u.s. EP;
Coalbed Methane
Coal Mine Methane (CMM)
Finance Guide
U.S. Enyiron'menfal Protection Agency
July 2009 '
EPA-4QO-D-09-001
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Coal Mine Methane (CMM)
Finance Guide
s
.0*
United States Environmental Protection Agency
Office of Air and Radiation
1200 Pennsylvania Avenue, NW
Washington, DC 20460
EPA-400-D-09-001
July 2009
www.epa.gov
NOTE: Names of companies and/or organizations mentioned herein are provided for the sake of illustration and should not be interpreted or perceived as a
U.S. EPA endorsement or recommendation of their services or activities.
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ACKNOWLEDGEMENTS
This report was prepared by Eastern Research Group, Inc. (ERG) and its subcontractor,
Rudo International Advisors, under EPA contract EP-W-07-067. Principle contributing
authors were Brooke Leigh Robel (ERG) and Dianne S. Rudo (Rudo).
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TABLE OF CONTENTS
INTRODUCTION 1
OVERVIEW OF METHANE CAPTURE AND USE PROJECTS 2
Why Target Methane? 2
Sources of CMM 2
Recovery and Use of CMM 2
CMM Project Market 2
CMM Project Development 3
CMM Project Feasibility 3
CMM PROJECT ECONOMICS 5
CMM Project Revenue Streams 5
CMM Project Costs 5
Assessing Financial Feasibility 6
CMM Project Risks 6
Mine Operation Risks 6
CMM PROJECT FINANCING 8
Equity Investment 8
Carbon Financing 8
RISK MITIGATION SUPPORT 13
Loan Guarantees 13
Political Risk and Credit Insurance 13
CONCLUSION 14
APPENDIX A: CMM PROJECT PARTICIPANTS 15
APPENDIX B: KEY ELEMENTS OF FEASIBILITY STUDIES AND U.S. GOVERNMENT SUPPORT 16
APPENDIX C: CMM PROJECT FUNDING SOURCES 18
APPENDIX D: RESOURCES 23
APPENDIX E: CMM PROJECT LENDING EVALUATION CHECKLIST 25
APPENDIX F: GLOSSARY 26
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INTRODUCTION
Global methane emissions from the coal-mining sector can be
reduced through recovery and utilization projects that collect
methane gas from coal mines and use it productively to gener-
ate electricity or to provide fuel to households and industry.
Often, the critical barrier to developing such coal mine methane
(CMM) projects is securing financing.
The U.S. Environmental Protection Agency's (U.S. EPA's) Coalbed
Methane Outreach Program (CMOP) is a voluntary program with
a goal of reducing methane emissions from coal mining activi-
ties. Our mission is to promote the profitable recovery and utili-
zation of CMM, a potent greenhouse gas (GHG) that contributes
to climate change if emitted to the atmosphere. When collected
and used for energy, CMM is a valuable fuel source.
CMOP estimates that more than 220 CMM projects are already
in operation around the world. Many more project opportunities
exist, especially in emerging market countries. Several factors
have prompted the resurgent interest in CMM projects around
the world. First, the steep growth in global energy demand
has catalyzed the search for new, unconventional sources of
natural gas and power. Second, programs such as the Kyoto
Protocol's Clean Development Mechanism (COM) and Joint
Implementation (Jl) have created financial incentives to develop
projects that reduce GHG emissions. Third, multinational collab-
orative initiatives such as the Methane to Markets Partnership
(www.methanetomarkets.org) have focused on overcoming
the policy, regulatory, legal, and technical barriers that inhibit
project development.
Many funding and investment sources emphasize sustainable
development, environmental protection, and climate change
mitigation as important components of projects that they
finance. CMM projects support all of these objectives. CMOP
has developed this guide for project developers and investors
who are interested in pursuing CMM project opportunities,
particularly in emerging market countries. While most of the
project and cost information described in the following pages is
U.S.-based, there are numerous global opportunities for CMM
project development.
This guide summarizes the market potential for CMM projects
(e.g., sources/uses of CMM), project economics, types of financ-
ing, and risk mitigation. Particular attention has been paid to
the emerging markets of carbon credits as potential funding for
CMM projects.
1
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OVERVIEW OF METHANE
CAPTURE AND USE PROJECTS
Why Target Methane?
Methane, one of the principal GHGs, is second only to carbon
dioxide (C02) in its contribution to climate change. Globally, it
accounts for approximately 15 percent of global total GHGs.1
Methane is a potent GHG that is more than 20 times more ef-
fective in trapping heat than a ton of C02 on a pound-for-pound
basis over 100 years. Global average atmospheric methane con-
centrations have more than doubled—from approximately 700
to 1,774 parts per billion by volume—over the time period of
1750 to 200B.2 After nearly a decade of stabilized levels, global
methane emissions rose by 27 million tons in 2007.3
Sources of CMM
Coal mines are a primary source of methane, responsible for
approximately 6 percent of estimated global anthropogenic
methane emissions in 200B.4 Methane and coal are formed
together during the conversion of vegetation into coal. CMM
refers to methane released from the coal and surrounding rock
strata due to mining activities. In underground mines, it can cre-
ate an explosive hazard to coal miners, so it is removed through
ventilation systems. In some instances, it is necessary to supple-
ment the ventilation with a degasification system to remove
methane from the mine. The schematic (next page) illustrates
how methane may be removed from longwall mines through
the ventilation system and a combination of gob wells, pre-mine
drainage wells, and in-mine boreholes.
