Centre for Energy Studies

Indian Institute of Technology

New Delhi, June 4,  2 0 0 8

Carbon finance for Solar Energy Applications

Chandra Shekhar Sinha

Head for Asia, Environmental Markets
l

This presentation was prepared exclusively for the benefit and internal use of the JPMorgan client to whom it is directly addressed and delivered (including
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E N V I R O N M E N T A L   M A R K E T S   O V E R V I E W — I N T E R N A L

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credit or to provide any other services.

I N T E R N A L
Outline of the Presentation

 Background
 Culprits of climate change

 International agreements to address climate change

 Market mechanisms in international agreements to address climate change

 Carbon Markets: carbon credits or offsets and allowances

 Impact of carbon credits on projects

 Carbon finance for Solar Energy Application

 Annex: Carbon Finance at JP Morgan

I N T E R N A L
Flow Diagram: Global Greenhouse Gas Emissions -- the “culprits” of climate change

I N T E R N A L

Source: WRI, Baumert et al, 2005

Cumulative Investment in Energy Infrastructure, 2005 - 2030

Source: IEA, WEO, 2006

I N T E R N A L
Incremental Coal-fired Investment

While there is no silver bullet

solution for climate change –
there is a single bullet that
can kill…. COAL

7785 TWh
CO2 emissions from electricity,
largely from increases in coal,
are projected to increase by
2/3 between 2004 and 2030,
rising at about 2% a year.

This increase occurs in spite of

efficiency improvements in
coal fired generation (from
42% in 1990, to 46% today).
Efficiency is expected to reach
51% in 2030.
Source: IEA, WEO, 2006

I N T E R N A L
International Agreements to Address Climate Change

United Nations Framework Convention 0n Climate Change (UNFCCC) – 1992

 Ultimate objective of stabilizing global greenhouse gas concentrations in the atmosphere
 Developed countries (Annex I countries) to
 aim to restore GHG emissions to 1990 levels
 Support capacity building in, and facilitate technology transfer to developing countries to
mitigate, and to adapt to climate change
 Meet as a “Conference of Parties” in the future, consider progress

The Kyoto Protocol to the UNFCCC – 1997

 38 Developed Countries and Economies in Transition (Annex B countries) agreed in 1997 to:
 reduce GHG emissions by 5.2 % below 1990 levels in the commitment period 2008-2012

 Create market mechanism to manage the cost of GHG reductions

 Status: In force since February 2005

 Coming into force: required ratification of 55 Parties to UNFCCC representing 55 % of CO2
emissions
 United States (36% of GHG emission) is not a Party

 Marrakech Accord: agreed in Nov 2001 sets rules of implementation

 Total demand created for GHG Reductions: ~2800 or 4800 Mt CO2, including US

I N T E R N A L
Carbon Finance as a Market Instrument to Address Climate Change

Two Main drivers till date

 Kyoto Protocol

 European Trading Systems

Increasingly relevant in the future

 Japans industries (Keidanren) voluntary action plan

 Regional trading systems in the United States and Australia

 Voluntary offset programs in Europe and United States

I N T E R N A L
 The Kyoto Protocol—Dominant international
compliance market
Global treaty

 The KP contains the following market mechanisms

 International Emissions Trading (IET): Trading blocks of emissions
credits between emissions-capped industrialized countries at the
national level
 Joint Implementation: Project-based trading between annex 1 countries
A N N E X — B A C K G R O U N D   A B O U T   C A R B O N   M A R K E T S

(developed countries)—generate
Emission Reduction Unit (ERU)
 Clean Development Mechanism: Project-based trading between annex 1
and non-annex 1 countries—generate Certified Emission Reduction (CER)

I N T E R N A L 12
 European Emission Trading Scheme Phases
Timeline

Jan 2005 Mar 2006 Feb 2009 Mar 2009 Jan 2011

Launch of Verification Allocation of Verification Proposed

EU ETS of 2005 EUA’s 2009 EUA’s of 2008 EUA’s introduction of
aviation into EU ETS
A N N E X — B A C K G R O U N D   A B O U T   C A R B O N   M A R K E T S

