Climate Change Capital's bets on emissions trading

Carbon Traders Create Cheap Credits in China for Sale in Europe

By Stephanie Baker-Said

Nov. 5 (Bloomberg) -- One early October day in London, a financier named James Cameron was poring over a poster-size map of China inside his offices near the River Thames.

Dotting the map were 20 or so sticky labels, similar to small Post-it notes. There were pink ones, blue ones, green ones, yellow ones -- each marking a spot where Cameron's company, Climate Change Capital, is wagering tens of millions of dollars.

Cameron doesn't invest in stocks or bonds. What he invests in is carbon dioxide (CO2), the principal cause of global warming. In return for curbing emissions in, say, China, Cameron can sell the right to pump CO2 into the air in Europe. The going price: about 17 euros ($24) per metric ton.

Since co-founding Climate Change Capital in 2003, Cameron and his business partner, Mark Woodall, have turned their company into a powerhouse in the burgeoning global market in greenhouse gases. Driven by the Kyoto Protocol on global warming, an accord Cameron helped write, this corner of the derivatives arena is growing as never before.

Global warming may present the greatest challenge humans have ever faced. For Cameron, part of a new breed of climate- change capitalists, it also offers something else: a chance to make money. Whether this quest for profit will avert the potentially catastrophic consequences of a warming Earth is, at this point, unknowable. One possible alternative to trading would be to tax emissions, thereby making it costly for companies to keep polluting.

Forerunner: Acid Rain

Al Gore, who won the Nobel Peace Prize on Oct. 12 for his work on climate change, has championed trading as one way to curb emissions of CO2, whose molecular structure traps heat near the Earth's surface. These markets enable power companies, refineries and factories to buy and sell the right to pollute once regulators cap emissions levels. Supporters of trading point to the success of the 12-year-old U.S. market for sulfur dioxide (SO2), a primary cause of acid rain. Since this system began, SO2 emissions from power plants have dropped 41 percent below 1980 levels.

The U.S. has fallen behind Europe in trading CO2 allowances -- ``carbon,'' in trader-speak -- because U.S. President George W. Bush has opted out of the Kyoto Protocol, saying its strict limits on emissions would prove too costly to U.S. companies.

As a result, London rather than New York has become the world capital of carbon finance. As part of the Kyoto accord, the European Union created a single market for CO2 rights on Jan. 1, 2005. Trading has exploded. Last year, the carbon market worldwide grew threefold to $30 billion, according to the World Bank.

$565 Billion Market

Investors have poured about $12 billion into funds devoted to pollution, according to London-based research firm New Carbon Finance. Half of that money is managed from the British capital. In the U.S., where polluters can trade CO2 rights among themselves if they choose, California Governor Arnold Schwarzenegger is pushing to create a market that could one day dwarf Europe's. By 2020, the global carbon market could swell to $565 billion, according to estimates from Oslo-based research firm Point Carbon.

So the great carbon rush is on. In January, Morgan Stanley bought 38 percent of MGM International, a Miami-based company that invests in emissions-reduction projects, as part of a $3 billion push into the carbon market. In June, Credit Suisse Group bought 10 percent of Dublin-based EcoSecurities Group Plc and said it may lend that company 1 billion euros for pollution investments. In August, a unit of London-based hedge fund giant Man Group Plc raised $382 million for a fund specializing in greenhouse gases at Chinese coal plants. And Salt Lake City- based Blue Source LLC, a startup run by two Utah entrepreneurs, has quietly amassed the biggest bank of pollution credits in the U.S.

Expecting `Big Returns'

So much money is pouring into this arena that some investors may not make as much profit as they think, says Martin Whittaker, a director at MissionPoint Capital Partners, a Norwalk, Connecticut-based private equity firm that manages a $335 million growth fund aimed at clean energy and the environment.

``A lot of investors have piled in expecting big returns in a nascent market,'' Whittaker says. ``As in any investment, you get a lot of capital chasing returns and it tends to depress the margins.''