Recovery and Use of CMM
Specific CMM end uses depend on the gas quality, especially the
concentration of methane and the presence of other contami-
nants. Worldwide, CMM is most often used for power genera-
tion, district heating, boiler fuel, and town gas, or it is sold to
natural gas pipeline systems. Other uses of CMM include the
following:
U.S. EPA. Global Anthropogenic Non-C02 Greenhouse Gas Emissions: 1990-
2020. June 2006. www.epa.gov/climatechange/economics/downloads/
GlobalMitigationFullReport.pdf
Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment
Report: Climate Change 2007, Working Group I Report "The Physical
Science Basis," November 17,2007. www.ipcc.ch/pdf/assessment-report/
ar4/wg1/ar4-wg1-chapter2.pdf
National Oceanic and AtmosphericAdministration. "Greenhouse Gases,
Carbon Dioxide And Methane, Rise Sharply In 2007." ScienceDaily. April 24,
2008.www.sciencedaily.com/releases/2008/04/0804231816B2.htm
U.S. EPA, idem
« Coal drying
« Heat source for mine ventilation air
• Supplemental fuel for mine boilers
• Vehicle fuel as compressed or liquefied natural gas (LNG)
• Manufacturing feedstock
• Fuel source for fuel cells
« Direct gas sales to industrial or other end users
CMM Project Market
There are more than 220 CMM projects worldwide in 13
countries that, in total, recover and use more than 3.8 billion
cubic meters of gas annually from active and abandoned coal
mines, thereby avoiding 54 million metric tons of carbon dioxide
equivalent (MtC02e) of GHG emissions each year. A comprehen-
sive list of global CMM projects can be found in the Methane to
Markets International Coal Mine Methane Projects Database at:
www2.ergweb.com/cmm/index.aspx.
Globally, the greatest volume of CMM recovered and used is
from drainage (degasification) systems at underground coal
mines. Degasification systems are currently employed at some of
the most gassy coal mines in 14 countries. Technologies to re-
cover and harness dilute methane from mine ventilation systems
are also beginning to be employed in some parts of the world.
Several countries with declining coal production are effectively
capturing and using the methane from their abandoned (closed)
underground coal mines.
Project Opportunities
Drained gas is the methane captured or recovered from degasifi-
cation systems at underground coal mines. Pre-mine drainage
produces very high-quality gas with methane concentrations
that can exceed 90 percent. Gob wells generally produce lower
quality gas due to entrained air and other impurities. Methane
concentration in gob gas varies widely, from less than 25 per-
cent in some Chinese mines to 80 percent in some U.S. mines,
depending on how carefully air intrusion is controlled. Currently,
in the United States, 24 underground coal mines employ de-
gasification systems, liberating more than 36 billion cubic feet
(Bcf) annually (more than 1 billion cubic meters) in 2007. Of this
amount, about 32 Bcf are recovered and utilized for energy.
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Removal of CMM From Longwall Mines
EMMJ
Vontllalion
System
Globally, most drained gas is used in internal combustion
engines or turbines to generate power. China and Australia, for
example, have projects of this type. Other uses for drained gas
include town gas, industrial uses, coal drying, and vehicle fuel.
Ventilation air methane (VAM) is the very dilute methane—typi-
cally 1 percent or less—released from underground mine venti-
lation shafts. VAM represents more than half of all coal mining
emissions in the United States and worldwide. With a few
exceptions (see case studies on page 12), it is simply released to
the atmosphere; however, it is technically possible to convert the
dilute methane in ventilation air to useful energy. The economic
feasibility of these projects on a commercial scale is currently
being demonstrated in Australia, and projects are in operation
or under development in China and the United States.
Even though active mining no longer occurs, abandoned or closed
underground coal mines can still produce significant methane
emissions (known as abandoned mine methane [AMM]) from
diffuse vents, fissures, or boreholes. This methane can be deliber-
ately extracted and used to generate power or for other end uses.
There are several thousand abandoned coal mines in the United
States. Of these, U.S. EPA has identified some 400 abandoned
mines that are considered "gassy" and has developed profiles
for abandoned mines that might be good candidates for project
development (see www.epa.gov/cmop/docs/profiles_2008_final.
pdf). Abandoned coal mines are important sources of methane
for power generation projects in several countries, including
Germany, Poland, and the United Kingdom.
CMM Project Development
Project development involves multiple steps, ranging from
evaluating project economics to determining how to mitigate
multiple project risks (see flow chart next page). Typical project
participants include the mine operator, the project developer,
regulatory agencies, and the end user or energy buyer. Some
CMM projects might be pursued as "turnkey" operations, where
a supplier/vendor constructs and installs the necessary equip-
ment and maintains responsibility for its operating performance.
Detailed descriptions of potential project participants can be
found in Appendix A.
For the purpose of this guide, we focus on assessing the initial
project economics (e.g., costs) and securing financing for CMM
projects.
CMM Project Feasibility
The demonstration of a CMM project's technical viability plays
an important role in securing financing. The project's viability
can be demonstrated through: pre-feasibility studies (PFS);
full-scale, comprehensive feasibility studies (FS); and technol-
ogy demonstrations. These analyses are typically funded by the
project developer or investors, although some government agen-
cies fund these studies, including U.S. Trade and Development
Agency (USTDA), U.S. Agency for International Development
(USAID), U.S. EPA, Australia's Commonwealth Scientific and
Industrial Research Organisation (CSIRO), and Australia's na-
tional government.5
Formerly Australia Greenhouse Office, now Department of Climate Change.
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CMM Project Development Activities
Evaluate preliminary
project feasibility
and economics
I
Conduct initial
exploration
Pei
&
Perform data
evaluation
4
Compile preliminary
information
Develop drilling plan
based on core data
4
Identify gas
treatment processes
Develop gathering
designs based on
drilling plan and
results
Compile preliminary
information
Identify method(s)
for handling
produced fluids
4
Develop a project
team
4
Identify and contract
with energy buyer
Conduct public
relations to educate
the community
Obtain the
necessary permits
4
Practice environ-
mental stewardship
Protect assets and
mitigate identified
project risks
Pre-Feasibility Studies and Feasibility Studies
One of the first steps in project development involves perform-
ing a PFS to evaluate potential project options. The PFS is a
first-order analysis of possible project configurations includ-
ing location, size, technology to be employed, market(s) to be
served, costs, and revenues. It identifies one or more options
that appear to be technically feasible and economically at-
tractive. Typically, the PFS will be conducted at a level of detail
adequate to broadly identify financing requirements and consid-
ers the potential capital structure, taking into account expected
project cash flows under various scenarios. If the PFS indicates
a potentially viable project, a more in-depth analysis, such as a
comprehensive FS, would be conducted.
A comprehensive FS is a rigorous, detailed assessment of the
technical and economic viability of a CMM project at a specific
site or group of sites. The objective is to perform due diligence
to determine if financial investment in the project is warranted,
given the project risks. A comprehensive FS considers the finan-
cial as well as technical, legal, regulatory, and environmental
elements of the potential project. Key elements of a comprehen-
sive FS can be found in Appendix B.