2005 2006 2007 2008 2009 2010 2011 2012

Feb 2005 April 2006 Feb 2008 April 2009

Allocation of Surrender of Allocation of Surrender of

2005 EUA’s 2005 EUA’s 2008 EUA’s 2008 EUA’s

Phase I Phase II Phase III

 Allocation of year’s EUAs is in February of that year

 Verification of previous year’s EUA’s is in March

 Surrender of previous year’s EUAs is in April

I N T E R N A L 13
 U.S. Federal legislation is coming
The next U.S. administration

GHG Target Auto Standard Ren. Energy CCS

Obama -80% by 2050 40 mpg by 2020; 25% by 2025 No ban on new coal
50% improvement by 2025

Clinton -80% by 2050 55 mpg by 2030 25% by 2025 All new coal w/CCS; fund 10 demos

McCain -65% by 2050 35 mpg std. Opposed stds Support clean coal
A N N E X — B A C K G R O U N D   A B O U T   C A R B O N   M A R K E T S

Cap-and-trade proposals before senate

Senate bill Scope of coverage Other details

Feinstein-Cooper, S.317, Electricity sector, Allocation is output-based for generators; auctioned
introduced 01/17/07 “downstream” regulation amount increases with time
Kerry-Snow, Economy-wide, point of regulation President determines allocation
introduced 02/01/07 not specified
McCain-Lieberman, S.280, Economy-wide, large sources EPA Administrator determines allocation
introduced 01/12/07 “downstream”, fuels “upstream”
Sanders-Boxer, S.309, Economy-wide, point of regulation Cap-and-trade is permitted, but not required
introduced 01/15/07 not specified
Bingaman, discussion draft Economy-wide, Allocation is specified for some sectors
“upstream” regulation Cap and trade, proposes carbon efficiency board
Lieberman-Warner Economy-wide, Allocation is specified for some sectors; auctioned
S2192 most important upstream and downstream amount increases with time
introduced 10/07

I N T E R N A L 16
Carbon Market and the Kyoto Protocol
• Kyoto creates binding greenhouse gas emission limit only for Industrialized countries and economies
in transition
• Allows a part of the emission reductions (Certified Emission Reductions) to be generated in developing
(host) countries and Emission Reduction Units in countries with commitments
Annex I Party (e.g EU
country) which has an
Host Party which emission cap
does not have an
emission cap ERUs
Specific place in
Specific place in Acquired
host party
host party CERs/ ERUs
are added to
the allowed
Emission emissions
Fired power plant
GHG emission from coal

Reduction CER
$
$
Gas-based power
GHG emission from

Host Party benefits Actual

From technology Emissions
and financial flows

Baseline Scenario Project Scenario

I N T E R N A L
 Market Volume Growth 2007 (World Bank assessment, May 2008)

(in MtCO2e)

Project-Based Allowance Markets

Transactions x 2.5

JI
41
x 1.0
EU Emission
x 10
CDM Trading Scheme
Secondary
551 CDM 2,061
240
x2
Voluntary
New South Wales
& Retail
Certificates Chicago Climate
42 25
x3 Exchange
x 1.3 x2
23 I N T E R N A L
 Market Value Growth 2007 (World Bank assessment, May 2008)

(in MUS$)

Project-Based Allowance Markets

x 3.5
Transactions
JI
x 1.3 500
EU Emission
x 12
CDM Trading Scheme
Secondary
7,400 CDM 50,100
5,500
x2
Voluntary
New South Wales
& Retail
Certificates Chicago Climate
270 x4 220 Exchange
x1 70 x2
I N T E R N A L
 Size of the environmental markets

$bn

Market size
Carbon Market Overview Regulatory framework Tradable units 2007 2012E

EU ETS  EU Emissions Trading Scheme  Compliance  EUAs (EU Emissions 46 325

 Largest multi-national, GHG emissions trading Allowance)
scheme globally
 Commenced operation on 01/01/05
 JI and CDM credits eligible via “Linking Directive”

