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Surprising Green Energy Investment Trends Found Worldwide

Science Daily 07.06.2009 - Some $155 billion was invested in 2008 in clean energy companies and projects worldwide, not including large hydro, a new report says. Of this $13.5 billion of new private investment went into companies developing and scaling-up new technologies alongside $117 billion of investment in renewable energy projects from geothermal and wind to solar and biofuels.

The 2008 investment is more than a four-fold increase since 2004 according to Global Trends in Sustainable Energy Investment 2009, prepared for the UN Environment Programme’s (UNEP) Sustainable Energy Finance Initiative by global information provider New Energy Finance.

Extremely difficult financial market conditions prevailed during 2008 as a result of the global economic crisis. Nevertheless investment in clean energy topped 2007’s record investments by 5% in large part as a result of China, Brazil and other emerging economies.

Of the $155 billion, $105 billion was spent directly developing 40 GW of power generating capacity from wind, solar, small-hydro, biomass and geothermal sources. A further $35 billion was spent on developing 25 GW of large hydropower, according to the report.

This $140 billion investment in 65 GW of low carbon electricity generation compares with the estimated $250 billion spent globally in 2008 constructing 157GW of new power generating capacity from all sources. It means that renewables currently account for the majority of investment and over 40% of actual power generation capacity additions last year.

Achim Steiner, UN Under-Secretary General and UNEP Executive Director, said: “Without doubt the economic crisis has taken its toll on investments in clean energy when set against the record-breaking growth of recent years. Investment in the United States fell by two per cent and in Europe growth was very much muted. However, there were also some bright points in 2008 especially in developing economies—China became the world’s second largest wind market in terms of new capacity and the world’s biggest photovoltaic manufacturer and a rise in geothermal energy may be getting underway in countries from Australia to Japan and Kenya”.

“Meanwhile other developing economies such as Brazil, Chile, Peru and the Philippines have brought in, or are poised to introduce policies and laws fostering clean energy as part of a Green Economy. Mexico for example, the Global host of World Environment Day on 5 June, is expected to double its target for energy from renewables to 16 per cent as part of a new national energy policy,” he added.

Overall Highlights from the Report

Wind attracted the highest new investment ($51.8 billion, 1% growth on 2007), although solar made the largest gains ($33.5 billion, 49% growth) while biofuels dropped somewhat ($16.9 billion, 9% decrease).

Total transaction value in the sustainable energy sector during 2008 – including corporate acquisitions, asset re-financings and private equity buy-outs – was $223 billion, an increase of 7% over 2007. But capital raised via the public stock markets fell 51% to $11.4 billion as clean energy share prices lost 61% of their value during 2008.

Investment in the second half of 2008 was down 17% on the first half, and down 23% on the final six months of 2007, a trend that has continued into 2009.

One response to the global economic crisis has been announcements of stimulus packages with specific, multi-billion dollar provisions for energy efficiency up to boosts to renewable energies.

“These ‘green new deals’ lined up by some economies, including China, Japan, the Republic of Korea, European countries and the United States contain some serious clean energy provisions. These will help support the market,” said Mr. Steiner.

“However, the biggest renewables stimulus package of them all can come at the UN climate convention meeting in Copenhagen in just over 180 days time. This is where governments need to Seal the Deal on a new climate agreement-one that can bring certainty to the carbon markets, one that can unleash transformative investments in lean and clean green tech,” he added.

Green Energy Costs Coming Down — Solar Costs Set to Fall 43%

The investment surge of recent years and softened commodity markets have started to ease supply chain bottlenecks, especially in the wind and solar sectors, which will cause prices to fall towards marginal costs and several players to consolidate. The price of solar PV modules, for example, is predicted to fall by over 43% in 2009.

Carbon Markets Continue Upward

Despite the turmoil in the world’s financial markets, transaction value in the global carbon market grew 87% during 2008, reaching a total of $120 billion. Following the lead of the EU and Kyoto compliance markets, several countries are now putting in place a system of interlinked carbon markets and working towards a global scheme under the UN Framework Convention on Climate Change (UNFCCC).

Growth Shifts to the Developing World

On a regional basis, investment in Europe in 2008 was $49.7 billion, a rise of 2%, and in North America was $30.1 billion, a fall of 8%.

These regions experienced a slow-down in the financing of new renewable energy projects due to the lack of project finance and the fact that tax credit-driven markets are mostly ineffective in a downturn. With developed country market growth stalled (down 1.7%), developing countries surged forward 27% over 2007 to $36.6 billion, accounting for nearly one third of global investments.

China led new investment in Asia, with an 18% increase over 2007 to $15.6 billion, mostly in new wind projects, and some biomass plants. Investment in India grew 12% to $4.1 billion in 2008. Brazil accounted for almost all renewable energy investment in Latin America in 2008, with ethanol receiving $10.8 billion, up 76% from 2007. Africa achieved a modest increase by comparison, with investments up 10% to approximately $1.1 billion.

The Greening of Economic Stimulus Packages

Not surprisingly given market conditions, private sector investment was stalling in late 2008 but government investment looks ready to take up some of the slack in 2009. Sustainable energy investments are a core part of key government fiscal stimulus packages announced in recent months, accounting for an estimated $183 billion of commitments to date.

Countries vary significantly in terms of investment and the clarity of their measures. The US and China remain the leaders, each devoting roughly $67 billion, but South Korea’s package is the “greenest” with 20% devoted to clean energy. This green stimuli illustrates the political will of an increasing number of governments for securing future growth through greener economic development.

According to Michael Liebreich, Chairman & CEO of New Energy Finance, “There is a strong case for further measures, such as requiring state-supported banks to raise lending to the sector, providing capital gains tax exemptions on investments in clean technology, creating a framework for Green Bonds and so on, all targeted at getting investment flowing”.

“What’s most important is that stimulus funds start flowing immediately, not in a year or so. Many of the policies to achieve growth over the medium term are already in place, including feed-in tariff regimes, mandatory renewable energy targets and tax incentives. There is too much emphasis amongst some policy-makers on support mechanisms, and not enough on the urgent needs of investors right now.”

Between 2009 and 2011 UNEP estimates that a minimum of $750 billion – or 37% of current economic stimulus packages and 1% of global GDP – is needed to finance a sustainable economic recovery by investing in the greening of five key sectors of the global economy: buildings, energy, transport, agriculture and water.

2009 and beyond: Climate change, energy security and green jobs

New investments in the first quarter of 2009 fell by 53% to $13.3 billion compared to the same period in 2008, reflecting the depth of the global financial crisis, according to the report, which notes “‘green-shoots’ of recovery during the second quarter of 2009, but the sector has a long way to go this year to reach the investment levels of late 2007 and early 2008.”

Climate change, economic recovery and energy security will spur far greater investments in coming years.

In particular, the growing understanding that global carbon emissions (CO2) must peakaround 2015 to avoid dangerous climate change (based on the 4th assessment of the Intergovernmental Panel on Climate Change– UNEP/World Meteorological Organisation) will make clean energy investments national priorities.

Annual investments in renewable energy, energy efficiency and carbon capture and storage need to reach half a trillion dollars by 2020, representing an average investment of 0.44% of GDP.

These levels of investment are not impossible to achieve, especially in view of the recent four year growth from $35 billion to $155 billion. However, reaching them will require a further scale-up of societal commitments to a more sustainable, low-carbon energy paradigm.

With the current stimulus packages now in play and a hoped-for Copenhagen climate deal in December, the opportunity to meet this challenge is greater than ever, even seen from the depths of an economic downturn.

Says Michael Ahearn, President of US-based First Solar: “This report highlights the continuing importance of government leadership to ensure that renewable energies, including solar, achieve their potential in weaning us off fossil fuels and addressing climate change.”