Logistical, time, and financial costs are quite high for an FS at a
coal mine, and several site visits and detailed information col-
lection from mine site personnel are required. Such a study can
typically take several months or a year to complete.
U.S. government funding to support the PFS/FS efforts for CMM
projects (see examples in Appendix B) may be available to project
developers depending on the location and nature of the project.
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CMM PROJECT ECONOMICS
This section identifies the primary revenue streams and costs for
typical CMM projects, as well as some of the risks associated
with these projects.
CMM Project Revenue Streams
• Revenues: CMM projects might generate revenues
through the sale of gas or electricity and/or realize cost
savings from avoided energy costs.
• Carbon Credits (e.g., GHG offsets, emission reductions):
CMM projects capture methane that would otherwise
have been vented into the atmosphere, and put it to use,
thus reducing GHG emissions.These emission reductions, if
properly verified, might be considered GHG offsets and sold
as "carbon credits." The financing opportunities associated
with carbon credits are discussed further on page 8.
• Tax Credits: In certain jurisdictions, tax credits might be
available for the development or recovery of CMM projects.6
CMM Project Costs
There are three general categories of costs associated with
CMM projects.
Capital Costs
Capital costs include costs associated with the development,
construction, and financing of the project. Typical capital cost
components are listed in the table below.
The total capital costs of a simple CMM project to produce and
sell pipeline-quality gas are likely to be several million dollars.
Projects involving enrichment, power production (electricity
generation), or equipment conversion will be more expensive,
sometimes involving initial costs of more than $10 million even
with an existing gas recovery system.
Operating Expenses
A project's operating costs depend on the project's complexity
and the end product that is being sold. Operating costs for gas
sales projects using high-quality gas from pre-mine drainage are
generally lower than gas sales projects involving gas upgrade
or enrichment, which are, in turn, lower than operating costs
for electricity generation projects. Operating costs components
include:
• Personnel, maintenance, and operation of gas recovery
systems.
« Annual operating costs for compressors, water/gas
separator, and equipment maintenance and insurance.
For more project-specific information on capital and operating
costs, please see U.S. EPA's Coal Mine Methane Project Cash
Flow Model at: www.epa.gov/cmop/resources/cashflow_model.
html.This online model will be updated periodically to reflect
the most current cost data. For more detailed information on
gas upgrade costs, see U.S. EPA's document Upgrading Coal
Mine Methane to Pipeline Quality (2008) at: www.epa.gov/
cmop/docs/red24.pdf.
Royalties, Fees, and Other Expenses
Royalties are assessed for the gas used by project developers who
are not the owner of the gas rights. On U.S. federal lands, the pre-
vailing royalty rate is 12.5 percent, subject to individual contract
negotiations. On private lands/leases, the royalty rate is negotiated
and is typically within this range.
Capital Cost Component
Degasification system
Gas collection and gathering system
Gas processing system
Electricity generation
Offsite gas sales
Onsite gas use
Description of Activities and Equipment
Drill, install, and complete wells and boreholes, including water disposal
Blowers, compressors, lines
Separators, dehydrators
Gas turbines or 1C engines, generator sets, utility interconnections
Enrichment equipment, compressors, sales meter/gas analyzer, transmission
pipeline
Conversion of mine boilers
Please check with your legal and accounting advisors to determine if tax
credits apply.
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In absolute terms, the project development and up-front financing
costs are roughly the same irrespective of the size of the project;
in percentage terms, however, they are a much bigger burden
on smaller projects. There are a number of organizational and
transactional costs associated with project development, which
might represent upwards of 25 to 30 percent of the total capital
costs.These costs include:
• Conducting "due diligence" or examining and verifying
the assertions and records of other project parties.
• Performing system design, engineering, and economic
assessment.
• Negotiating and drafting legal documents and
agreements.
• Obtaining the necessary permits, licenses, and rights-of-
way for pipelines or power lines.
Other significant non-operational expenses that are regularly
incurred include the following:
• Taxes (federal, state).
• Financing-related costs (including interest).
Assessing Financial Feasibility
There are two standard and interrelated methods used to mea-
sure an investor's return on equity for assessing CMM project
financial feasibility:
• Discounted Cash Flow Method: The sum of a project's
net cash flows over the project's life is discounted to the
present (i.e., the net present value [NPV] of the project).
The discount rate used to make this calculation represents
the investors' cost of capital. If a project's NPV is positive,
then the project is deemed capable of yielding the inves-
tor's minimum required return.
• Internal Rate of Return: The internal rate of return (IRR)
on a project is the discount rate at which the NPV of the
project's net cash flow is zero. In other words, it is the rate
that equates the present value of future cash flows with
the initial capital investment. A project's expected IRR can
be compared with return rates on alternative investment
opportunities.
Sensitivity analysis should also be carried out to examine the
impact of risks on project returns. Risks could include changes in
key financial variables, such as gas production or electricity prices.
As previously mentioned, CMOP has developed the Coal Mine
Methane Project Cash Flow Model, a Web-based cost-benefit
analysis tool to assist developers with estimating financial
scenarios associated with CMM projects. The online tool al-
lows users to enter mine-specific information including percent
methane of the drained gas, distance from drainage area to
onsite use, compressor/blower efficiencies, drainage well and
blower development costs, gas availability, project lifetime, loan
terms and interest rate, and certified emission reduction (CER)
unit sale price. The model provides estimated outputs including
equity amount, IRR, and a cash flow analysis. The tool is avail-
able on the CMOP Web site at: www.epa.gov/cmop/resources/
cashflow_model.html.
CMM Project Risks
Project risks change depending on the stage of the project:
development, construction, or operation. The equity investor
generally bears the development risks of a project—those risks
associated with the developer's ability to complete the project
and receive project cash flows. In this case, the developer/inves-
tor would be unable to recover "sunk" costs, such as legal or
consulting fees incurred. Construction and operations risks might
also be associated with substantial losses. Associated CMM
project risks are described in the exhibit on page 7.
Mine Operation Risks
Mine operators might encounter a separate set of potential
risks than project developers and/or investors. Maintaining the
productivity and profitability of their mining operations are the
primary concerns of mine managers. Mine operators are also
concerned about potential risks that the CMM project could
pose to their coal operations in terms of safety and flexibility,
as well as the risks of the project itself. Possible risks for mine
operations include:
• Interference with mining operations. Coordinating gas
production and use with coal operations requires both
detailed planning and great attention in implementation,
which could potentially distract from or interfere with coal
production, or both.