Other Kyoto  Protocol to the UN Framework Convention on Climate  Kyoto driven compliance  CERs (Certified Emissions 20 140
I N T R O D U C T I O N   T O   E N V I R O N M E N T A L   M A R K E T S

compliance Change (UNFCCC) Reduction/ERUs (Emission

 Assigns mandatory emission limitations for the Reduction Units)
reduction of GHG emissions to the signatory nations
Key nations include:
 Japan
 Canada

North America  Entities (including corporations, governments, and  Voluntary/pre-compliance  VERs (Verified Emissions 0.2 3
pre-compliance individuals) voluntarily participate in the reduction of Reduction)
voluntary their GHG emissions
 U.S. is key market
 Potential compliance market based on cap-and-trade  Compliance 42—1501
bills in the senate

Total 66 510—618
1
[Market value with carbon prices seen in EU-ETS, $30/tonne could be $150bn in 2012 and $250bn in 2015 (Warner-Lieberman Bill—Point Carbon Analyst Feb 2008]

With growing linkages between these markets and the advent of a regulated US market,
the environmental products market could approach $550+bn by 2012

I N T E R N A L 4
 EUA and CER Market Overview
Current Market Status

 Designed as an entity-based domestic cap and trade emissions allowance programme that started
operation on January 1, 2005

 Allowances allocation in accordance with a national allocation plan (NAP I,II and III)
 Phase I (2005-07) - Learning Phase 2006: $24.5 billion market
 Phase II (2008-12) – Next Operational Phase
 Phase III (Post 2012) – Review of the Directive: policy
A N N E X — B A C K G R O U N D   A B O U T   C A R B O N   M A R K E T S

 NAP I (long), NAP II (short ?), NAP III (could be very short)

EUA Historical Prices (€/MT): Dec-06, Dec-07, Dec-08, Dec-09 EUA Dec-08 and CER Dec-08 Historical Prices (€/MT)

35 35
Dec-06 Dec-07 Dec-08 Dec-09 CER Dec 08 EUA Dec 08 EUAs/CERs Spread

30 30

25 25

20 20

15 15

10 10

5 5

0 0
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 J un-06 Aug-06 Nov-06 Feb-07 M ay-07 J ul-07 Oct-07 J an-08 Apr-08

Source: JPMorgan, data as of April04, 2008

I N T E R N A L 14
There are significant opportunities to achieve needed abatement
at costs of less than €40/tCO2e
COST OF ABATEMENT, EUR/t CO2e, 2030
Industrial Avoided
feedstock Coal-to-
defores-
substitution gas shift
Soil CCS, tation
CCS EOR, Forestation Asia
Waste
Livestock/ Wind, coal
soils new coal retrofit
40 Smart transit low Solar
Small hydro Forestation pen.
30 Nuclear
20
Industrial non-CO2
Airplane efficiency
10 Stand-by losses
0
-10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

-20 Cellulose Industrial Avoided Industrial

ethanol non-CO2 Co-firing CCS, deforestation CCS
-30
Sugarcane biomass new coal America
-40 biofuel Abatement
Industrial motor Gt CO2e/year
-50 Fuel-efficient systems
-60 vehicles
-70 Water heating Uncertainties which could
-80 Air Conditioning decrease abatement Uncertainties which could
-90
supply increase abatement supply
Lighting systems
-100
• Regional or no • More nuclear
-110 Fuel-efficient participation
-120 commercial • CSS (retrofit)
vehicles • Technology
-130
• Consumer behaviors
-140
Insulation improvements • Consumer behavior
-150
-160
I N T E R N A L

Source: McKinsey
 All CDM Projects in the Pipeline in
Brazil + Mexico + India + China
as a fraction of all projects

100%
80%
Projects

60% Mexico

40% Brazil
China
20%
India
0%
Q1-04

Q2-06
Q2-04
Q3-04
Q4-04
Q1-05
Q2-05
Q3-05
Q4-05
Q1-06

Q3-06
Q4-06
Q1-07
Q2-07
Q3-07
Q4-07
Q1-08 I N T E R N A L
 Number of projects in Asia by type
Fuel switch
1% Agriculture
HFC & N2O
reduction 1%
6% Affore-station
& Refore-
station
0%
Demand-
side EE
12%
Renew ables
39%