Cameron, 46, and Woodall, 45, run Climate Change Capital out of a glass office tower near the south bank of the Thames, next to the headquarters of London Mayor Ken Livingstone. The company, which has about 120 employees, projects an eco-friendly image. The walls are covered with bamboo and the floors are blanketed with gray carpet made from recycled fabric. The coffee machine is full of fair-trade beans. Tables and worktops are made from recycled plastic yogurt containers. A series of multicolor tiles use English words and Chinese characters to proclaim the company's motto: ``Wealth Worth Having.''

Carbon's Goldman Sachs

Cameron, who is vice chairman, and Woodall, chief executive officer, have big plans for their company. Climate Change Capital is already financing projects that it says will eliminate 70 million metric tons of greenhouse gases. That's roughly equivalent to the amount of CO2 Denmark sends into the sky each year. Cameron and Woodall predict that assets under management will swell to $10 billion within five years. They've pushed Climate Change Capital to manage money, finance clean-air projects and advise on mergers and acquisitions -- in other words, to become a sort of Goldman Sachs of carbon.

In September, the duo flew to New York, where the UN was holding a meeting on global warming, to rub elbows with Gore, former U.S. President Bill Clinton and Hollywood star Brad Pitt. Their latest project is to raise $1 billion for a fund that will invest in low-energy buildings. ``We're just babies,'' Cameron says. ``We've just begun.''

Luring Investors

Climate Change Capital has already lured deep-pocketed investors. In 2005, New York-based Och-Ziff Capital Management LLC, the hedge fund firm founded by former Goldman Sachs Group Inc. trader Daniel Och, bought 20 percent of the company, Woodall says. A unit of Man Group has bought 10 percent. MSM Capital Partners, part of an investment firm started by Priceline.com Inc. co-founder Jesse Fink, also bought in.

MSM recently sold its shares, more than doubling its initial investment, says Whittaker of MissionPoint, which was started by Fink and Mark Schwartz, a former CEO of Soros Fund Management LLC. ``It was a tremendously successful investment,'' Whittaker says, declining to elaborate.

Threat to Crops

The money keeps pouring in. In 2006, Climate Change Capital raised more than 800 million euros for a new carbon investment fund. More than two-thirds of that came from the Dutch pension giants ABP and PGGM, which together manage more than $425 billion. Otto van der Wyck, the founder of BC Partners Ltd., one of Europe's biggest buyout firms, became chairman of Climate Change Capital in 2004 and has helped raise the firm's profile.

For now, Climate Change Capital has the edge in carbon investing, says PGGM money manager Jelle Beenen. ``They represented the first serious strategy in emission rights,'' he says.

There's big money at stake -- for everyone. Nicholas Stern, former chief economist of the World Bank, last year forecast that climate change might cost the global economy $9.6 trillion by 2100. A rise of just 2-3 degrees Celsius in the average world temperature might displace 200 million people, devastate food crops and shave 3 percent off the global economic output, Stern concluded in an October 2006 report prepared for the U.K. Treasury.

Cap-and-Trade

Whatever the scope of the problem, trading in pollution permits may or may not be the solution. So far, trading CO2 rights has done little to curb emissions in Europe, according to Open Europe, a London-based think tank. The group is backed by U.K. executives such as Michael Spencer, CEO of broker-dealer ICAP Plc, and Brian Williamson, former chairman of the London International Financial Futures Exchange, which is now part of Euronext NV.

European emissions rose 0.8 percent from 2005 to '06, according to Open Europe, which has urged the EU to let member countries decide how to reduce emissions on their own.

Europe has adopted a so-called cap-and-trade market similar to the one the U.S. Environmental Protection Agency created in 1995 for SO2. For each year through 2007, EU governments granted about 12,000 factories and power plants the right to emit a total of about 2.2 billion tons of CO2 -- the ``cap'' in cap and trade. The EU also permitted the companies to buy and sell allowances -- the ``trade'' in cap and trade. If companies think they might exceed their annual CO2 allowance, they can buy rights from companies that pollute less. Under the Kyoto accord, the UN has issued similar credits from emission-reduction projects in 49 countries.