• Reduction in mine planning flexibility. Mine operators
might be concerned that gas operations will limit their
ability to change plans at a given mine or to close or
sell a mine (e.g., contracts requiring delivery of specified
amounts of gas over a given time frame could infringe on
the ability to alter coal mining operations).
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Risks Associated With CMM Projects
Project Development Risks
Construction and Operations Risks
Inability to obtain agreements with mining company and
adjacent land owners.
Indications of marginal gas resource (such as gas quality,
rate of flow, and longevity).
Inability to negotiate energy sale agreements.
Inability to obtain permits.
Insufficient development
capital.
Inability to secure financing.
Construction cost overruns or delays in construction
completion.
Poor gas productivity (such as flow rate, reliability,
and quality).
Technological risk (poor system performance).
Market risk (drop in revenues due to price changes).
Contractual/legal problems with customers, mine owner/
operator, system suppliers, or regulatory agencies.
Mine closing or change in mining plan, causing stranded
investment.
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CMM PROJECT FINANCING
Appropriate sources of financing vary depending on the project.
Project developers often manage their risk exposure by us-
ing project financing, a financing technique used to raise debt
financing on the basis of a project's projected cash flows. Project
revenues might also include carbon financing, which could pro-
vide a revenue stream based on mitigated carbon emissions.
Equity Investment
Lenders typically require that developers invest equity to dem-
onstrate their confidence in the project's success and willingness
to risk their own financial resources. While acceptable debt-to-
equity ratios vary, project financing using project debt can be
highly leveraged. The actual ratio preferred by lenders usually
reflects the project's perceived risk as well as the borrower's
financial stability. In practice, many CMM projects developed
in the United States have been financed through corporate
resources rather than project-specific debt and equity.
A wide variety of financial institutions or financiers provide debt
or equity capital, or both (see examples at right). These entities
vary in terms of their risk tolerance; some will accept project risk
and others will not. Multilateral and bilateral funding institu-
tions, such as the Asian Development Bank, the World Bank, and
the Japan Bank for International Cooperation, have played a
significant role in financing CMM projects. Appendix C provides
a more complete overview of these and other project funding
sources, the risk/return profiles of these institutions, the particu-
lar investment areas in which they specialize, and the current
status of the marketplace.
An equity investment can be made in a project itself (i.e., as
in a project finance transaction) or in the company developing
the project. In the former case, the investor's return is solely a
function of the project's financial performance. In the latter, the
return is a function of the financial performance of all the com-
pany's operations, rather than the project alone. Consequently,
the investor must evaluate the company's strategy, its competi-
tive advantages relative to other firms in its industry, and the
quality of its management, in addition to the economics of the
particular project.
Equity investors can become involved in a project at any stage
in the project development process depending on their level
of activity and risk tolerance. In the early stages of project
Examples of Project Funding Sources
Commercial banks profit by lending money at higher
interest rates than they pay on deposits. Banks might
provide short-, medium-, and long-term corporate
and project finance loans at a margin or spread over
a benchmark rate such as LIBOR.7
Finance companies normally provide debt financing
for projects and transactions, often financing projects
in earlier stages than banks and investing in a wider
range of industries. Most finance companies will
not put up initial risk capital to fund project devel-
opment, but they will provide subordinated debt
financing in exchange for increased lending rates.
Investment bankers provide a wide variety of services
that support raising financing. They provide advice
on corporate and project financing alternatives,
arrange debt and equity public offerings and private
placements, and assist in transactions such as merg-
ers, acquisitions, and divestitures.
development, there is a relatively high probability that the proj-
ect will never be implemented, so investors who fund the early
costs bear the most risk. Most equity investors will consider a
project only after technical and economic studies (such as FS)
show that the project is technically and financially viable, and
after important contracts such as energy purchase/sale agree-
ments have been signed.
In addition to the typical financial sources noted above, many
bilateral and multilateral organizations have funding available
for climate change-related programs or initiatives, and several
are currently engaged in projects to mitigate GHG emissions
(see selected examples in Appendix C).
Carbon Financing
Many CMM utilization projects can offer financial returns that
are sufficient on their own merits to attract traditional inves-
tors and lenders. For other projects, the sale of carbon credits
from GHG emission reductions may be required to make them
an attractive investment. In most cases, carbon credit revenues
7 London Interbank Offered Rate, comparable to the U.S. Federal funds rate.
8
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Carbon Credit Terminology
Carbon Financial Instruments (CFIs): The Chicago Climate Exchange (CCX) unit of trade, which can be issued as
allowance-based or offset credits. One CFI represents 100 tC02e.
Certified Emission Reductions (CERs). A unit of GHG emission reductions issued pursuant to the Clean
Development Mechanism of the Kyoto Protocol, and measured in tC02e. One CER represents a reduction of GHG
emissions of one tC02e.
Emission Reduction Units (ERUs). A unit of emission reductions issued pursuant to Joint Implementation. This unit is
equal to one tC02e.
European Union Allowances (EUAs)\~lhe allowances in use under the European Union Emissions Trading Scheme
(EU ETS). An EUA unit is equal to one tC02e.
Renewable Energy Certificates (RECs,):Tradable environmental commodities in the United States which represent
proof that 1 megawatt-hour (MWh) of electricity was generated from an eligible renewable energy resource.
Verified Emissions Reductions (VERs). A unit of GHG emission reductions that has been verified by an independent
auditor and can be traded on the voluntary market.
Source: World Bank, Ecosystem Marketplace and New Carbon Finance.
alone are inadequate to provide the level of funding necessary
for project planning and implementation. Carbon credits are
particularly useful for improving the cash flow of projects that
are otherwise economically marginal and, therefore, unattractive
to investors.
The emerging carbon credits market consists of three main types:
• Regulatory (Compliance) Carbon Markets: Cap-and-trade
systems under regulatory regimes, such as the Kyoto
Protocol (through the Clean Development Mechanism or
the Joint Implementation scheme), the European Union
Emissions Trading System (EU ETS), or the Australia New
South Wales (NSW) trading scheme.