Landfill etc Supply-side

33% EE
8%
I N T E R N A L
 Nature of Carbon Financing Contract

Investor Banks

Equity Debt

Power Purchase Agreement

$$
Electricity

$$
$ $
Carbon
Carbon Credits
Fund Emission Reduction
Purchase Agreement
2 2

I N T E R N A L
 Impact of Carbon Finance

INCREMENTAL IRR - CARBON FINANCE

Renewable Energy
Purchase period
ER Prices
5y ('08-'12) 7y 10y 14y 21y Impact per Unit
$5.00 0.5% 0.6% 0.8% 1.0% 1.2% $3.16 / MWh
$10.00 1.0% 1.4% 1.7% 2.1% 2.3% $6.33 / MWh
$15.00 1.6% 2.1% 2.7% 3.1% 3.3% $9.49 / MWh
$20.00 2.2% 2.9% 3.6% 4.1% 4.5% $12.65 / MWh

INCREMENTAL IRR - CARBON FINANCE

Solid Waste
Purchase period
ER Prices 5y ('08-'12) 7y 10y 14y 21y
0.58 tCO2e/tSW 0.74 tCO2e/tSW 0.93 tCO2e/tSW 1.11 tCO2e/tSW 1.29 tCO2e/tSW Impact per Unit
$5.00 17.9% 24.1% 29.2% 31.7% 32.8% $41 / MWh
$10.00 52.3% 59.1% 62.4% 63.5% 63.8% $82 / MWh
$15.00 88.2% 93.3% 95.4% 95.9% 96.0% $124 / MWh
$20.00 123.7% 127.3% 128.6% 128.8% 128.9% $165 / MWh
*tSW = ton solid waste

INCREMENTAL IRR - CARBON FINANCE

HFC23
Purchase period
ER Prices
5y ('08-'12) 7y 10y 14y 21y
$5.00 110.8% 112.3% 112.7% 112.7% 112.7%
$10.00 176.7% 177.3% 177.4% 177.4% 177.4%
$15.00 227.3% 227.6% 227.7% 227.7% 227.7%
$20.00 270.0% 270.2% 270.2% 270.2% 270.2% I N T E R N A L

*65% tax applied on carbon revenues

 Potential Opportunities in the Power Sector

Power Sector

 Generation
 Generation from renewable energy (hydro, wind, geothermal, biomass, solar)
— Limitations on large (>20MW) hydro
 Fuel switching from coal and oil to natural gas
 Investment in super critical / ultra super critical power generation for coal
 Replacement of equipment such as turbines and boilers to improve efficiency

 Power Transmission and Distribution

 Decentralized power generation (mini-grids or off-grid applications)
I D E N T I F Y I N G   C A R B O N   P R O J E C T S 

 Electricity loss reduction from transmission and distribution networks

 Reduction of leakage of SF6 in transformers and switch gears

 Energy (end-use) Efficiency Measures

 Energy efficient lighting
 Municipal water pumping

I N T E R N A L
 Solar Energy Applications and Carbon Finance

Power Generation – Grid Applications

A Solar Thermal or PV power project connected to the grid might affect:

 The choice and/or timing of new power plants (or life extension of existing ones), i.e. the build margin,
and/or

 The operation of existing power plants, i.e. the operating margin

The methodology for estimating the emission reduction (ACM0002) uses “combined margin”
approach, or average of averages with different subsets of power plants, but averages at the
end
 Calculate a baseline emission factor EFy as the average of the Operating Margin emission factor
I D E N T I F Y I N G   C A R B O N   P R O J E C T S 

(EF_OMy ) and the Build Margin emission factor (EF_BMy,):

EFy = 0.5 * EF_OMy + 0.5 * EF_BMy

 CEA database in TCO2e/MWh (December 2007) availabale at http://cea.nic.in

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

North 0.72 0.73 0.74 0.71 0.71 0.71 0.72

East 1.09 1.06 1.11 1.10 1.08 1.08 1.03

South 0.73 0.75 0.82 0.84 0.78 0.74 0.72

West 0.90 0.92 0.90 0.90 0.92 0.87 0.85

North-East 0.42 0.41 0.40 0.43 0.32 0.33 0.39

India 0.82 0.83 0.85 0.85 0.84 0.82 0.80

I N T E R N A L
 Solar Energy Applications and Carbon Finance

Power Generation – Grid Applications

 Contribution of carbon finance to the cost of electricity

US cents/kWh

Carbon credit price ($/TCO2e)