Importing Cheap Credits

This dual system enables European corporations to buy indulgences from those in developing countries rather than mend their polluting ways, up to varying limits. It's simply cheaper to reduce emissions in, say, China, than it is in Europe. The EU has allowed European companies to import too many cheap credits, according to the World Wildlife Fund. The result is that some of these companies are doing less than they could to reduce emissions, according to a June WWF report.

``You're sending a signal to companies in Europe that they can carry on investing in high-carbon infrastructure by offsetting reductions,'' says Kirsty Clough, a climate-change policy analyst at the WWF in London. ``That locks us onto a high-carbon path for decades.'' A better approach would be to prevent European companies from using so many credits from developing countries, Clough says.

`Birmingham or Beijing'

Cameron says the system is helping to put China's fast- growing economy on a lower carbon path. ``A ton of carbon is a ton of carbon,'' he says. ``It doesn't matter if you reduce it in Birmingham or Beijing.''

European CO2 trading has enriched big utilities. At recent prices, the allowances that EU governments have granted to companies largely for free for 2008 carried a combined market value of 43.1 billion euros.

For investors such as Climate Change Capital, the potential rewards -- and risks -- have been enormous. The price of 2007 CO2 rights plummeted after traders concluded that the EU had flooded the market with allowances. The plunge prompted the EU to tighten emissions caps from 2008 to '12 and reduce the number of allowances it issues. Carbon investors and traders applaud that decision, and with reason: Fewer credits mean higher prices.

Allowances for 2008 were trading at about 21.65 euros on Oct. 31. Some EU members, including the Czech Republic and Poland, have threatened to sue the European Commission, saying their pollution caps are too stringent.

`A Lost Decade'

The question is, where do prices go from here?

Oslo-based Point Carbon predicts that prices will rise to as much as 30 euros in 2008 and '09 as more utilities start buying allowances in order to comply with Kyoto rules.

Catrinus Jepma, professor of energy and sustainability at the University of Groningen in the Netherlands, says they'll plummet as credits from developing countries deluge the European market. Since 2005, the United Nations Clean Development Mechanism has issued about 85 million Kyoto credits. That number is likely to surge to 2.5 billion by 2012, according to the UN agency.

So far, the European market has been a costly mistake, Jepma says. ``The Kyoto Protocol period is almost a lost decade,'' he says. The idea behind Kyoto credits was to place a high price on polluting. Instead, an oversupply of credits means the price to pollute could stay low, he says.

HFC-23 Gas

Back at Climate Change Capital, Cameron points to a yellow tab affixed to his map of China. The sticker marks chemical maker China Fluoro Technology Co., located in Shandong Province. China Fluoro Technology exemplifies the potential for profit -- and controversy -- in the pollution market. The Chinese company makes refrigerant gases. One byproduct of that process is a potent greenhouse gas called HFC-23. Pound for pound, HFC-23 traps 11,700 times more solar heat in the atmosphere than CO2. Because China doesn't regulate HFC-23 emissions, China Fluoro can belch countless tons of gas into the air with impunity. (The U.S. doesn't regulate HFC-23 emissions, either.)

That's where Climate Change Capital comes in. Cameron and Woodall have helped devise and finance a system that captures the gas and prevents it from swirling into the atmosphere. In return, Climate Change Capital takes a cut of the emissions credits that the UN awards China Fluoro Technology under the Kyoto Protocol.

Factory `Subsidy'

The project will generate 23.5 million tons of carbon- equivalent credits over six years. At current prices, China Fluoro credits are worth as much as 399 million euros. The result is that China Fluoro stands to make more money selling its pollution credits than it does selling its refrigerants. And factories in Europe and Japan can buy the credits from China rather than curbing pollution themselves.

Some investors have steered clear of HFC-23 projects altogether. ``This is supposed to be about clean development,'' says Lionel Fretz, who co-founded Climate Change Capital and now runs London rival Carbon Capital Markets. ``It's not meant to be a subsidy to refrigerant factories in China.''

Cameron says that, over time, the invisible hand of the marketplace will reduce greenhouse gas levels and help head off climate change.