• Voluntary Carbon Exchanges: Voluntary yet legally
binding, membership-based cap-and-trade systems, for
example the Chicago Climate Exchange.
• Voluntary Over-the-Counter (OTC) Markets: Project-based
carbon offsets purchased exclusive of a cap-and-trade
system, usually through negotiated bilateral agreements.
Regulated Carbon Markets
The Kyoto Protocol is a legally binding agreement under which
nearly 200 industrialized countries have agreed to reduce col-
lective GHG emissions to an average of 5 percent below 1990
emissions levels by 2012. To date, the regulated overseas GHG
markets that have evolved under the Kyoto Protocol are flexible
cap-and-trade mechanisms that enable developed countries and
countries with economies in transition (EITs) to purchase carbon
credits from other developed countries and EITs to fulfill emis-
sion reductions commitments including:
Joint Implementation (Jl): A project-based transaction
system under the Kyoto Protocol to allow emitters in de-
veloped countries (i.e., "Annex 1" countries) to purchase
carbon credits from GHG reduction projects implemented
in another developed country or EITs.
Clean Development Mechanism (CDM):A project-based
transaction system under the Kyoto Protocol, through
which developed countries can accrue carbon credits by
financing GHG reduction projects in developing countries.
Case Studies: Leveraging Carbon Funds for CMM
Projects in China
Two CDM utilization projects are underway in the coal min-
ing concession area of the Yangquan Coal Industry (Group)
Company Limited (YCIG) in China.
• CMM Capture and Use for Power Generation: This
project installed 90 MW of gas engines for power
generation from CMM.
• Using CMM for Fuelling a Furnace System:This
project represents the first CMM-fuelled aluminum
hydroxide roasting furnace system in China and
perhaps the world. The furnace project is expected to
reduce methane emissions by nearly 7 MtC02e over
seven years (2007-2013).
Funding for both projects was secured through the
European Carbon Fund (ECF), which contributes to the
financing of projects that help fight climate change by
reducing GHG emissions around the world.
9
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COM Projects by Source, 2007
Jl Projects by Source, 2007
Other 1%
Fugitive 3%
Hydro 3%
Source: World Bank State and Trends of the Carbon Market 2008
There are several distinct emissions trading systems that have
been established either within the framework of the Kyoto
Protocol or entirely outside of it. These allowance-based transac-
tion systems set a regulatory cap or limit on total carbon emis-
sions and allow trading within that cap to meet the established
limits. Some of the caps can be met through the purchase of
offsets. These systems establish legally-enforceable limits and
are enforceable in their own right. Examples include the EU ETS
and Australia's NSW Greenhouse Gas Reduction (previously
"Abatement") Scheme (GGAS).
Recent Kyoto Protocol carbon market activity is reflected in the
pie charts on the previous page, with CMM representing 5 and
27 percent in COM and Jl projects, respectively.
In the United States, 10 East Coast states have developed the
Regional Greenhouse Gas Initiative (RGGI, www.rggi.org), a
regulated carbon market, to reduce C02 emissions from power
plants.8 Currently, neither the RGGI program nor other regional
and state-level programs underway in the United States, such
as the Oregon Standard and the Western Climate Initiative,
explicitly address CMM emissions reductions, but they may in
the future.9
Connecticut, Delaware, Maryland, Massachusetts, Maine, New Hampshire,
New Jersey, New York, Rhode Island, and Vermont participate in RGGI.
For a complete summary, see "Forging a Frontier: State of the Voluntary
Carbon Markets 2008" at: www.ecosystemmarketplace.com/documents/
cms_documents/2008_StateofVolunta ryCarbonMarket2.pdf.
Other
Renewbles 1%
^WasteMgmt
3%
Source: World Bank State and Trends of the Carbon Market 2008
Voluntary Carbon Markets
Voluntary carbon markets can be divided into two distinct com-
ponents: carbon exchanges (e.g., CCX) and OTC markets.
• The Chicago Climate Exchange (CCX) was launched in
2003 and describes itself as "the world's first and North
America's only active voluntary, legally binding integrated
trading system to reduce emissions of all six major GHGs
with offset projects worldwide." CCX Members (full,
associate, and participant) represent all sectors of the
global economy. They make a voluntary but legally binding
commitment to meet annual GHG emission reduction
targets. Those who reduce below those targets have
surplus allowances to sell or bank; those who emit above
the targets comply with their commitment by purchasing
CFIs. Two U.S. coal mining companies have joined the CCX
as members and at least one CMM project developer has
joined as an offset provider.
• Over-the-Counter (OTC) carbon markets are not driven
by any sort of emissions cap and do not operate via a
formal exchange (e.g., trading). Buyers of carbon credits
are typically motivated by environmental philanthropy,
public relations (demonstrating sustainability), or pend-
ing regulations. OTC sellers include project developers,
aggregators/wholesalers, retailers, and brokers.
10
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Overall Value of Global Carbon Markets
Markets
Chicago Climate Exchange (CCX)
Over-the-Counter (OTC) Carbon Markets
Total Voluntary Markets
European Union Emissions Trading Scheme (EU ETS)
Primary Clean Development Mechanism (COM)10
Secondary Clean Development Mechanism (COM)
Joint Implementation (Jl)
Australia New South Wales (NSW) Trading Scheme
Total Regulated Markets
Total Global Market
Volume (MtC02e)
2006
14.3
10.3
24.6
1,044
537
25
16
20
1,642
1,667
2007
42.1
22.9
65.0
2,061
551
240
41
25
2,918
2,983
Value (USS million)
2006
58.5
38.3
96.7
24,436
5,804
445
141
225
31,051
31,148
2007
258.4
72.4
330.8
50,097
7,426
5,451
499
224
63,697
64,028
Source: New Carbon Finance, Ecosystem Marketplace, World Bank
While the regulated or compliance markets currently outperform
the voluntary markets, 2006 and 2007 trading volumes and
values suggest that the OTC market is gaining momentum (see
above).
