an increasingly mature
and global industry, destined to play a major role in meeting the electric power needs of a world
undergoing rapid economic, social, political and environmental change. The actors are changing
as well as the scenery.
• There were many ‘firsts’ in 2007: this was the first year in decades that the majority of the
annual installations of wind power were outside of Europe; at the same time, this was the
first year that wind power was the largest net supplier of new power generating capacity in
Europe. This was the first year that domestic Chinese turbine manufacturers supplied the
majority of turbines in the world’s most dynamic market; and it was the first year in which
the majority of the top ten owners of wind were utilities.
But wind power, just like any other form of generation, is radically dependent upon the right
policy frameworks; and those policy frameworks are a reflection of the desires of governments
and energy planners at the time. Just as the drive for electrification in the early part of the last
century saw the creation of government-funded hydroelectric projects, and led to hundreds of
billions of dollars per year in subsidies for the fossil fuel industry, all in search of cheap
electricity to power their rapid industrialization.
• They (Energy policy makers) increasingly seek energy sources that provide security of
supply, local industrial development and re-development, and for energy sources that avoid
the ‘external’ costs of power generation, whether they be the costs of increased health care,
lost productivity and damage to ecosystems and infrastructure through air pollution, or costs

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associated with the control and avoidance of that new commodity, ‘carbon’, which is unique
in that its value is in its absence.
• They seek energy sources which decrease the vulnerability from dependence upon imported
fuels, and which ease the economic insecurity when the engine of their economy is exposed
to the wild swings and inexorable rise of fossil fuel prices in international commodity
markets.
Wind power fits the bill in all cases.

The EU will enact the legislation which enshrines the 20% by 2020 target into law, and along
with it pledge to reduce greenhouse gas emissions by 20%, 30%, or more by that same deadline.
A new US administration will be under immense pressure to not only grapple with limiting US
greenhouse gas emissions, but also to lend some long term stability to the federal support
measures for wind power and other renewable sources.
People's Republic of China’s wind industry will emerge from its dynamic local markets to
become a major player on the global stage.
Brazil, Mexico, Argentina and other Latin American economies will make fundamental energy
choices of their own in the face of looming crises, and one or more of them may host the next
major wind boom.
The same could be said of the Middle East/North Africa region.
The backdrop to all of this will be the development and conclusion of the multilateral climate
change negotiations that were begun in Bali last December, and which are set to conclude in
Copenhagen at the end of 2009.
In direct terms, Kyoto has not done as much as hoped to foster the renewables industry. But
energy policies in Europe, North America, and Asia have all responded, albeit in different ways,
to the first attempts to control greenhouse gases globally. Europe, Japan, and New Zealand have
responded with support measures directly designed to assist in reaching emission reduction
goals.
U.S. and Australian states and Canadian provinces have responded to the failure of their federal
governments to live up to their commitments. With overwhelming public support, they have
taken matters into their own hands and taken bold steps in the arena usually reserved for federal
governments.

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In PR China and India, Kyoto’s Clean Development Mechanism (CDM) has provided a boost to
renewable energy in general and to wind power in particular. There are now more than 15,000
megawatts of wind power in the CDM ‘pipeline’, mostly in PR China and India. But all of this is
just a prelude to the much greater effort that will almost inevitably result from the current round
of climate negotiations.
The power sector has a crucial role to play in reducing CO 2 emissions, and the large-scale
deployment of renewable energy is the only way to make substantial reductions on the supply
side in the short to medium term. Wind energy is the one technology with the maturity and
global reach to achieve massive cuts in power sector emissions when we need it: now.

The EUA spread over the secondary CER widened to nearly €10 at the time of this writing, and
even higher for most primary CER contracts. The key challenge is not how to reduce the success
of the CDM, but rather how to raise the ambition of the world, including the EU, to set science-
based emission reduction targets and meet them cost-effectively.

“In spite of its success, or perhaps even because of it, the carbon market came under close public
scrutiny in 2007. The success of the CDM is threatened by a creaking infrastructure that, despite
some efforts to streamline, is struggling to process the overwhelming response from project
developers worldwide in a timely manner.” World Bank Report ‘State and Trends of the Carbon
Market 2008’.

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This report further states following problems in CDM market:


‘Procedural inefficiencies and regulatory bottlenecks have strained the capacity of the CDM
infrastructure to deliver CERs on schedule, as too many projects await registration and issuance:
- Out of 3,188 projects in the currently pipeline, 2,022 are at validation stage.
- Market participants report that it is currently taking them up to six months to engage a
Designated Operational Entity (DOE), causing large backlogs of projects even before
they reach the CDM pipeline.
- Projects face an average wait of 80 days to go from registration request to actual
registration. The Executive Board has requested a review of several projects received or
registration, has rejected some of them, and has asked project developers to re-submit
their projects using newly revised methodologies. There is a very short grace period
allowed to grandfather the older methodology, and the additional work adds to delays and
backlogs.
- Projects are currently taking an average of 1-2 years to be issued from the time they
enter the pipeline. Over 70% of issued CERs come from industrial gas projects, with the
vast majority of energy efficiency and renewable energy projects remaining stuck
somewhere in the Pipeline.’