2006-07 10 15 20 25 30 35

North 0.72 0.72 1.08 1.45 1.81 2.17 2.53

East 1.03 1.03 1.54 2.05 2.57 3.08 3.59

South 0.72 0.72 1.08 1.44 1.79 2.15 2.51

West 0.85 0.85 1.28 1.70 2.13 2.55 2.98

I D E N T I F Y I N G   C A R B O N   P R O J E C T S 

North-East 0.39 0.39 0.58 0.78 0.97 1.16 1.36

India 0.80 0.80 1.20 1.60 2.01 2.41 2.81

I N T E R N A L
 Solar Energy Applications and Carbon Finance

Power Generation – Off- grid Applications

 Can be for solar thermal or PV power generation for capacity < 15MW
 Default emission factor: 0.8TCO2e/MWh or where there is adequate justification:
I D E N T I F Y I N G   C A R B O N   P R O J E C T S 

Carbon credit price ($/TCO2e) US cents/kWh

EF 10 15 20 25 30 35

2.40 2.40 3.60 4.80 6.00 7.20 8.40

1.20 1.20 1.80 2.40 3.00 3.60 4.20

0.80 0.80 1.20 1.60 2.00 2.40 2.80

I N T E R N A L
 Solar Energy Applications and Carbon Finance

Solar Thermal Applications

 Small-scale methodology applicable for thermal generation capacity up to 45MW for thermal
devices (co-firing is permitted) that supply individual household or users. Solar thermal water
heaters, dryers and solar cookers would fall in this category. Methodology I.C is applicable.

 Baseline emission: fossil fuel that would have been used in the absence of the solar
technology. IPCC default emission factors can be used.
 Cogeneration application is permitted. Equivalent electricity (from grid or captive
generation) and thermal energy is used for estimation of the baseline emissions.

 When non-renewable biomass was used for thermal energy and is displaced (instead of fossil
fuels) by the renewable technology (such as solar cooker), use small-scale methodology I.E
I D E N T I F Y I N G   C A R B O N   P R O J E C T S 

 Some limitations (e.g. non-renewable biomass in use since 31 December 1989)

 Assume that equivalent fossil fuel likely to be used by similar consumers instead of the
non-renewable biomass (using IPCC default values)
 Need to ensure that definition of non-renewable biomass and of renewable biomass is met

I N T E R N A L
 Solar Energy Applications and Carbon Finance

Conclusions

 Carbon markets have developed rapidly, driven by the EU Emissions Trading

System and the Clean Development Mechanism of the Kyoto Protocol
 India has been at the forefront of this development

 Solar technologies have seen limited benefits of the carbon market

 Carbon prices have been low till very recently
 Solar technologies have been relatively expensive and only now does it seem that cost
reduction potential may be achievable
I D E N T I F Y I N G   C A R B O N   P R O J E C T S 

 While there are some uncertainties about the size of the carbon market, the
long term prospects are very promising
 In India the development of promotional policy and addressing of institutional issues
may permit rapid expansion and diffusion of the solar technologies, partially aided by
carbon finance.

I N T E R N A L
Chandra Shekhar Sinha
Head for Asia, Environmental Markets
JP Morgan Chase NA,
Mafatlal Centre (9th Floor), Nariman Point, Mumbai.
T: +91-22-6719-8084
E: chandra.s.sinha@jpmorgan.com

I N T E R N A L
 JPMorgan’s activity in the carbon market
Environmental Markets are a growth business within the JPMorgan Energy Business

 Emission Trading:
 JPMorgan can provide transactional support services for the compliance and pre-compliance/voluntary carbon
markets

 Emission Distribution:
 JPMorgan benefits from its extensive Global Energy Franchise and has, so far, built a solid distribution platform
of secondary-market Certified Emissions Reduction (CERs) to compliance buyers in Europe and Japan