``Right now the market is doing exactly what it should do - -it's going after as many tons as possible at the lowest possible cost and taking them out,'' Cameron says.

Chernobyl Effect

Cameron and Woodall came to the carbon market from different corners. Cameron is the policy brain, Woodall the financial brain. The lanky Cameron, who's half English and half Australian, grew up in Lebanon and Singapore. He studied international law at Cambridge University in the 1980s.

In 1986, he became interested in environmental law after seeing plumes of radioactive smoke billowing across borders from the Chernobyl nuclear accident in Ukraine. That prompted him to help set up the Center for International Environmental Law based in Washington. He used the nonprofit organization to make a name for himself negotiating the Kyoto Protocol on behalf of the Alliance of Small Island States, a 39-nation coalition he helped to build pro bono. He later started the climate change practice at international law firm Baker & McKenzie in London.

Johannesburg Rendezvous

In 2002, Cameron made his first stab at setting up a business to implement Kyoto. He tried to form a sustainable investment group, a coalition of different companies and organizations that would manage funds to invest in the emerging low-carbon economy. He thought he had the European Investment Bank on board to fund his dream. Instead, one of its senior bankers shot down the idea, saying it would be like asking a fish to ride a bicycle.

Cameron didn't give up. At the end of 2002, he bumped into Woodall on the sidelines of the UN's sustainable development summit in Johannesburg. The idea for Climate Change Capital was born.

When he met Cameron, Woodall was a serial entrepreneur who was integrating a technology investment company he founded into Pi Capital, a London private equity firm. Woodall, whose grandfather was the chairman of British Steel during World War II, stumbled onto environmental causes by accident back in the 1980s, when he set up his first company selling products to help factories clean up oil and chemicals. A former British Army officer educated at the elite U.K. boarding school Wellington College, Woodall put his first company into administration when the pound crashed in 1992.

Garden `Hedging'

``I thought hedging was something you did in your garden,'' he says.

After earning a Master of Business Administration from the U.K.'s Cranfield University School of Management, Woodall tried to get a job at a venture capital company. No one would hire him, he says. He decided instead to start what would become Impax Capital Corp., which invested in renewable energy. Woodall exited the business in 2000 when Impax went public. Nowadays, he drives to the office in an electric G-Wiz car, made in India by Reva Electric Car Co., from his home in the south London neighborhood of Stockwell.

From the start, Woodall and Cameron saw opportunity in climate change. They raised 1 million pounds ($2 million) from what Woodall describes as ``friends.'' Cameron remortgaged his house to invest in the venture, and Woodall also dug into his own pockets. They were joined by Gareth Hughes and Anthony White, fellow founding partners who run the firm's corporate development and advisory businesses.

`Terrified' of Failure

``I put my entire life and guts in the business, terrified it was going to go belly up,'' Cameron says.

The pair soon raised more than $100 million for their first carbon fund to invest in rights to emit greenhouse gases. By 2006, Climate Change Capital was readying a fund 10 times that size.

``They've raised the money very swiftly,'' says Nick Wood, head of Man Investments' environmental strategies group in London. ``They've been around the longest in a high-profile sense.''

Cameron says the firm is breaking even. Climate Change Holdings Ltd. reported a loss of 426,100 pounds in the year ended on Aug. 31, 2006, compared with a loss of 1.6 million pounds the previous year, according to the most-recent filings with Companies House.

Focus on China

In September, the firm announced it had raised 200 million euros more for a new private equity fund targeting clean technology, energy efficiency and waste recovery across Europe. Investors included AlpInvest Partners NV, the Dutch private equity firm with 35 billion euros under management, and HSBC Holdings Plc.

The bulk of Climate Change Capital's funds are still invested in China, which last year surpassed the U.S. as the biggest emitter of CO2. The firm has been a big player in the market to check HFC-23 emissions.

HFC-23 projects accounted for almost half the credits issued by the UN Clean Development Mechanism through the end of October. Money flowing from the sale of these credits could be up to 10 times higher than the cost to curb the emissions, according to an August UN report.