These delays are affecting expected CER delivery schedule, payments as well as dampen
enthusiasm for further innovation, which is urgently needed to mitigate climate change. Delays
in payments favour self-financed projects by large and wealthy project developers. Projects that
really need the carbon payments to overcome barriers are more likely to fail as a result of these
delays. Clearly, the delays are untenable and are a major risk to CDM momentum and market
sentiment.

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Suggestions for GE Energy’s Wind Power Projects:

Recommendations for business development in Croatia:


• Extensive opportunities for companies in wind power sector in Croatia as local
market has less competitors and GE wind turbine sale is gaining momentum in central
Europe.
• Government in Croatia is providing various incentives in form of Green tariffs, Feed-
in tariffs on basis of plant size, etc.
• For wind energy utilisation by new generation wind turbines, the program for wind
energy use, ENWIND, has been started.
• Croatia is a new market for GE so supply chain in Croatia may be a problem.

Recommendations for business development in Poland:


• GE is already operating in Poland.
• Descent wind speed for bigger wind turbines.
• Average wind turbine size is about 1.9 MW.
• Since Wind Turbine market has number of players so supply chain is not a problem.
• “Good Energies and Continental Wind Partners Select GE Energy's 2.5xl Wind
Turbines for Deployment in Central Europe”, thus a good time for GE in European
markets.

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Bibliography
Reports & Journals:
• ‘A Comparison of Wind Power Industry Development Strategies in Spain, India
and China’ by Mr. Joanna I. Lewis. Prepared for the Center for Resource Solutions
Supported by the Energy Foundation, China Sustainable Energy Program on July 19, 2007.
• ‘State and Trends of the Carbon Market’ Report, May 2008, World Bank
• ‘Screening Report of Croatia’, Chapter 15- Energy, 29 March 2007

• ‘Position Paper on Agenda Item at the 24th session of the SBI (Subsidiary Body for
Implementation) of the UNFCCC’, Bonn, 18 - 26 May 2006 - Level of emissions for the
base year of Croatia under Article 4, paragraph 6 of the UNFCCC.
• ‘Polish Wind Energy Association position concerning realization of the Nature 2000
Programme in Poland’, a report by Polish Wind Energy Association.
• ‘PWEA’s position paper on suspension of Joint Implementation (JI) projects
approval’, a working paper by Polish Wind Energy Association.
• ‘Assessment of wind energy development opportunities and potential in Poland until
2020’, a working paper by Polish Wind Energy Association.
Exchange Data in information from websites of respective exchanges.
Courtesy of the Carbon Neutral Company for providing overview of Carbon Market
Structure.
Global Wind Energy Council – GLOBAL WIND 2007 REPORT
Croatia GHG Projections – 1990-2020, UNFCCC
Croatia’s National Allocation Plan, UNFCCC
Croatia’s National Inventory Report 2007, UNFCCC
Greenhouse gas emission trends and projections in Europe 2007”, European Environment
Agency
Minister of Economy ordinance notification (Poland), Dated: 15.12.2000.
“Assessment of wind energy development opportunities and potential in Poland until 2020”,
Polish Wind Energy Association, 2007.

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• EUROPEAN COMMISSION COM (2003)40323 July 2003, Disclosure on Linking


Directive.

Presentations:
“CDM Project Development in India-Need for Accelerators”, Presentation by
Mr. Vinod K Kala, Emergent Ventures India Pvt Ltd.

Articles:
“Powering ahead”, by John Adolph an associate at Bracewell & Giuliani, on US Wind Power,
in Environmental Risk Section in Energy Risk, 2008 issue.
“Global Wind Power Capacity Reaches 100,000 Megawatts”, by Jonathan G. Dorn Earth
Policy Institute March 4, 2008

Web links:
UNFCCC Website.
Exchange Data in information from websites of respective exchanges.
Courtesy of the Carbon Neutral Company for providing overview of Carbon Market
Structure.
Global Wind Energy Council – GLOBAL WIND 2007 REPORT
Croatia GHG Projections – 1990-2020, UNFCCC
Croatia’s National Allocation Plan, UNFCCC
Croatia’s National Inventory Report 2007, UNFCCC
Greenhouse gas emission trends and projections in Europe 2007”, European Environment
Agency
Minister of Economy ordinance notification (Poland), Dated: 15.12.2000.
“Assessment of wind energy development opportunities and potential in Poland until
2020”, Polish Wind Energy Association, 2007.
• EUROPEAN COMMISSION COM (2003)40323 July 2003, Disclosure on Linking
Directive.
• Carbon Positive Website.

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• www.bloomberg.com
www.energyagency.at
www.goodenergies.com
www.ebrdrenewables.com
www.ewec2006proceedings.info
www.renewable-energy-industry.com
www.wallenborn-projekt.de
www.energia.gr

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