Challenges of Carbon Financing
There are several issues associated with securing carbon credits
for CMM projects. Some of these challenges or barriers include:
• Lack of standardized methodologies. Because there is no
one universal carbon trading program, GHG reduction
projects are subject to different standards. For example:
- COM and Jl projects are subject to the require-
ments of Approved Consolidated Methodologies
(e.g., ACM0008). These methodologies require
that the project demonstrate its "additional-
ity" or emissions reductions in excess of those
that would otherwise occur under a baseline
scenario. http://cdm.unfccc.int/methodologies/DB/
UJW6WTG49X4VYQZK8U4TC8YWY51U1 Y/view.html
- Voluntary carbon markets each have their own stan-
dards. For example:
o CCX Offset Project Registration, Verification &
Crediting Procedure: www.chicagoclimatex.com/
content.jsf?id=104
o International Organization for Standardization
(ISO)14064 Standards:
Part 1: www.iso.org/iso/catalogue_
detail?csnumber=38381
Part 2:www.iso.org/iso/catalogue_
detail?csnumber=38382
Part 3: www.iso.org/iso/
catalogue_detail?csnumber=38700
o Voluntary Carbon Standard (VCS): www.v-c-s.org/
documents.html
Ownership of credits. In order to buy or sell credits, proof
of ownership must be demonstrated and legally transferred
to the other party following the transaction. Under most
circumstances, credit ownership will be recorded under the
appropriate trading mechanism (e.g., COM, EU ETS, CCX)
but in the absence of clear reporting (i.e., OTC markets),
a contract specifying ownership of the resultant carbon
credits should be obtained.
Process for validating/verifying credits. The validation of
carbon credits has become increasingly important. This also
requires having an acceptable methodology and third-party
verifiers. These mechanisms allow the market to impose
some discipline by ensuring that credits are valid.
10 Primary COM transactions refer to the first sale of CERs from the project
owner to the buyer. Secondary COM transactions refer to subsequent sales
of primary CERs.
•11
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- Regulated markets: There have been substantial
delays in validating and verifying COM projects, in
particular.11 These delays, in turn, slow the issuance
of CERs, which might affect project financing and
implementation.
- Voluntary markets: Third-party verification has become
prominent. More than 87 percent of credits in the
OTC voluntary markets in 2007 were verified by a
third party.12
Post-2012 uncertainty. In the absence of a global trading
regime, it is unclear how the carbon credit markets might
fair in the post-Kyoto period (i.e., after 2012). Financial
institutions might not be willing to invest in projects for
which there is limited or no future liquidity. However,
national governments, multilateral funds, and/or other
investors with mandates for alternative investments (e.g.,
venture capital, hedge funds) might continue to pursue
carbon credits beyond 2012 if certain guarantees can be
secured (e.g., future "market price," forward contracts).
11 World Bank's State and Trends of the Carbon Market 2008
12 Ecosystem Marketplace and New Carbon Finance, 2008
VAM Mitigation: Cutting Edge Technologies Convert Methane Emissions to Income
In September 2007, the world's first commercial-scale power plant using VAM as the primary fuel went into full operation at the
West Cliff Colliery of BMP Billiton in Australia. The plant generates 6 megawatts (MW) of electricity and reduces GHG emissions
by 250,000 tonnes of carbon dioxide equivalent (tC02e) each year, thereby allowing BMP Billiton to convert the reductions into
corresponding carbon credits. Use of this extremely lean fuel is made possible by a patented combination of emission control and
steam cycle technologies developed by MEGTEC Systems, a Methane to Markets Project Network member. By using its flameless
VOCSIDIZER® regenerative thermal oxidizer (RTO) as an energy source, MEGTEC generates high grade, super-heated steam from
a fuel with 0.9 percent methane content. This project is the culmination of technology demonstrations conducted in Australia and
the United Kingdom. The VOCSIDIZER® has also been demonstrated in the United States at a CONSOL Energy mine. The West Cliff
facility received financial assistance from the Australian Greenhouse Office Greenhouse Abatement Programme.
Biothermica Technologies Inc., a Methane to Markets Project Network member, announced in April 2009 that its VAMOX™ CMM
abatement system is fully operational at Jim Walter Resources' mine no. 4 in Brookwood, Alabama. For the first time in the United
States, VAM is being destroyed at an active coal mine, all the while generating bankable carbon credits. Biothermica will use
its VAMOX™ RTO to mitigate VAM as it is released to the atmosphere, creating income by selling carbon credits from the VAM
destruction. Approved by the U.S. Mine Safety & Health Administration (MSHA), this medium-size unit will achieve GHG emission
reductions amounting to approximately 40,000 tC02e annually, the same as removing 8,000 cars from the road. Biothermica
plans to develop additional VAM oxidation projects around the world under various GHG reduction schemes.
12
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RISK MITIGATION SUPPORT
Raising debt and equity to finance projects in developing
countries can be challenging. There are a number of risk mitiga-
tion instruments that facilitate raising private capital in these
markets. These instruments are designed to transfer certain
defined risks from lenders and equity investors to creditworthy
third parties such as guarantors or insures. Multilateral insti-
tutions (such as the World Bank, Asian Development Bank,
Inter-American Bank), export credit agencies (e.g., U.S. Export-
Import Bank, Japan Bank for International Cooperation, Export
Development Canada), and political risk insurers (e.g., Overseas
Private Investment Corporation, Nippon Export and Investment
Insurance, United Kingdom's Export Credit Guarantee
Department) provide different types of risk mitigation support.
The CMM project sponsor that possesses a thorough knowledge
of these instruments and practices will be better prepared to
negotiate with potential financiers and, ultimately, is more likely
to succeed in attracting capital.
Loan Guarantees
In order to reduce political risk exposure associated with cross
border lending, banks or other lending institutions might require
a loan guarantee to ensure timely repayment. A loan guaran-
tee is a promise of an acceptable, creditworthy party to repay
all or part of the loan in the event (or under certain specified
circumstances) that the borrower does not or is unable to repay
the loan. In limited recourse project finance, project developers
rarely provide guarantees of loan repayment, although partial
guarantees under specified circumstances (such as construction
completion) do occur. Loan guarantees are typically provided by
national governments interested in catalyzing economic activity
in their areas (see text box). Depending on the credit quality
of the guarantor, these guarantees reduce the loan default risk
which in turn reduces the interest rate on the loan.
Some financial institutions have standardized loan applica-
tion forms that potential borrowers complete. Most, if not all,
institutions will expect the borrower to present a business plan
(i.e., project documents and technical studies). Appendix E
provides a checklist of the typical lending terms and conditions
that financial institutions might use in evaluating CMM projects.