It would cost about 100 million euros to install incinerators at the 17 refrigerant producers in the developing world, says Michael Wara, a researcher at Stanford University. Yet, at current prices, the 40 million credits issued for HFC-23 projects are worth about 880 million euros. ``These projects have distorted the market,'' Wara says.

Wind, Biomass

Cameron and Woodall defend their work. China taxes profits from HFC-23 projects at 65 percent and puts the receipts into a special fund to finance clean energy, Woodall says. Besides, without Climate Change Capital, the greenhouse gas at China Fluoro Technology would just end up in the atmosphere.

These days, Climate Change Capital is expanding into wind farms, biomass power plants and other sorts of green projects. The challenge will be to keep on delivering high returns.

``There can be no trade-off,'' Cameron says. ``None of this, `We're terribly nice people trying to save the world; therefore, we can perform averagely.''' Cameron and Woodall say they want to do good. They just want to make sure they do well, too

Old article - Renewables Review 2006

Renewables Review 2006
14 February 2007

(IJ Online) The past year the renewables market grew dynamically in 2006, doubling by volume from US$11 billion to US$22.8 billion and by deal size with 133 deals closed, up from only 68 the previous year - write Simon Ellis and Martin Malinowski.

The surge can be attributed to three trends: the acquisition and refinancing of large portfolios by corporates and private equity companies, the revival of the US wind and ethanol markets through new policy drivers and the arrival of large-scale solar in the Spanish market.

As a consequence of these factors, the Spanish and US markets both topped the US$5 billion mark for transaction value and hosted more than 25 deals each. Italy and Germany both jumped significantly on the back of large waste-to-energy deals and wind portfolio consolidations.

The market also saw strong growth in the second half, buoyed by the closing of three large wind portfolio financings: Trinergy's 'Project S' refinancing, Acciona's Renomar wind portfolio and Babcock & Brown's 'Martel' refinancing of Enersis' Portuguese wind assets.
In the past six months RBS was the leading underwriter of project finance debt lending US$2.2 billion, while HSH Nordbank was the most active globally lending 15 tranches of debt.

The next six months are expected to be marked by a downturn in US renewables as the ethanol market reaches saturation point, a trend partially offset by a growth in the wind sector.

In Europe, a number of offshore wind, biomass and waste-to-energy deals coupled with wind portfolio financings are expected to stabilise the lending market as new-build onshore wind loses ground.

The European market: Private equity arrives
The European market saw economies of scale begin to play a dramatic role as private equity funds sought to transfer mature wind assets into pension fund collateral.

Trinergy, in which the private equity firm Matrix Group holds a significant stake, closed the largest wind transaction on record - a US$1.5 billion refinancing of its 648MW German and Italian portfolio.

Investment bank Babcock & Brown also stepped up its move into the market splitting the French wind, Iberian wind and Portuguese hydro assets of Enersis into three portfolios.

In the third major renewables transaction of the second half, Spanish construction giant Acciona opted to refinance its bridge loan for the Renomar transaction through Spanish investor's vehicle Medwind.

According to John Dunlop, manager of energy and renewables at HSH Nordbank, the large private equity plays are here to stay: 'I think that we will continue to see portfolio financings because there are a lot of private equity funds in the market and you are going to want portfolio financings not individual projects,' he says.

Global Renewables Market 2005-6

Overall consolidation deals contributed to the significant increase in volume in Spain and Portugal.

In Germany, there was no change in deal flow from 2005 to 2006, but a vast jump in overall volume from US$470 million to US$2,480 million.

This can be largely put down to a move away from the small-scale new build wind projects that dominated the market in 2005 towards consolidation of wind assets, such as Breeze II, and the arrival of large waste-to-energy projects including Infraserv's US$430 million Hoechst plant.

Despite passing the 2,000MW mark for wind generation, the UK continued to underperform as only four wind farms with a total value of US$400 million were project financed through 2006.

This compares unfavourably with France, where despite a subsidy regime still perceived as 'unattractive', 10 wind portfolios with a total value US$700 million reached close.