See also: Investment in Clean Energy Exceeded Fossil Fuel Investment in 2008

Global Trends in Sustainable Energy Investment 2009 — Sector Hi-lites

Wind

Wind attracted the highest new investment ($51.8 billion, 1% growth on 2007), confirming its status as the most mature and best-established sustainable generation technology. Wind’s leading position continues to be driven by asset finance, as new generation capacity is added worldwide, particularly in China and the US.

Solar

Solar continues to be the fastest-growing sector for new investment ($33.5 billion, 49% growth on 2007), with compound annual growth of 70% between 2006 and 2008. Solar’s growth reflects the easing of the silicon bottleneck and falling costs, which are expected to decline 43% in 2009. Solar project financing underwent the most dramatic growth in 2008, rising 71% to $22.1 billion.

Biofuels

Investment in biofuels fell 9% in 2008 down to $16.9 billion. Although the technology is well established, particularly in Brazil, it has suffered for the past two years from over-investment in early 2007, followed by a fall from grace caused by a combination of high wheat prices, lower oil prices and an increasingly heated food-versus-fuel controversy. Biofuels technology investment is now focused on finding second-generation / non-food biofuels (such as algae, crop technologies and jatropha): the second half of 2008 saw next-generation technology investment exceed first-generation for the first time.

Geothermal

Geothermal was the highest growth sector for investment in 2008, with investment up 149% and 1.3 GW of new capacity installed. The competitive cost of electricity from geothermal sources and long output lifetimes have made this an attractive investment despite the high initial capital cost.

Energy Efficiency

New private investment in energy efficiency was $1.8 billion – a fall of 33% on 2007 – although this figure doesn’t capture the investments made by corporates, governments and public financing institutions.

The energy efficiency sector recorded the second highest levels of venture capital and private equity investment (after solar), which will help companies develop the next generation of sustainable energy technologies for areas such as the smart grid. Energy efficiency also attracted more than 33% of the estimated $180 billion in green stimulus measures.

Global Trends in Sustainable Energy Investment 2009 — Regional Hi-lites

Europe

Europe continues to dominate sustainable energy new investment with $49.7 billion in 2008, an increase of 2% on 2007 (37% CAGR from 2006-2008).This investment is underpinned by government policies supporting new sustainable energy projects, particularly in countries such as Spain, which saw $17.4 billion of asset finance investment in 2008.

North America

New investment in sustainable energy in North America was $30.1 billion in 2008, a fall of 8% compared to 2007 (15% CAGR from 2006-2008). The US saw a slow-down in asset financing following the glut of investment in corn based ethanol in 2007. Also, the number of tax equity providers fell for wind and solar projects due to the financial crisis.

Africa

South Africa — Feed-in Tariffs Kick Start Green Investment

On 31 March 2009, South Africa announced ‘feed-in’ tariffs that guarantee a stable rate-of-return for renewable energy projects. South Africa is hoping to spur the sort of investment spurred in Germany and Denmark through feed-in tariff schemes.

Sub-Saharan Africa — Geothermal Kenya & Sweet Sorghum Ethanol

Elsewhere in Sub-Saharan Africa, lack of finance is the principal barrier to sustainable energy roll-out. However, some notable progress was made in 2008.

In Kenya, a number of investments are underway; including the continents first privately financed geothermal plant and a 300MW wind farm planned for construction near Lake Turkana.

In Ethiopia, French wind turbine manufacturer Vergnet signed a EUR 210 million supply contract in October 2008 with the Ethiopian Electric Power Corporation for the supply and installation of 120 one MW turbines.

In Angola, Brazilian industrial conglomerate Odebrecht set up an Angolan sugar cane processing plant and plans to steer its production from ethanol to sugar when it comes online late next year. UK-based Cams Group announced plans for a 240 million liter per year sweet sorghum ethanol facility in Tanzania.

North Africa — Sun and Wind

Renewable energy in North Africa remains focused on Morroco, Tunisia and Egypt, particularly in solar and wind. Egypt recently announced its expectation that wind farms in the Saidi area will produce 20% of the country’s energy needs by 2020. Morocco’s government has also outlined plans to meet 10% of its power needs with renewable energy sources.

Asia

China – Asia’s Green Energy Giant

By 2008, China was the world’s second largest wind market by newly installed capacity and the fourth largest by overall installed capacity. Between 5GW and 6.5GW of new capacity was installed and commissioned in 2008, bringing total capacity to 11GW to 12.5GW.

China became the world’s largest PV manufacturer in 2008, with 95% of its production for the export market.

Some 800MW of biomass power was added in 2008, bringing the total installed capacity for agriculture waste-fired power plants up to 2.88GW. Development of biofuels has all but ground to a halt, mostly due to high feedstock costs.

India – Pressing Need for Grid Improvements and Clean Power Generation

In 2008 the largest portion of new investment in India went to the wind sector, growing 17% — from $2.2 billion to $2.6. Thanks to a supportive policy environment, solar investment grew from $18 million in 2007 to $347 million in 2008, most of which went to setting up module and cell manufacturing facilities.

Small hydro investment in India grew nearly fourfold to $543 million in 2008, while biofuels investment stalled and fell from $251 million in 2007 to only $49 million in 2008.

Japan – A New Push for Sustainable Energy

In December 2008, Japan unveiled a new $9 billion subsidy package for solar roofs, granting JPY 70,000 ($785)/kW for rooftop PV installation. For the first time in three years, domestic shipments of solar cells rose between April to September (up 6%), indicating a fundamental change in domestic solar demand.

Geothermal also seems to be reawakening in Japan, after a twenty-year lull. In January 2009, plans for a 60MW geothermal plant were announced.

Australia – Geothermal and Wind Gaining Support

The Australian government has set up a A$500m ($436 million) Renewable Energy Fund to accelerate the roll-out of sustainable energy in the country. A$50 million has already been committed to helping geothermal developers meet the high up-front costs of exploration and drilling.

Geothermal is expected to provide about 7% of the country’s baseload power by 2030.

Wind will also benefit from Australia’s new push for sustainable energy, and is expected to provide most of the 20% renewable energy by 2020 target.

Other Asian Countries — Philippines, Thailand, Malaysia

In late 2008, the Philippine government signed a new Renewable Energy Law, offering specific incentives (mainly tax breaks) for renewable generation — a first for Southeast Asia and perhaps a model for other countries. Thailand and Malaysia have been talking about introducing renewable energy legislation for some time; and other countries are planning biofuel blending mandates, similar to those introduced by the Philippines in 2007 and subsequently by Thailand.

Latin America

Brazil – World’s Largest Renewable Energy Market

About 46% of Brazil’s energy comes from renewable sources, and 85% of its power generation capacity thanks to its enormous hydropower resources and long-established bioethanol industry.

Some 90% of Brazil’s new cars run on both ethanol and petrol (all of which is blended with around 25% ethanol). By the end of 2008, ethanol accounted for more than 52% of fuel consumption by light vehicles.

Brazil is now moving into wind. The government has announced a wind-specific auction to take place in mid-2009, for the sale of approximately 1GW of wind energy per year.

Brazil also has a global leader in renewable energy financing. In 2008 the Brazilian Development Bank (BNDES) was the largest provider globally of project finance to renewable energy projects.

Chile, Peru, Mexico and the rest of Latin America

Brazil accounted for more than 90% of new investment in Latin American, but several other countries are looking to implement regulatory frameworks supportive of renewable energy.

Chile’s recently approved Renewable Energy Legislation is responsible for regulating the country’s renewable energy sector, where small hydro, wind and geothermal projects have become increasingly attractive for investors. It requires electricity generators of more than 200MW to source 10% of their energy mix from renewables.