This document should provide the CMM project developer with
a good sense of the information required before approaching a
financial institution.
Risk Reduction Assistance
Certain institutions offer financial assistance to reduce the
risks that domestic companies might face when exporting
their products or services abroad.
• The Export-Import Bank of the United States
(Ex-lm Bank) provides long-term loans and guar-
antees, working capital guarantees, and political risk
insurance tied to the sale of U.S. goods and services.
It also offers certain special financial terms to com-
panies that export environmental goods to foreign
companies that are unable to obtain traditional
financial support, www.exim.gov
• The Overseas Private Investment Corporation
(OPIC) helps U.S. businesses invest overseas by of-
fering support to mitigate these risks. OPIC provides
a range of traditional finance resources, such as
loans and guarantees. In addition, it offers political
risk insurance products for cross-border lending or
investing in emerging markets.www.opic.gov
• As a member of the World Bank Group, the
Multilateral Investment Guarantee Agency
(MIGA) promotes foreign direct investment into
developing countries to help support economic
growth, reduce poverty, and improve people's lives.
MIGA addresses investment concerns and political
risk perceptions by providing political risk insurance,
technical assistance, and dispute mediation services
to help remove obstacles.www.miga.org
Political Risk and Credit Insurance
Risk mitigation, in the form of political risk insurance or credit in-
surance, is offered by public (multilateral and bilateral development
institutions - see text box above) and private insurance companies.
It is often used in international project finance transactions and is
available to both lenders and equity investors. Political risk insur-
ance typically covers the following risks: inconvertibility and trans-
ferability of foreign currency, expropriation and nationalization,
political violence and breach of contract. Credit insurance covers
losses in the event of a debt service default regardless of the cause
(i.e., covering both political and commercial risks) and is often used
when a government entity is the off-taker of the product.
•13
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A host of finance and revenue sources are available to CMM
project developers worldwide. By tapping the appropriate sourc-
es, funding can be secured for all phases of the project develop-
ment cycle, from prefeasibility studies, to technical specification
development, to pilot/demonstration studies and full implemen-
tation. The finance organizations and opportunities outlined
in this guide contribute to the project development process in
several ways. Some provide risk reduction products to mitigate a
technology or service provider's concerns about entering foreign
markets. Others provide lending and related financial assistance
for projects that offer environmental benefits and contribute
to sustainable development and poverty alleviation. Still oth-
ers purchase carbon credits and thereby could supplement a
project's cash flow. The preceding examples demonstrate that by
mixing equity investment with financing available from a variety
of sources, project developers can support even the largest
CMM development projects.
CONCLUSION
14
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APPENDIX A: CMM
PROJECT PARTICIPANTS
Construction and Operations Risks
Developer
Responsible for conceptualizing, assessing, developing, and implementing a project. Identifies project
opportunities and then completes or delegates project development tasks. Leads the project through all
phases, which include project development, financing, construction, and operation. May be independent
of, a partner with, or the same as, the mine operator.
Mine Operator
A critical participant and at a minimum, supplies the site and fuel to the project. Projects using coal
mine methane (CMM) are located at the host coal company's mine, typically employing the mine's de-
gasification system. Projects might take place prior, during or after mining, depending on the technology
employed. Often plays a much more extensive role. At most existing CMM projects in the United States,
also functions as project developer.
Regulatory Agencies
Provide permits and approvals in the United States, including: U.S. Mine Safety and Health
Administration (the mine operator must file a degasification plan as an amendment to the mine ventila-
tion and dust control plan); state mining authority; state oil and gas agency; and state environmental
or natural resources department. On U.S. federal lands, the Bureau of Land Management deals with
coal/gas leases, and the U.S. Forest Service deals with surface access rights on restricted lands (e.g.,
Inventoried Roadless Areas). The developer might also need permits for rights of encroachment on the
land owner's property and for potential environmental impacts related to pipeline rights-of-way, water
treatment, and combustion related to gas processing. Most permits require that the developer file
detailed project plans, designs for underground and surface equipment, and land surveys.
System Supplier
Provides the systems that convert raw gas to pipeline quality gas or electric and thermal energy that
might require more than the off-the-shelf compressors, pipes, and meters that the mine operator or
developer can install. The viability of a project depends on the system and its supplier's guarantees and
therefore is considered a major project participant. Vendors will often sell a system on a "turnkey basis,"
where the vendor is responsible for the installation and performance of the entire system. Often investors
will insist that the system supplier retain system ownership until rigorous performance testing is complet-
ed. Suppliers may extend their warranties through the project life by means of a maintenance contract.
Project Contractor
Responsible for the design, procurement, construction, and/or installation of CMM project equipment.
Either possesses all necessary capabilities in-house, or will enter into subcontracting arrangement
with other firms. Some contractors, in conjunction with a system supplier, will provide a project facil-
ity on a guaranteed turnkey basis, assuming responsibility for the project's completion and operational
performance.
Project Operator
Responsible for cost-effective delivery of the energy product throughout the life of the project. Performs
management functions, as well as the operation and maintenance (O&M) of the system, typically on a
contractual basis with the project. Can be a separate third-party firm under contract to the project own-
ers, or one of the other participants. Major maintenance is usually the function of the system supplier.
Energy Product
Buyer
Provides the CMM project's revenues. Buyers include electric utilities, local gas distribution companies,
gas wholesalers/blenders, major gas pipelines, and local fuel users (e.g., boilers, kilns). The mine itself
could take delivery of CMM project electricity, thermal energy, or raw gas to power onsite equipment. Ir
order to obtain financing for the project, the project must contract with the energy product buyer for a
period not less than the term of the senior debt, plus a 2-3 year "tail."
Financial
Institutions/Carbon
Financiers
Fill multiple roles, from arranging to providing the financing for the project.
•15
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APPENDIX B: KEY ELEMENTS OF
FEASIBILITY STUDIES AND U.S.
GOVERNMENT SUPPORT
A comprehensive feasibility study includes the following key
elements:
• A summary of mine characteristics based on information
from the pre-feasibility study (PFS) and site visit(s).
• A detailed assessment of available gas resources based
on historical gas emissions from the mine, data on in situ
gas content, and plans for future mine activities. This ele-
ment might include pilot well tests.