The delay stems from the decentralised planning system, which has slowed projects such as the vital Beauly-Denny transmission line connecting the grid with wind farms in the Highlands, and uncertainty about the reallocation of the Renewables Obligation Certificates (ROCs) in the forthcoming energy review.

The Barker Review into planning - currently at the consultation stage - is not expected to have any catalytic effect on planning in the 2007 outlook.

Meanwhile the forthcoming Energy Review could also provide a breakthrough in the financing of offshore wind as John Dunlop explains: 'The uncertainty with the availability risk for offshore wind is slowly going away with time as more and more operating experience has been built up.

'It is still difficult to get the numbers to stack up with offshore given they are so much more expensive,' Dunlop adds, 'I think that will change if the White Paper that will be produced in spring allocates more ROCs per MW/h to offshore projects than their onshore counterparts.'

Prominent Renewables Transactions H2 2006

Solar Power Focus
2006 was very much Spain's year in solar power project financing, as a combination of generous government incentives and more favourable locations saw it overtake last year's leader, Germany.

A worldwide shortage of polycrystalline silicon (an essential component of PV panels) also increased costs, making many German PV projects financially unviable. Portugal also made its mark on the sector with the largest PV financing to date in Sepra in April. The main target of Spanish government generosity was solar plants of less than 100kW, where incentives are almost double those offered for larger plants. Most of these projects were too small to be usefully structured as project financings. This is likely to change, however. La Magascona - a 20MW photovoltaic plant which closed in 2006 qualified for the high rate energy tariff because it was split into 200 separate installations.

A highly significant development was the resurgence of parabolic trench geothermal technology in the two near-identical Andasol projects which closed in 2006 to the tune of US$650m. A technologically superior alternative to photovoltaics, it does not rely on silicon, and improves on the power availability issues of PV by heating up a reservoir of molten salt in the daytime which can generate steam to power a turbine after the sun has set. At 50MW each, they are also the largest solar projects to date.

Sponsors of solar projects have benefited from increasingly beneficial terms in 2006: Pricings have been within the 50-100 bp range, and debt:equity ratios have steadily been ratcheting up towards the nineties. This is a reflection of several factors:

solar power projects have gained a great degree of market acceptance as a secure investment owing to the fact that the only real risk they face is political - from local authorities reneging on their power purchasing agreements. This is widely acknowledged as a highly unlikely development

solar power projects are more reliable and and less subject to availability problems than wind farms. The only issue to date has been their relatively small size, which has tended to make project financings look unattractive. But the arrival of the AndaSol parabolic trench projects, and portfolio-style projects like Sempra and Magascona are gradually changing this status quo

the value to banks of participation in solar projects is also not measured solely in financial terms.With ecological concerns becoming more prominent, banks are keener than ever to be associated with renewables projects, and this is reflected in the more favourable terms sponsors have been enjoying

Solar Outlook
Spain is expected to enjoy another robust year for solar power financings in 2007. The target for the Spanish government is to have 400MW installed by 2010, although industry experts have predicted this figure may reach as much as 1,000MW.

Although solar projects have thus far enjoyed tariff agreements in Europe that have been easily the most generous out of all the renewables incentives, this could change quickly. As quotas fill up, local authorities could decide at short notice that the costs of their solar drive are outweighing the benefits.

And a question mark hangs over the future of photovoltaic projects, especially in sites further from the equator. Industry experts recently warned that the shortage of polycrystalline silicon would not ease in 2008, as had previously been expected, but that it could persist for as long as 5 years. In such a situation it is hard to see many large PV projects taking off, particularly considering the stiff competition they will face from thermosolar projects which do not require silicon at all.


The US: Good politics, finally
US renewables received a double boost at the start of 2006 with the banning of fuel substitute MTBE and the extension of the Production Tax Credit (PTC) for renewables to 2008, catalysing ethanol and wind development respectively.

The US ethanol market grew from virtually a standing start to reach US$2.4 billion over the course of the year, the equivalent of nearly an extra two billion gallons of capacity was financed over the course of the year

In addition to the recorded figures it is estimated that up to 10 stand-alone projects worth a further US$1-1.2 billion were financed by small-scale agricultural banks, bringing total market value to around US$3.5 billion.