In 2008 Peru introduced legislation that requires 5% of electricity produced in the country to be derived from renewable sources over the next five years, including financial incentives such as preferential feed-in-tariffs and 20-year PPAs for project developers.

Mexico has a non-mandatory target to source 8% of its energy consumption from renewable sources by 2012. However a new national energy plan expected at the end of June 2009 is expected to double that target.

For original article click here.

Source: ScienceDaily 07.06.2009

Filed under: Asia, Australia, Brazil, China, Colombia, Energy & Environment, India, Japan, Latin America, Library, Malaysia, Mexico, News, Peru, Risk Management, Thailand, , , , , , , , , , , , , , , , ,

Asia’s first cleantech funds now raising capital

Preqin shows private-equity managers in Asia are beginning to participate in the worldwide boom of cleantech funds.

Perhaps the biggest trend in private equity right now is investing in cleantech, a term that refers to products or services that improve operational performance, productivity or efficiency, while reducing energy consumption, waste and pollution. And PE managers in Asia are introducing the region’s first dedicated cleantech funds, says Preqin, a London-based consultancy specialising in private equity and infrastructure. Click here for original article.

See also: Investment in Clean Energy Exceeded Fossil Fuel Investment in 2008

According to Preqin, there are now four Asia-based PE funds trying to raise capital for dedicated cleantech funds (see table below). The two largest are from Hong Kong-based First Vanguard, which is raising $500 million for the China and Pacific Rim Water Infrastructure Fund; and Singapore-based Middle East & Asia Capital Partners, which is raising $400 million for its MAP Clean Energy Fund.

There are two more players raising $250 million funds: in Singapore, Ant Global Partners is financing its Ant Global Partners Cleantech Fund; and in Malaysia, Abundance Venture Capital seeks capital for its AVC Abundance Energy Fund.

The first private-equity or venture-capital fund to include a cleantech focus, within a diversified portfolio, emerged in 2005 in India, where IDFC closed a $440 million infrastructure fund. Then in 2006, China’s Prax Capital closed a $153 million fund that included cleantech themes, as did China’s Northern Light Venture Capital, which closed a $350 million fund.

Since then activity has picked up: in 2008, funds in India, China and Hong Kong closed over $5 billion worth of diversified funds that included cleantech plays, while earlier this year, Singapore’s SEAVI Advent closed a $178 million diversified buyout fund.

Preqin says there are now at least 10 PE funds trying to raise capital towards themes that include cleantech, of which four are dedicated, as mentioned above. Together these 10 seek to raise up to $3.6 billion, with the four dedicated funds accounting for $1.4 billion of that.

Preqin has released a report on cleantech funds that shows huge interest among institutional investors and funds of funds. Despite the global financial crisis, overall cleantech fundraising remained steady in 2008, with 29 funds raising a total of $6 billion worldwide, roughly the same as was raised in 2007. The majority has gone to VC funds, with infrastructure funds also playing a big role.

In North America, funds this year seek to raise up to $9 billion, making this the biggest market, followed by European funds, which want to raise over $7 billion, Preqin says.

The consultants also find more than half of cleantech-focused VC firms prefer to take minority stakes, while buyout and infrastructure firms mostly prefer controlling stakes. For institutional investors, these funds represent the preferred means of accessing cleantech themes, as opposed to via the public markets, because the sector is too new to be well represented in the listed space.

Preqin’s 10 largest funds with a cleantech focus raised by Asian fund managers

Fund Fund Type Size (Mn) Vintage Fund Cleantech Focus Fund Manager Fund Manager Location
Baring Asia Private Equity Fund IV Balanced 1,515.0 USD 2008 Diversified Baring Private Equity Asia Hong Kong
IDFC Private Equity Fund III Infrastructure 700.0 USD 2008 Diversified IDFCPrivate Equity India
IDFC Private Equity Fund II Infrastructure 440.0 USD 2005 Diversified IDFCPrivate Equity India
LC Fund IV Venture (General) 400.0 USD 2008 Diversified Legend Capital Management China
Northern Light II Venture (General) 350.0 USD 2007 Diversified Northern Light Venture Capital China
Qiming Venture Partners II Venture (General) 320.0 USD 2008 Diversified Qiming Venture Partners China
Softbank China Venture Capital III Venture (General) 2,000.0 CNY 2008 Diversified SB China Venture Capital China
Nexus India Capital II Early Stage 220.0 USD 2008 Diversified Nexus India Capital India
SEAVI Advent Equity V Buyout 178.0 USD 2009 Diversified SEAVI Advent Singapore
Prax Capital II Expansion 153.0 USD 2006 Diversified Prax Capital China

Preqin’s 10 largest funds with a cleantech focus currently raising by Asian fund managers

Fund Fund Type Target Size (Mn) Fund Status Vintage Fund Cleantech Focus Fund Manager Fund Manager Location
ORYX-STIC Fund II Buyout 500.0 USD Raising 2009 Diversified STIC Investments South Korea
China and Pacific Rim Water Infrastructure Fund Infrastructure 500.0 USD Raising 2009 Pure Cleantech First Vanguard Hong Kong
Sandalwood Capital Partners II Early Stage 350.0 EUR Raising 2009 Diversified Sandalwood Capital Partners India
Ascent India Fund III Expansion 450.0 USD Raising 2009 Diversified UTI Venture Funds India
MAP Clean Energy Fund Infrastructure 400.0 USD Raising 2009 Pure Cleantech Middle East & Asia Capital Partners Singapore
AmKonzen Asia Water Fund Infrastructure 320.0 USD Raising 2009 Diversified AmKonzen Water Investments Management Singapore
Asia Strategic Capital Fund Mezzanine 300.0 USD First Close 2008 Diversified Asia Mezzanine Capital Group Hong Kong
Tripod Capital II Buyout 300.0 USD Raising 2009 Diversified Tripod Capital China
Ant Global Partners Cleantech Fund Venture (General) 250.0 USD Raising 2009 Pure Cleantech Ant Global Partners Singapore
AVC Abundance Energy Fund Natural Resources 250.0 USD Raising 2009 Pure Cleantech Abundance Venture Capital Malaysia

Source: AsianInvestor.net, 08.06.2009 by Jame DiBiasio

Filed under: Asia, China, Energy & Environment, Hong Kong, India, Korea, Malaysia, News, Services, Singapore, , , , , , , , , , , , , , , , ,

Investment in Clean Energy Exceeded Fossil Fuel Investment in 2008

In a sign of the growing importance of renewable sources of energy, global investment in wind power, solar power, and other alternative forms of energy last year exceeded investments in coal, oil, and carbon-based energy for the first time. The United Nations Environmental Program (UNEP) reported that in 2008, 56 percent of all money invested in the energy sector went to green sources of power, with $140 billion in investments in renewable energy compared to $110 billion in fossil fuel technologies.

Wind power attracted the most investment, with $51.8 billion worldwide, while investments in solar power rose 49 percent to $33.5 billion, UNEP reported. Investment in geothermal energy rose most rapidly, increasing 149 percent over 2007, to $2.2 billion. China drove much of the growth in investment in renewable sources, particularly in wind power. Despite booming investment in green energy, the renewable sector still only accounts for 6.2 percent of total power generating capacity.

Source:Yale Environment 360, 03.06.2009,     New York Times, 05.06.2009

Filed under: Energy & Environment, News, , , , , , , , , , ,

Worldbank: State and Trends of the Carbon Market 2009

Over the past year, the global economy has cooled significantly, a far cry from the boom just a year ago in various countries and across markets. At the same time, the scientific community communicated the heightened urgency of taking action on climate change. Policymakers at national, regional and international levels have put forward proposals to respond to the climate challenge.

