SG KE TOI Companies must factor in risks of Carbon Credit deals
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Source: Times of India
Namrata Singh | TNN
Mumbai: With Dublin firm AgCert becoming the first carbon credits company to go into examinership, the signal to Indian companies pursuing clean development mechanism (CDM) projects is loud and clear: Understand project risks and manage them well. AgCert ran into financial problems as it could not meet its carbon credit delivery commitments to polluting companies.
As a result, its debts mounted to E90 million.
With the UN methodology to register emission reduction projects getting tougher, Indian industry is worried about similar outcomes, if risks are not entirely covered.
JSW Steel deputy GM Suresh Iyer said, “Companies need to do proper due diligence for CDM projects to assess the quantum of carbon credits expected to be generated. Factors like operational efficiencies, plant availability, etc, need to be taken into account before contracting part of the volume based on conservative estimates.’’
Risks across the carbon asset monetisation cycle are varied. According to CantorCO2e India MD Ram Babu, “Price risk can be mitigated by entering into at least part forward contracts or options. But project, technology and regulatory risks are to be managed by project developer/advisors. CDM revenue,as expected,will not accrue if companies don’t understand and manage the risks involved in the CDM process and project.’’
Issuance of CDM projects are falling short of registration by at least 30%.This is due to a shortfall in project performance, changes/clarification in the methodology.
There are times when companies, in a bid to get a better price for future credits, enter into contracts giving delivery guarantees even though their project type are known to have huge fluctuation in annual carbon credit generation.
Enam Holdings emerging business head Vishal Kedia said: “In some hydro projects, for example, there will be considerable annual fluctuations, as it is a ‘spill-over’ dam that only comes into play when there is enough water to fill the main dam and sufficient surplus to fill the second. In such a scenario, companies take unnecessary risks of fulfilling delivery guarantees by buying carbon credits from the open market.’’
Hence, though the contracted rate for delivered carbon credits is high in the agreement, in reality, the company’s realisation is much lower or even negative (after account for the loss they incur by buying credits in open market at higher rates). “In case the buyer of delivery-guaranteed credits gets into a financial mess, there is a risk of the buyer initiating litigation to enforce delivery guarantees offered by Indian company,’’ said Kedia.
According to JSW’s Iyer, companies can mitigate the risks by building in suitable “condition precedent’’ clauses/automatic termination clauses and non-guarantee clauses in the emission reduction purchase agreement (ERPA).
Note: Contents from other well known sources are for Knowledge Exchange and Not for Any Commercial Gains. Also they provide Authenticity - Ganesh Srinivasan
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