Two portfolio financings in particular showed the potential in the market for combining sophistication, scale and the offsetting of feedstock/ offtake risks: the ASAlliance Biofuels and BFE Operating Company Ethanol.

ASAlliances' US$423 million, 300 gallon-per-year portfolio hedged its risks with 10-year feedstock and offtake contracts with US agricultural conglomerate Cargill.

The deal also attracted multi-party financing arranged by WestLB through a US$175 million senior facility priced at Libor + 250bp, a US$100 million Term B Loan priced at Libor + 450bp and US$54 million in sub-debt in the 1,300 to 1,500bp range.

Later in the year, BFE's two plant financing showed financier's increased comfort with ethanol risks. BNP Paribas' single US$300 million credit facility priced at Libor + 300bp, the lowest spread achieved for a large-scale greenfield ethanol financing to date.

Financiers showed some signs of cooling off in the second half, especially towards smaller projects, with only four deals with an average size of US$250 million. In the first half, eight projects closed with an average financing requirement of US$150 million.

Indeed ethanol development in the US is likely to fall off in H1 2007 due to two factors, firstly the convergence of the falling oil price with the rising cost of corn, the predominant feedstock, which doubled from US$2 to US$4 per bushel over the year.

Secondly, saturation, as the industry nears the federal mandated target of 7.5 billion gallons per year, there is doubt about the certainty of the long term commitment to the fuel substitute.

A partial replacement could be distillate-based biodiesel which draws its feedstock from agricultural by-products and also has a supportive subsidy regime. The first 100 million gallon plant - a scale comparable with the largest ethanol plants - is in development.
Further ahead cellulosic ethanol drawn from switchgrass and other freely available organic products could provide a more sustainable substitute to conventional fuel, and received the personal approval of President Bush in the last State of the Union.

After the extension of the PTC, wind also surged both in overall volume and scale as 12 projects closed with an average deal size of US$175 million.

The scale of US wind projects is partly a function of the historically stop-start nature of the US market. After every renewal of the PTC, turbine supply fails to meet demand, pushing up prices and favouring large utility sponsors with the balance sheets to make large orders.
A current bill to extend the PTC for a further five years could redress the balance in the US while easing the global pressure on turbines and parts, by allowing manufacturers to set up in the US market on a long term basis.

John Dunlop of HSH Nordbank claims the extension will be crucial to allow manufacturers to react to demand in the US: 'When turbine manufacturers and component manufacturers look at a market which goes from 2,000 turbines to zero from year to year, it is pretty tough to justify building a plant in the US that will be running full throttle one year and then doing nothing the next. No long-term investment decisions can be made on the stop-go PTC.

'If you have got a five-year extensions instead of the two-year extension we have seen historically', he adds 'that will lead to more turbine supply in the market and I think you will see an easing of the turbine shortages.'

The rest of the world - Growing momentum
Phase one of Brazil's renewable energy incentives programme PROINFA, aimed at generating 3,300MW of renewable power, split equally between wind, mini-hydro (of up to 30MW) and biomass started to bear fruit with US$465 million in project financing committed.
Developer confidence has been bolstered by the prospects of a PPA from state utility Electrobras for 70 per cent of generation and an A-loan of up to 80 per cent of project value from national development bank BNDES.

A typical structure was Iberdrola's Rio do Fogo wind farm which closed in March with a US$31 million BNDES direct loan TJLP (8.15%) +350bp and an ABN AMRO onlending facility for the same amount priced at TJLP+400-425.

In Asia Pacific, Japan saw greatest dealflow with 10 deals closed in the wind sector, representing a net value of US$310 million. It is indicative of the small scale of Japanese wind that by volume, the largest market in the region was Australia where only two wind projects were closed with a net value of US$350 million.

In the medium term, the outlook for the world's two upcoming economic superpowers will hinge largely on the success of the UN Clean Development Mechanism (CDM), under which projects generate Certified Emissions Reductions (CERs) tradable with EU carbon credits.
The Chinese government had approved 164 projects to apply for CDM status, as of the start of November 2006, of which 30 had received final approval from the CDM's international Executive Board.