The most concrete of these is the adopted EU Climate & Energy package (20% below 1990 levels by 2020), which guarantees a level of carbon market continuity beyond 2012. The EU package, along with proposals from the U.S. and Australia, tries to address the key issues of ambition, flexibility, scope and competitiveness. Taken together, the proposals tabled by the major industrialized countries do not match the aggregate level of Annex I ambition called for by the Intergovernmental Panel on Climate Change, or IPCC (25-40% reductions below 1990). Setting targets in line with the science will send the right market signal to stimulate greater cooperation with developing countries to scale up mitigation.

Download: Trends of the Carbon Market May 2009 Worldbank

Overall Market Grows
The overall carbon market continued to grow in 2008, reaching a total value transacted of about US$126 billion (€86 billion) at the end of the year, double its 2007 value (Table 1). ApproximatelyUS$92 billion (€63 billion) of this overall value is accounted for by transactions of allowances and derivatives under the EU Emissions Trading Scheme (EU ETS) for compliance, risk management, arbitrage, raising cash and profit-taking purposes. The second largest segment of the carbon market was the secondary market for Certified Emission Reductions (sCERs), which is a financial market
with spot, futures and options transactions in excess of US$26 billion, or €18 billion, representing a five-fold increase in both value and volume over 2007. These trades do not directly give rise to emission reductions unlike transactions in the primary market.

See also: Investment in Clean Energy Exceeded Fossil Fuel Investment in 2008

Source: Worldbank, 26.05.2009

Filed under: Australia, Brazil, China, Energy & Environment, India, Japan, Latin America, Library, Mexico, News, Risk Management, , , , , , , , , , , , , , , , , , , ,

The Carbon Rating Agency Publishes the First Risk Assessment of a Programme of Activities

Programmatic CDM is one of the most important developments in the CDM world and is attracting the interests of the most farsighted players in this space.  It is being recognised as the natural bridge between the first and the second commitment period, and it has great potential to enable the move from measuring tons to constructively affecting the emission trends of developing countries. However, there has been a very slow uptake due to regulatory and design issues.

Better understanding of the challenges inherent in programmatic CDM (pCDM) development is crucial to promote the uptake of the small scale projects under this very promising category.

The Carbon Rating Agency (CRA) has developed a unique risk assessment methodology to evaluate pCDM, which combines a bottom-up analysis of project activities with the specific considerations applicable for specific pCDM risks. The CRA’s pCDM evaluation process provides a comprehensive risk assessment enabling the project participants to understand both the registration risk of the PoA as well as the performance risks of the first and subsequent CPAs.

CRA is leading the way in setting the analytical framework for government and private sector participants to manage a successful pCDM capability, by developing rigorous risk assessment tools that can assist developing economies to be at the forefront of the imminent market needs.

CRA relies on its experienced team of senior advisors including Christiana Figueres (Vice Chair of the Carbon Rating Agency). She has been instrumental in developing the thinking on pCDM for several years, and remains involved in its implementation. Having joined the company in early 2008, Christiana has provided crucial insights for the development of the pCDM evaluation methodology.

CUIDEMOS Mexico CFL programme of activities

The first PoA assessed under the CRA Programmatic evaluation tool was the CFL distribution Programme CUIDEMOS Mexico. The rating provides an overview of the PoA structure and presents its main challenges.

The evaluation considers the risks related to the distribution plan, the incentives presented to the distribution partners and the target population, the coordination of the educational campaigns to promote the exchange of light bulbs and the verification process for CFL installation.

The financial feasibility of the PoA is evaluated in light of current CER prices and the variations in the exchange rate (US$/€) resultant from the financial crisis. Modelling of the possible price scenarios provide a revised approach of the expected PoA returns.

The Mexican CFL rating report has already been recognised as a useful instrument by developers engaged in pCDM:

“The pCDM Rating is a useful instrument to enhance investor’s confidence in pCDM. It contributes to better understanding of how PoAs are structured and what kind of support is needed for the expansion of such activities.”

Phil Cohn Cool Nrg International

It also received the support from other market participants: “The CRA analysis is crucial to understand how the program is intended to work and helps the reader to build an opinion on the risks associated with the program. I can only encourage the CRA to keep on with their analytical effort in this domain.”

Dr.Klaus Oppermann  KfW Bankengruppe

The Carbon Rating Agency is already engaged in evaluating PoAs in Asia and Africa. As the pCDM market develops, CRA envisages an increased need for an independent overview of all the risks perceived in such emerging mechanisms. CRA initiative of developing a specific tool for pCDM evaluation will assist companies getting involved in next generation emission reductions and enhance credibility in this market.

For a sample of the Mexican CFL report, please contact the Carbon Rating Agency: info@carbonratingsagency.com

Source: MondoVisione, 27.05.2009

Filed under: Asia, Energy & Environment, Latin America, Mexico, News, Risk Management, , , , , , , , , , ,

Brazil’s President wants to boost Trade Ties with Saudi Arabia

RIYADH – Brazilian President Luiz Inacio Lula da Silva told Saudi business leaders on Sunday that he wanted to strengthen the ties between his country and Saudi Arabia in all trade areas.

The Brazilian leader delivered a speech after meeting with the Riyadh Saudi Trade and Industry Association in which he called for intensified business contacts and visits by businessmen from the two countries. “Brasilia and Riyadh are resolved to exchange opinions” and to hold meetings to strengthen cooperation and ties that unite the two countries, Lula said.

The two nations are going to push for more bilateral visits and contacts to foster cooperation in all areas, especially in agriculture, petroleum and chemical production, the Brazilian president said.

Lula emphasized the resources Saudi Arabia has in the area of investment, knowledge, industry and technology, calling this sufficient reason for his country’s business community to travel to the Middle Eastern kingdom to pursue investment opportunities in the industrial and petroleum sectors.

Riyadh Saudi Trade and Industry Association head Abdel Rahman bin Ali al Yerisi said in his own remarks that Lula’s visit will contribute to bringing about a situation in which greater business cooperation can be achieved between the two countries.

“The meeting of the Brazilian president with Saudi businessmen from Riyadh will generate a strong impulse for reactivating bilateral cooperation, thanks to the enormous economic and human capacity both countries possess,” the Saudi business leader said.

During the meetings between the two countries’ delegations, several accords were signed, among them one between Brazilian state-owned oil company Petrobras and the Saudi Modern Chemical Company.

Source: Latin America Harald Tribune, 17.05.2009

Filed under: Brazil, Energy & Environment, News, , , , , , ,

China and Venezuela Launch Joint Oil Venture

BEIJING – State-owned PetroChina and Petroleos de Venezuela SA, or PDVSA, have formed a joint venture to pursue exploration and production projects in Venezuela, the official Xinhua news agency reported Wednesday.

China’s largest oil company will hold a 40 percent stake in the joint venture, PetroChina CEO Jiang Jiemin told company directors. PetroChina also approved the signing of a loan totaling 100 billion yuan ($14.7 billion) to fund foreign operations in 2009.

“The drop in oil prices on the international market represents a special opportunity for expanding horizons,” PetroChina said.

PetroChina and PDVSA plan to form two other joint ventures that will focus on transporting crude and developing two refineries, one of which will be in the southern province of Canton, Jiang said. The executive did not provide specific figures on the agreements reached with PDVSA.

PetroChina, the world’s second-largest oil company in terms of market capitalization, trailing only U.S. behemoth ExxonMobil Corporation, expects to produce 40 million tons of Venezuelan petroleum annually, Jiang said.

The joint venture created by PetroChina and PDVSA will allow the oil companies to work together and cut exploration and production costs.

Source: Xinhua 13.05.2009, LatinAmerica Harald Tribune 18.05.2009

Filed under: Asia, China, Energy & Environment, Latin America, News, Venezuela, , , , , , , , ,

A New Growth Industry: Carbon Fraud

As the U.S. Congress gears up to begin debate on a cap-and-trade system aimed at reducing emissions of carbon dioxide and other global warming gases, fraudsters are licking their lips at the multi-billion dollar potential for gaming the system.