 Emission Origination:
 In order to originate quality CERs in specific markets, JPMorgan is working with selected quality specialists that
I N T R O D U C T I O N   T O   E N V I R O N M E N T A L   M A R K E T S

combine:
— Local presence and knowledge of doing business in their local emerging markets
— Have the relevant expertise in Clean Development Mechanism (CDM) methodology and execution
 Origination agreements established with a number of leading suppliers of registered CERs in Asia, Africa and
Latin America

Climate Care acquisition

 JPMorgan has significantly expanded its team capabilities to address growing client demand. As part of this build out,
the bank has hired highly experienced staff and also recently acquired Climate Care, a pioneer in carbon emission
reductions; offering carbon offsets to businesses and individuals.

 Combined strength provides a strong platform for JPMorgan to invest in large-scale carbon emission reduction
projects and renewable energy credits that meet high quality requirements.

I N T E R N A L
 Environmental markets are a growth business within
JPMorgan’s commodities business
Oil and
refined products
I N T R O D U C T I O N   T O   E N V I R O N M E N T A L   M A R K E T S
 Actively trading
since 1997
 WTI, Brent, Tapis, Dubai
and Urals
 Also present in light
products, distillates and
fuel oil, covering and
offering a wide range of
products
and services
 Experienced team with
strong relationship with
major producers and
consumers worldwide
Note: Please refer to annex for acronyms
Global Commodities
Blythe Masters
JPMorgan Energy Trading
Catherine Flax and Ray Eyles
Power Gas Coal and emissions
 Actively trading  Actively trading  Actively trading
since 2004 since 1997 since 2004
 Rapidly developing  Significant presence in  Coal, including PRB and
business NYMEX futures Central Appalachian
 Supply power to utilities,
and options  Emissions allowances (SO2,
retail power suppliers and  Basis—large number of NOx)
end users locations  EU ETS carbon
 These activities are
actively traded
 Kyoto Protocol Driven CDM
quickly establishing
and JI Carbon Credit Bruce Tozer
JPMorgan as a top tier
origination Global Head
player in the electricity
Environmental
derivatives and risk  Voluntary emission
Markets
management marketplace reductions
 Renewable energy credit
and RPS risk management
 Physical and financial
capabilities
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 Our environmental markets team has both depth and experience
 Mansoor Sheikh, Head European Energy, London, 44 207 7774392
Trading and risk
management  Nigel Felgate, Executive Director, London, 44 207 7779925

 Bruce Tozer, Global Head Environmental Markets, London,

bruce.c.tozer@jpmorgan.com, 44 207 7771531

 Donnatella Cuocci, Vice President, London, 44 207 7774005

 Charlie Pool, Analyst, London, 44 207 777 3674

 Kedin Kilgore, Head Environmental Markets Americas, kedin.e.kilgore@jpmchase.com,

Sales 1 212 834 6387

 Bhavna Prasad, Vice President, New York 1 212-834-2231

I N T R O D U C T I O N   T O   E N V I R O N M E N T A L   M A R K E T S

 Tina Reine, Vice President, New York 212 834 4281

 Chris Neidow, Head of Energy Sales and Marketing Asia, Singapore, (65) 68822107

 Daniel Rosetto, Vice President, Sydney, 61 2 9220 1503

 Odin Knudsen, Managing Director, Policy and Business Development, D.C.,
odin.k.knudsen@jpmchase.com, 1 202 585 3785
Project
 Chandra S. Sinha, Head for Asia, Mumbai, 91 22 6719 8084
origination
and structuring
 Fernando Cubillos, Vice President, Origination, Santiago

 Tiffany Bourgoin-Heskia, Associate, London, 44 207 777 0381

 Paul Kelly, Executive Director, New York, 1 212 834 7263
Principal
 Jose Tumkaya, Vice President, New York, 1 212 834 5654
Investments
 Matt Ginzberg, Analyst, New York, 1 212 834 9103
 Mike Mason, founder of Climate Care, Oxford

Climate Care  Edward Hanrahan, Head of Sales, Oxford

 Tom Morton, Head of Origination, Nairobi

I N T E R N A L