In terms of breakdown, 122 of these were wind or mini-hydro, 17 were methane recovery and a further eight were dedicated to restricting the potent pollutant HFC23.

At the start of the year, Endesa signed a US$36 million deal to purchase CERs from a 3-wind farm 195MW portfolio planned by one of China's largest independent power producers Huaneng Power International.

Meanwhile, Hong Kong-based utility China Light and Power has committed to generate five per cent of its energy from wind and mini-hydro by 2010.

In India, the strength of domestic turbine manufacturer Suzlon is expected to act as a strong corrective to turbine supply concerns while industrial developers increase their use of captive wind and mini-hydro plants.

However, policy uncertainty about international carbon markets, high country risk and low deal size are expected to make Chinese and Indian renewable projects unsuitable for international project financing in the short-term. Domestic banks in both countries are expected to have a stronger appetite.

Conclusion - The Maturing Market
The growing scale of renewable energy deals throughout 2006 is an encouraging sign both for the maturity of the technology and market as a whole.

In Europe, independent developers are beginning to build portfolios on a scale that attract the interest of long-term investors.
The growing scale of renewables could also be good news for strained national grids around trhe EU. The Netherlands is in dire need of extra generation capacity, with the reserve capacity falling below five per cent. Germany and the UK are also falling below the recommended 15 per cent reserve margins.

A number of renewable developers including Theolia, Fred Olsen and Airtricity are expected to seek expansion financings in 2006.
In addition, the demand from private equity for mature wind assets will ensure a number of mid-sized utilities which expanded into renewables beyond their host countries may be tempted to realise the attractive gains of concentration on core markets.
Meanwhile the United States, while the ethanol boom will begin to dissipate, a more positive policy stance towards other renewables is expected to more than compensate.

For the global wind energy industry globally, the long-term extension of the US PTC is also crucial. The resulting establishment of a permanent wind manufacturing base in the US could put an end to the current shortages of turbines, gearboxes and bearings which has frustrated the expansion of the global market.

Another Carbon Credit Fund created

South Korea to Start State-Led Carbon Fund in July (Update1)
By Meeyoung Song

May 28 (Bloomberg) -- South Korea, which imports 97 percent of its energy and mineral needs, plans to set up the nation's first government-led carbon fund in July.

The fund may be as large as 200 billion won ($215 million), the Ministry of Commerce, Industry and Energy said in an e-mailed statement today. It will invest in carbon-reducing businesses approved by the United Nations and profit from selling carbon credits these businesses produce, the ministry said.

South Korea wants to reduce reliance on oil and diversify energy sources after crude oil prices more than doubled since 2001. The country joins Japan and China in trying to expand the use of cleaner fuels to address concerns that power generation is harming the environment. Energy and industrial activity account for more than 90 percent of the country's greenhouse gas emissions, the ministry said.

The Clean Development Mechanism under the 1997 Kyoto Protocol allows companies in industrialized nations including Japan and most of Europe to buy carbon credits from developing countries to comply with requirements to cut emissions. The credits are derived from projects such as wind farms that are approved by the UN.

The fund will be managed by Korea Investment Trust Management Co., while Korea Energy Management Corporation will invest an initial 20 billion won and act as an adviser, the ministry said.

Kookmin Bank
Kookmin Bank, South Korea's largest lender, will establish a 330 billion won fund that will invest in companies dealing with renewable energy such as solar power, the ministry said on May 20.

Kookmin Bank's fund will be in operation for 15 years, with a yield of more than 7 percent annually after exemptions, the ministry said at the time.

There are more than 30 carbon funds worldwide, valued at at least 2.5 billion euros ($3.4 billion), the ministry said today.

South Korea is among 21 Asia-Pacific Economic Cooperation member nations meeting in Darwin this week to discuss energy- supply security and climate change. The group is responsible for 60 percent of world energy use.

Global energy demand is set to increase by 50 percent by 2030, resulting in an increase in carbon dioxide emissions of between 35 percent and 55 percent, according to International Energy Agency forecasts.