As honey attracts bees, money draws thieves. Such is human nature. So if you create a new multi-billion dollar market, it won’t take long for the bad guys to find a way to get in on the game. The new game is called cap-and-trade and the new currency is the carbon credit. The federal budget put forth by the Obama administration earlier this year forecast revenues of $650 billion over 10 years from the sale of carbon credits. And worldwide, the global carbon trading market is expected to grow to $700 billion annually by 2013 and as much as $3 trillion by 2020 – a fraudster’s dream come true.                                                                                                                  Read orignal article by Kroll  Tendencias May 2009
Cap-and-trade is a market-based system that aims to decrease greenhouse gases in the atmosphere by capping the emissions of polluting companies and reducing those caps over time. If polluters produce emissions below their legal limit, they earn carbon credits which they can sell to companies that do not meet their targets. These credits can be bought and sold on regulated exchanges.

As the United States enters the uncharted waters of cap-and-trade, much of the debate will revolve around the impact of imposing such a quota system for polluters on the cost of doing business. Will cap-and-trade unfairly burden US industry? Will it lead to protectionist policies aimed at emerging markets where emissions are not likely to be capped for many years to come? These discussions are sure to overshadow the issue of fraud. But the artificial restraints of cap-and-trade are certain to propel a new generation of malefactors to quickly learn the art of concealing and trading  not stolen art or African ivory  but emissions credits.

While new in the US and Latin America, carbon markets have been operational elsewhere since 2005. London-based consultancy New Carbon Finance estimates that the global carbon trading market increased from $64 billion in 2007 to $116 billion in 2008, based mostly in the European Union. Globally, the carbon market could reach $669 billion by 2013, according to a report last month by market research firm SBI. That figure includes an estimated $117 billion generated by the proposed cap-and-trade system in the US. In Latin America, Mexican officials have already expressed interest in bringing large polluters, such as Pemex and Cemex, into a cap-and-trade market.

With such huge sums at stake, there is a growing recognition of the potential for fraud. A recent report by accounting firm Deloitte warns that fraud in carbon markets “may be especially prevalent during the early stages of regulation by those looking to take advantage of naive market participants.”

Although still in its infancy, a few of the possibilities for fraud in a cap-and-trade system include:

Pumping Up the Baseline – A baseline scenario is an estimate of greenhouse gas emissions that would occur in the absence of a proposed project. If a project, once completed, produces fewer emissions than its pre-established baseline, the difference can be sold for credits. This gives project owners an incentive to exaggerate a baseline in order to receive more credits than they deserve. In the absence of proper oversight, there is enormous potential for abuse.

Potemkin Factories – Jim Lane, Miami-based editor of Biofuels Digest, a daily online compendium of news stories and commentary on renewable energy projects around the globe, refers to a Potemkin factory as a project built specifically for the sake of generating emissions credits. Like the Soviet Union’s Potemkin villages built to show off a phony communal paradise to naïve foreigner visitors, new emissions reduction projects could be contrived in a similar manner. The Potemkin factory charge has been used in connection with plans to build refrigerant gas plants in China. Critics alleged that the plants, which produce the harmful greenhouse gas HFC23, could potentially generate more revenue from the sale of emissions credits than from their core business.

Outsmarting the Auditors – Clever crooks (think Enron) have been outsmarting even the most conscientious auditors for as long as they have been around. No matter how tight the controls are on carbon production and carbon reduction, the urge to cheat, especially with wildly fluctuating prices of carbon per ton, will be great. For example, highly sophisticated meters and other equipment will need to be installed at companies that claim to be sequestering carbon dioxide emissions. But, as one carbon credit expert recently observed, sometimes gaming the system is as easy as sending air through the meter instead of gas.

Good Old Corruption – Given the amount of money in play, there always remains the possibility that an agent whose job it is to monitor and verify emissions reductions could be bribed. It is worth noting that the auditors that are currently empowered to verify emissions reductions programs around the world are all certified by the United Nations. If the oil-for-food program is any guide, that kind of certification program is far from foolproof.

Controls to prevent such fraudulent activity have been debated and will continue to be discussed during and following the December 2009 Copenhagen Climate Conference, where environment ministers from 192 countries aim to craft an agreement to replace the United Nations Kyoto Protocol, which ushered in the era of cap-and-trade and will expire in 2012. Much practical experience has already been gained from the European Union Emission Trading Scheme, the world’s first operational cap-and-trade system, which went into effect in 2005. Nonetheless, the risks will remain.

While a simpler alternative to cap-and-trade, such as a carbon tax, would be less attractive to fraudsters, some form of carbon trading will likely come into effect in the US and eventually in parts of Latin America. Governments and companies wishing to play the game of carbon credits need to have their eyes open about the real risks of fraud. As Yuda Saydun, founder and CEO of Florida-based carbon operations consultancy ClimeCo, notes, “tight, frequent, ongoing monitoring will be fundamental to the integrity of any cap-and-trade system.”

Source: Kroll Tendencias May 2009 – The author: Shanti Salas (shsalas@kroll.com)  is an Associate Director with Kroll in Miami.

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How to develop Carbon Credits and make money

South Pole is a carbon asset manager that helps companies develop projects that create credits to trade on carbon trading markets. We talk to Renat Heuberger, a managing partner at South Pole, about the industry.

How aware are Asian companies about the carbon trading market?
The world of carbon is dividing into two parts — those with Kyoto targets and those without Kyoto targets. The countries that have Kyoto protocol targets at the moment are mainly OECD (Organisation for Economic Co-operation and Development) countries, and in Asia (ex-Australia), Japan is the only country that has such targets. As a result, only Japan has so far been acting as a buyer.

In other Asian countries, however, there are many companies that are active on the selling side of the carbon trading market. These include Korea, Thailand, Indonesia, Malaysia and of course China and India. The way they participate is by, for example, introducing CO2 reduction measures for their companies, whereby the resulting certificates are then sold. So the level of participation in carbon trading really depends on what country you come from. So Asia is aware of the market.                      Read orignal article by FinanceAsia.com

You help companies that are investing in projects that potentially qualify for emission reduction credits. How does that work?
South Pole is a carbon development and carbon trading company. We have offices staffed with technology experts all around the world. When we’re talking about selling to the carbon market (so I’m talking now about the countries outside of Japan) what these experts do is approach companies and identify what they could do to reduce emissions. Of course, we have a lot of experience in what works and what doesn’t. This is very important, because you need to take measures that reduce at least 50,000 tonnes of CO2 per year to make it worthwhile. If it’s lower than that, it gets tricky, it’s not really worth the effort so much to participate in carbon trading. So we are quite aware of what industries work for carbon trading and we approach companies in those industries and propose emission reduction measures.

We also have technology partners, for instance providers of bio-gas engines, generation equipment or boilers — technology that is directly or indirectly used for reducing emissions — and we introduce these technology providers to the companies.

So basically we come through the door and say: ‘Ok guys, we see an opportunity for emission reductions, and guess what, we have a solution. We can help you reduce the emissions and you can even make money from it.’

How long does this whole process take?
There are two parallel steps. The first part, which is to get the technology in place and start reducing the emissions, can take from six months up to several years. How long this takes is often linked to the question of how fast you can get your financing act together. In parallel, the process to register the project (so it is accepted as a clean development mechanism, or CDM, project) normally takes another year.

Just to be clear to our readers. Under the Kyoto Protocol, developed countries with quantitative emission limits can invest in carbon projects in developing countries to assist their sustainable development. Those projects are known as CDM projects. And those CDM projects produce tradable carbon credits called certified emission reductions or CERs. But there are also voluntary emission credits, or VERs, which are also called carbon offsets. In this case, a purchaser — typically a commercial firm — buys an emissions allowance to offset the carbon produced. This happens mainly for reputational purposes, and to contribute voluntarily in the fight against climate change. There is no formal market for VERs.

So, my question for you is, do you normally do projects that are CDMs, that will produce certified CERs? You don’t usually do VERs, do you?
We do both. Our focus is obviously on CERs because the market is much bigger, but the voluntary market is growing. The good thing is it doesn’t stop in 2012. On the voluntary market you can transact emission reductions for as long as you want. While on the compliance market, things may change once the political circumstances change.

We are the only carbon credit development company in the world which has an office in Taiwan. Taiwan doesn’t qualify for CDMs because its legal status with the United Nations is not clear due to its dispute with China and it is not under the Kyoto Protocol. So we are generating VERs in Taiwan, which is quite an interesting model as well.

Do you tell a company “I think you should produce CERs” or do they usually tell you what they would prefer to do?
It depends. There are certain industries, for instance the starch or the ethanol industry in Thailand, which are already aware that they can produce CERs by covering their waste-water lagoons and producing bio-gas. The starch industry is quite busy in Thailand and these companies are more or less aware of carbon trading and basically it comes down to what company they are comfortable doing business with to produce their CERs.

For other industries, it’s all quite new. There are sectors, such as the transport industry, or producers of energy efficient appliances, which only recently became aware that there is this possibility. So in these cases, it’s typically us going to them and saying: “You have this potential, why don’t you do this…?”

Ok, so once a project has CDM status and you’ve produced CERs, how are they then traded?
For CDMs, it’s like trading crude oil. The volume may be a bit smaller, but it’s the same mechanics. It mostly happens in Europe, because most of the buyers are in Europe. But every day you can check the current spot price. And so you develop your project, and you sell it at a good moment — when you believe the price is not going to move against you. It’s very classic trading techniques.

The difference is that when you trade crude oil, someone actually has the product. You have the one gallon of oil. With carbon trading, you don’t have a product. You just have a couple of bytes on a server at the United Nations. It’s an abstract commodity, if you will. But it can be traded.

Aside from it being abstract, the market is also slightly different because it is exposed to political decisions. If the political winds move in a way that makes them say, no one wants these products anymore, obviously the price will fall. But if the political winds blow in another way, and politicians say we’ve not done enough to prevent global warming and we need to reduce emissions even more, the pricing will go up. So my point is, this market is not only driven by fundamentals but also by political decisions, and that makes it unique from other commodity markets. That’s the CER market.

I think, however, it’s also important to note once again the difference between CERs and VERs because the VERs don’t have this 2012 deadline, which is when the Kyoto Protocol expires. They can sell indefinitely. The voluntary market is like selling any product. For this, you go out and talk to banks and airlines, anyone who can be interested in voluntarily offsetting and making a contribution to prevent global warming and promote sustainable development in the developing world.

So the CER market has this political element, which makes it different, while the VER market doesn’t have such a political element, but much more of a reputational element.

In December, world leaders are coming together in Copenhagen to try to reach a decision on how to, if at all, continue the Kyoto Protocol. Do you think there will be an agreement in Copenhagen in December?
In 2012, the Kyoto Protocol expires. Unfortunately, the world has yet to agree what will happen after that. This is unfortunate right now, because, as I mentioned, it takes about two years to take a project to market, and we’ve only got three years left to go with the Kyoto Protocol. So now, if you were to start a project, you’re only talking about one, maybe two, years of trading under Kyoto — but a typical CDM project could generate up to 21 years worth of credits. One or two years versus 21 years is obviously a big difference. So of course we hope that a resolution is reached in December in Copenhagen that calls for countries to extend their commitment beyond 2012.

At the moment we are hopeful that this will happen because of the new administration in the US. What challenges the whole thing is the financial crisis, which is changing the focus for politicians. Their priority is fighting the financial crisis rather than focusing on the Kyoto Protocol. So the climate issue goes on the back burner. But there are positive signs from the US and Europe. European leaders, for example, have said that if other countries participate they would aim for 30% less emissions by 2020.

Now, what would happen if it doesn’t go through? The reality is this market won’t collapse. The good news is it would not go away just because there is no agreement. What would happen is there would be regional markets. For example, in Australia, the new government has embarked on an emissions trading scheme that is likely to launch in 2010 or 2011. Once it’s online, it will include commitments that go way beyond 2012.

The Europeans have also committed that even if there is no agreement they would continue carbon trading. Of course, the big unknown is the price. No one knows what the price would be in those schemes.

The good thing about the Kyoto market is that there’s one set of rules that applies to everybody. But if nothing is passed in Copenhagen, what could emerge is that we have a series of domestic schemes — one plan in Australia, another in Europe, another in Canada — with everyone having different rules. And that complicates matters. So once you start developing projects you would have to do it according to the rules of the country in which you were going to sell the credits. This would be more complicated, but it could work.

What type of products does South Pole specialise in?
We specialise in renewable energy and energy efficiency. And we of course specialise in the highest quality products — Gold Standard credits — you could say that we dominate that market, as we think it adds far more value. What qualifies as Gold Standard? Mainly energy efficiency and renewable energy. So we have a lot of wind power, hydropower, thermal-power, solar power, bio-gas — these types of projects. There’s a lot of potential in Asia. For example, countries like Thailand and Malaysia have a lot of potential for bio-gas power. And wherever there are mountains — there is potential for hydropower, so Vietnam, Indonesia and China are good countries. So there’s room to grow.

Tell us a little more about the Gold Standard carbon credit that South Pole created.
The point of these projects is to reduce emissions as the main aim is to protect the planet against global warming. But, you get there in different ways. You may have a project where you have a landfill site and you burn the landfill gas. That is good for reducing emissions, but that’s it. There’s no other benefit in doing this. The “only” benefit is to prevent climate change.

Now, there is a group of NGOs, such as WWF and the like, who said: ‘If we do this carbon trading mechanism, we should actually distinguish between the projects that only reduce climate gases and those that reduce climate gases and provide additional benefit to their host country.” We agreed, and contributed to make the Gold Standard happen.

The Gold Standard is given to projects that reduce carbon gases but also have social benefits. Some examples would be employment generation, or other positive impacts on air pollution, or a project that also reduces water pollution, and so on. The focus of the Gold Standard is projects that have a community element — so the money doesn’t just go to the industry but to the community as well. A very good example is rural electrification, which brings clean energy to people in the countryside.

What do you say to people when they are sceptical about CO2 emissions, arguing that it’s not necessary, or whatever their criticism may be? Do you hear criticisms? Or by the time they come to you, are they already convinced that they need to do something?
Well there are two types of critics. Both of them are clearly wrong, I would say. The first type of critic is still sceptical about climate change and the question of whether the problem is man-made. If you’ve got hundreds of scientists agreeing to the fact that the fast worsening of climate change is man-made, it’s amazing there are still people questioning this. There’s just an overwhelming amount of evidence, and it’s just very, very hard to find convincing evidence to the contrary. But there will always be people who will say crazy things.

But even if there wasn’t the issue of climate change, it still makes sense to reduce CO2 emissions, because when you do that you typically save fuel. And the fuel we use — such as crude oil — is going to run out at some point. So there’s anyway value to reducing our use of it.

The second set of critics say that carbon trading is not a good thing — they argue it’s not sound. This is clearly wrong too. Because nations have set up a very extensive set of compliance rules — that’s why it takes more than one year to complete a project — and the process is extremely conservative, in the way we prove and calculate and certify it by an independent entity.

Plus there are lots of economic arguments for carbon trading. Money incentivises people to reduce emissions. If a European company finds it difficult to reduce their emissions any further, it makes sense that they finance a measure in Asia where it can be less expensive to reduce emissions. That’s what climate trading is all about. It leads to a good allocation of resources so that we can protect the planet in the most efficient manner.

Finally, another important point for Asia (and also the rest of the world) is that most of the Asian companies, who participate in carbon trading, actually end up making money doing it (and I’m not talking about trading here, I’m talking about the process). Because what is an emission? It’s waste, it’s inefficiency. And it does intuitively make sense to reduce your inefficiencies.

Source:FinanceAsia, 07.05.2009

Filed under: Asia, Australia, China, Energy & Environment, Library, Malaysia, News, Risk Management, Thailand, Vietnam, , , , , , , , , , , ,

Challenging Year for Thomson Reuters, Bloomberg and Financial Information/analysis Market

Burton-Taylor International Consulting LLC, a leading financial news and market data research, strategy and business consulting organization, today released research showing the market shares of industry leaders Thomson Reuters (TRI) and Bloomberg to have increased slightly in 2008 to 34% and 24% respectively. The overall spend on financial information and analysis globally was flat year-on-year, as the industry exited 2008 at US$23.01 billion versus US$22.99 billion in 2007.

Although distant in terms of revenue, the fastest growing major data providers in the industry were FactSet, Interactive Data Corporation (IDC) and SIX Telekurs which now enjoy 2.5%, 3.3% and 1.2% global share respectively. The fact that the third, fourth and fifth biggest players hold less than 4% market share each only serves to underscore the duopolistic nature of the current market data industry.

Asia led all regions in 2008 with a 20.3% increase in spend, while Europe, Middle East and Africa (EMEA) grew at just under 7% and the Americas contracted by almost 10%. Thomson Reuters is the market share leader, with Bloomberg second, in each of the three regions. Quick sits third in Asia while SIX Telekurs is third in EMEA and IDC third in the Americas.

Burton-Taylor data shows that exiting 2008 the largest segment, in terms of total information and analysis spend worldwide, is Fixed Income/FX Sales & Trading. Investment Management is second largest, followed by Equity Sales & Trading, Corporate, Wealth Management, Commodities & Energy and a dramatically smaller Investment Banking segment.

A challenging year in 2009 is projected by Burton-Taylor, with negative 1-3% growth seen for the industry. The Americas will continue to contract. EMEA will remain flat but be supported by growth in the Middle East and Eastern Europe. Asia’s growth rate will be significantly less than recent years but still reach the low to mid-single digits, fueled by external investment from Japan and internal investment in China.

“Thomson Reuters and Bloomberg will face differing challenges and changing business focuses in 2009,” says Douglas B. Taylor, Managing Partner of Burton-Taylor. “At TRI, feeding the appetites of the growing ‘low latency’ and risk management monsters, as well as continuing to establish a foothold against strong competitor Dow Jones in the machine readable news market, are key priorities. At the same time, launching a new financial video service and rebuilding equity news to leverage their desktop dominance in the North American Wealth Management space will test the Company’s ability to both invest and seek overall margin improvement.”

“At Bloomberg the attention is directed at finding new revenue outside the core terminal business,” Taylor says. “Commitments to high margin datafeed sales, and to improved news coverage in China, are seen as significant opportunities, but successfully capitalizing on the strategies without cannibalizing existing revenue will require creative commercial models and deft execution in areas that are relatively new to the company.”

According to Taylor, “Both TRI and Bloomberg are facing these challenges at a time when the revenue insulation provided by their dwindling two and three year client contracts is rapidly eroding. Additionally, IDC’s continued aggressive approach to pricing and SIX Telekurs’ continued strong organic and acquisition-based growth may begin to dent the market shares of the ‘Big 2’. Maintaining revenue by Thomson Reuters and Bloomberg over the next 12-24 months will be strictly on the merit of their strategic planning and execution. Both companies are leaning heavily upon their proprietary news capabilities to help drive growth, which is one reason that Burton-Taylor in the coming weeks intend to publish the first ever, detailed comparative study of Bloomberg News versus Reuters News.”

“Because market participants are finding it increasingly difficult to differentiate services, we believe that our study ‘Bloomberg vs Reuters News – Analysis of International Services 2009’; a quantitative and qualitative analysis of Bloomberg News and Reuters News including regional and international content, daily and hourly volume, 3rd party redistribution, coverage breadth, coverage depth and commentary comparison, will provide a transparency and illumination that improves competition between industry participants and profitability of industry clients,” say Taylor.

Source: Burton-Taylor Internationalm 17.02.2009

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Asia: Green investments get pruned

A generation of alternative-energy investors faces the ugly reality that pollution pays.

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Investment in environmental technology and clean energy was a headline maker just a few months ago, on the back of high fossil fuel prices, climate change and wars in the Middle East. Since then the credit crisis has pushed the quest for environmental alpha into the background.

Whilst folk may be concentrating less on saving the planet in preference to saving their own personal environment, investment in green themes and clean energy was always based on hard money-making objectives in the line of producing sustainable returns.

Investors are looking up the wrong end of 30% falls to the value of green portfolios this year. That is because the environment sector is capital intensive and in the crunch it got hit. Liquidity has dried up for environmental projects, which tend to be enormously expensive to build.

Many clean-energy companies are at early stages of development and have found it hard to find funds. Venture capital and private equity investment in the space totaled $4.4 billion in the third quarter of 2008, a fall of 24% from the second quarter. The credit crisis has played havoc with the debt-laden and subsidy-driven renewable energy sector.

“Most environmental infrastructure plays are leveraged 70:30. It costs a massive amount to build these things,” says Glenn Fung, the portfolio manager of the Verde Fund in Hong Kong. The Verde Fund is 5% long and goes 10% long or short maximum net exposure, but the fund is down double digits for 2008. “There are lots of value plays, at 15 year lows in terms of value. Those entering now can get into deals at very good price levels.”

The second big black hole has been the fall in the oil price. As the oil price has tumbled to less than half of its peak levels it has meant that people are less interested in buying clean energy, which was meant to serve as a substitute. The propensity to invest in new energy sources has started to erode.

The China Growth Opportunities Fund allocates 70% to energy and clean technology, so it has not been as badly impacted as many funds. The main hit been from listed water stocks, because as project finance dries up these struggle to expand, and their valuations have tanked in line with the general stock market.

“When people are losing their jobs, companies are going bankrupt and asset prices are falling, the environment tends to get pushed to the sidelines, especially when the cost of oil more than halves,” says Simon Littlewood, who runs the China Growth Opportunities Fund. “The interesting angle is how the clean-tech sector is now being heralded by politicians like Barack Obama and Gordon Brown as the big job creator, the next wave of growth for Western economies. The question is where the funding will come from?”

President-elect Obama is promising emissions cuts of 80% by 2050, but offers no goals for 2020. He and similarly minded politicians such as Australian prime minister Kevin Rudd are motivated by energy security as well as more altruistic environmental concerns. However, given the state of the financial sector and the huge amount of distressed assets available to anyone looking to invest money, it is going to take a lot of government and state involvement to drive the sector forward, nudging the investors towards key specific environmental sub-sectors.

“Governments and politicians need to take the lead in driving green investments through regulation,” says Joost Bergsma, the head of clean energy at Fortis Investments. “This is both a national as well as a local responsibility. Local governments can be somewhat slow in approving investments and this bottleneck needs resolution.”

It is already the case that governments have acted as by far the main promoter of environmental investment. Ethanol and petrol substitute investment remain driven by governments, and as an experimental business, subsidies are still vital.

The gloomy atmosphere doesn’t mean that entrepreneurs are not pressing ahead with their green projects. PT FirstFruits is an Indonesian firm planning to produce green bio-ethanol from the nipah palm, which is grown in plantations in Papua, Indonesia. The feedstock for ethanol production varies from sugar cane, sugar beet and other agricultural products. Producing the sugar-rich Nipah Palm sap is price-competitive compared to the cost of using, say, sugar cane, palm oil, Jatropha or Arenga palm to create ethanol. Costs of production equate to approximately $0.10 per litre, with a sale price of $0.71 per litre.
With this level of margin, it means that ethanol production is less affected by the lower crude oil price, as would be the case with oil sands, a field in which operating costs are a lot higher, making that investment decision more marginal.

“For investors in our project, we have been looking to high-net-worth individuals in Brunei, Hong Kong, and Japan, plus we’ve been talking to private-equity houses,” says Yan Mandari, majority owner of PT FirstFruits. “We chose this route rather than Indonesian commercial banks, which don’t have a lot of credibility in this area. Right now it is incredibly difficult to get funding from an Indonesian bank for a project such as this.”

On the private-equity side there is a full spectrum of investment opportunities ranging from risky new technology venture capital, through to more solid infrastructure such as power stations.

On the listed side there are very large companies, for example Shell, BP, and Veolia Environment, which are active in clean technologies, but as that accounts for just a small part of their revenues; these are not pure clean-energy investments. Purer plays include solar panel manufacturers such as Suntech, Suzlon Energy (which makes wind turbines), or China High Speed Transmission (a maker of gears for wind transmission equipment). These companies tend to be smaller and subject to far more volatility. To short that end of the sector is difficult because of a dearth of liquid borrowable stocks, so hedge funds have found it hard to profit from their stock price falls.

Capital funding is drying up, but also the dislocation of markets is affecting firms in other ways, even those companies with solid order books. The shares of China High Speed Transmission fell 50% in two days during October when it ran into trouble on its convertible bond-hedging program, having offered the bonds with put protection that proved to be out of the money.

So where are the clean energy funds looking for the future?

“Converting waste to energy via incineration has additional potential as an environmental investment theme,” says Andrew Pidden, CIO of Clean Resources Asia, which runs long only and long/short clean energy and water funds. “Forestry also looks interesting, as and when subsidies are forthcoming for leaving forests intact instead of cutting them down.”
He also cites hybrid technology as benefiting as electricity or biofuels replace oil in transport, as well as the cutting edge of generating fuel from algae.

The green investment space has come to an impasse. Take cars. Gas guzzlers like sports utility vehicles (known in Britain as ‘Chelsea tractors’) continue to sell below cost. The death of the Humvee may yet be premature as oil prices tumble. Investment into alternative energy has abated. Yet the long-term trend for oil prices must be upward, once China gets its growth story back on track. In China, coal is trading at $130 per ton, down from the peak of $154 per ton but well above the long-term average price of $70.

This means the old methods and fuel sources are proving more lucrative to investors than the new alternatives.

Utilities and power used to be regarded in investment circles as a ‘defensive’ area of the market. To the extent that clean energy has tried to affix itself to that sector, then given the performance of 2008, it can hardly be defined as defensive. In the Asian market, investors simply perceived alternative-energy stocks them as China-related mid caps and sold them off.

Here’s the rub: in spite of all the green initiatives, investment dollars, subsidies and carbon-credit change incentives, the world’s population is still belching out more carbon into the skies every year. None of the good intentions have paid off.

“Sadly, the credit incentives might seem good, and be well intentioned,” says Hong Kong-based scientist Dr Martin Williams, “but they are clearly woefully inadequate when it comes to tackling climate change, as are all other measures adopted so far.”

There’s still a mountain to climb, and whether you’re an investor, or just a person inhaling the pollution, the message is that dirty energy still rules.

Full article click here

Source: Asian Investor, December 2008  by

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Era of cheap Oil is over

Forget about cheap gasoline, today’s low oil price masks a looming energy crisis that could dwarf the current economic problems.

If you thought things couldn’t get any worse than a collapse of the global financial markets, think again. The economic meltdown is a good reason to be gloomy, for sure, but an under-reported study by the world’s leading energy agency recently raised the spectre of a collapse in the global energy market too.

The steep fall in oil prices during the last few months of 2008 prompted many people to think that the run-up to $147 a barrel was an aberration – driven by speculators or another artefact of the credit bubble. But some industry analysts say that today’s prices are the real aberration and, in fact, oil production is dangerously close to going into a permanent and unstoppable decline.

Indeed, the collapse in oil prices is accelerating this trend. Non-traditional projects that were profitable when prices were high, such as Canada’s oil sands and fields that are deep underwater, are now being postponed or even scrapped. At the same time, the Organisation of Petroleum Exporting Countries (Opec) cut production targets in December in a desperate bid to reverse the decline. That move seems to have had some effect, but there is now a fear that supply in the oil market will be dangerously out of sync with demand when the economy starts to recover.

“We will work our way through these financial problems, but what would be really unfortunate is that once things bounce back, oil prices will bounce back too,” said Matt Simmons, chairman of Simmons & Company International, at a roundtable held in mid-December. He says that supply shortages could help oil prices soar through $147 as unhindered as a hot knife cuts through butter.

It is no longer just conspiracy theorists that are worrying about a looming energy crisis. Today, even the International Energy Agency (IEA) is sounding the alarm bells. The agency, which has very close ties to the big oil companies, quietly dropped a bombshell in its World Energy Outlook 2008 when it revealed that its first ever real-world survey of existing oil fields shows production falling at a much faster rate than its earlier guesses.

At the current rate of decline, says the IEA, oil production from existing fields will fall to just 30 million barrels a day by 2030 – or roughly 73 million barrels short of the expected level of demand. New sources will make up some of the difference, but to fully meet future demand, the world’s energy companies will need to discover the equivalent of six new Saudi Arabias during the next 20 years. Simply maintaining today’s levels means discovering four new Saudi Arabias.

Not even the IEA expects this to happen. Its 2008 report represents the most optimistic outlook, but is nevertheless dire. Its executive summary starts with a quiet, but very important statement: “Current global trends in energy supply and consumption are patently unsustainable.” And concludes with a similarly potent call to arms: “Time is running out and the time to act is now.”

Put simply, there is no quick fix to meeting the world’s future energy needs. “There is no fix actually,” says Simmons. “The only fix is making a sprinting retreat from our use of oil today. If you get smart people looking at the data it doesn’t take more than a couple of minutes for them to say, ‘This is awful.'”

It may be too late already. Forecasts for production declines are based on the depletion rates of large oilfields, but almost half of the world’s oil supply comes from tiny fields that produce fewer than 400 barrels a day – and these small fields are known to decline much quicker than big fields.

“Oilfields aren’t like emptying a bucket or taking boxes out of inventory,” says Robert Hirsch, a senior energy adviser at Management Information Services, speaking at the same roundtable as Simmons. “You can’t keep pulling oil out of the ground at the rate that you did in the past because of the basic geological processes.”

In the midst of a global recession, much of the explanation for falling prices has focused on the supposed collapse in demand for oil, particularly from Asia’s rising economic powerhouses, but talk of China’s falling oil imports is misleading. It is only growth that is falling – from 28% in October to 17% in November.

According to Simmons, the story of supply destruction is a more immediate problem. “We’re unwinding supply right now just as fast as we’ve ever done and it’s like a bulldog chewing on somebody’s behind,” he says.

As the IEA says in its report, the era of cheap oil is over. And, unless drastic measures are taken to reduce energy consumption and speed up the development of new energy sources, the world could be headed for a serious energy crisis as soon as 2015. If that happens, our current economic woes will hardly merit a mention in tomorrow’s history books.

Source: FinanceAsia.com

Filed under: Asia, Energy & Environment, Latin America, News, Risk Management, , , , , , , , , , , , , ,

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