• A detailed assessment of degasification technologies and
mine drainage techniques, both those currently in place
and those that could be added to maximize the quality
and quantity of drained gas.
• A detailed assessment of technical possibilities to use the
gas based on its quality, the overall project objectives,
and the PFS results. End uses to be considered include
power generation, gas sales to pipeline (with or without
upgrade), coal drying, and mine heating.
• A detailed assessment of market opportunities for gas
and/or power, including factors such as the distance to
nearby pipelines, the current and projected market price
of gas, the demand for and price of power generation in
the area, and the possibility of carbon credits.
• A detailed assessment of proposed project costs for the
project scenarios of interest, using estimates and financial
projections. These are based on best-available estimates
from technology vendors and technical experts.
• A detailed assessment of site-specific legal, regulatory,
and environmental issues, including the status of gas
ownership rights, any issues associated with access
to surface lands for degasification systems, and other
restrictions on the potential project (e.g., wetlands
infringement).
• A detailed cost-benefit analysis for each technically vi-
able scenario based on the market assessment and the
overall project objectives.
• A conclusion section that includes an assessment
of the project's overall viability, whether financial
investment should be made, and any other appropriate
recommendations.
The following U.S. government agencies provide assistance
for determining project feasibility, ranging from pre-feasibility
studies to comprehensive feasibility studies and technology
demonstration projects.
• U.S. Trade and Development Agency (USTDA)
provides funding to facilitate the export of U.S.
technologies, products, and services to developing and
transitional countries. Applications for USTDA feasibility
study grants and technical assistance grants can be
submitted via two mechanisms: 1) sole source by a
U.S. company partnering with a project abroad, or 2)
competitive bidding by a foreign grantee. USTDA has
provided grant funding to assess the feasibility of several
coal mine methane (CMM) projects. For instance, USTDA
funded a study of potential ventilation air methane
(VAM) utilization projects in Poland. It has also supplied
the grant funding for project design and related planning
at the Jincheng Anthracite Coal Mining Group's Sihe
Mine in Shanxi, China, which involves a 120 megawatts
(MW) CMM-based power generation project. Recently,
the agency provided about US$500,000 in grant funding
for a feasibility study of CMM development potential in
Ukraine, www.ustda.gov
« U.S. Agency for International Development
(USAID), as part of its Methane to Markets commitment,
offers funding support for methane mitigation projects.
USAID missions, such as those in India and Ukraine,
have offered Global Development Alliance (GDA)
funding support to energy industry representatives,
research and academic groups, financial institutions, and
nongovernmental organizations to assist in promoting
methane capture and productive use. One of their key
activities has been a technology demonstration project of
in-mine drilling and methane degasification at a Ukraine
coal mine), www.usaid.gov
• U.S. Environmental Protection Agency (U.S. EPA)
has funded a number of CMM project-level technology
demonstration projects, pre-feasibility studies (PFS), and
comprehensive feasibility studies (FS). Domestically, the
U.S. EPA has worked with the U.S. Department of Energy
to support a demonstration project of VAM technology.
16
-------
As part of its support for the Methane to Markets
Partnership, U.S. EPA has also funded a number of pre-
and comprehensive feasibility studies overseas, including
these activities in the following partner countries:
- China: Three comprehensive feasibility studies of
CMM projects; a PFS of VAM mitigation; and a tech-
nology demonstration of VAM technology.
- India: A PFS of VAM mitigation at two mines.
- Mexico: A demonstration project.
- Mongolia: A PFS at an underground coal mine.
- Nigeria: A PFS at an underground coal mine.
- Poland: A pre-feasibility assessment of 10 mines for
VAM mitigation and a technology demonstration.
For more information on U.S. EPA's activities, visit: www.epa.
gov/cmop.
•17
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APPENDIX C: CMM
PROJECT FUNDING SOURCES
Types of Financiers Risk/Return Portfolios
Commercial Banks
Specialized Investment
Areas
Current Status
Commercial banks profit
by lending money at higher
interest rates than they pay
on deposits. Banks might
provide short-, medium-,
and long-term corporate
and project finance loans at
a margin or spread over a
benchmark rate such as the
London Interbank Offered
Rate.
Because banks are generally
conservative, they apply risk
minimization techniques. A project
developer seeking bank financing
therefore must be prepared to
show the bank's loan officer all
important project contracts; a
credible, independent project
technical assessment; and pro
forma financial statements
demonstrating the project's ability
to service debt. The developer also
should be prepared to discuss
its own project development
experience and creditworthiness,
as well as project assets that
could serve as collateral.
Because banks are regulated at
the federal and/or state levels and
are legally restricted from making
risky loans, they are conservative
lenders, generally providing senior,
secured loans to experienced
entities. They typically do not fund
projects in their development
stages, preferring to wait until
projects are well-characterized.
Bank financing has been
used to fund large-scale
coal mine methane (CMM)
projects that require major
capital investments in
both gas recovery systems
and collection/utilization
components. Few, if any,
smaller CMM projects have
been bank-financed, however,
because:
• Most banks are unfamiliar
with the CMM project
market.
• Smaller projects frequently
are not profitable for banks,
even when expected pricing
is high, due to the bank's
costs for examining and
processing the transaction.
CMM projects are not
inherently "unbankable,"
despite the lack of bank
participation thus far. They
are generally supported
by strong contracts, earn
sufficiently high rates
of return, and employ
a resource that is well-
characterized. The latter point
is especially true in the case
of use projects at mines with
degasification systems. If
banks find a CMM project of
an acceptable size and are
willing to lend on a project
finance basis, they could play
a more significant role once
they have greater familiarity
with the industry. Banks
located near gas resources
might be good candidates
because they are more likely
to have experience with the
gas industry and, therefore,
be more comfortable with
CMM projects.
Gas Purchasers
Gas companies to date have
played a significant role in
financing CBM projects.
Gas pipeline companies and
gas distribution companies
are potential sources of
capital for CMM projects
because they are interested
in securing low-cost supplies
of gas.
These companies often face
"make or buy" decisions: will it be
more profitable to buy or develop
gas resources? By developing
CMM and other gas projects,
they might be able to ensure
themselves long-term, low-cost
supplies.
Gas/purchase sale contracts
can be negotiated between
the CBM project and the gas
company such that the project
is profitable and the gas
company pays a relatively low
price for gas.
18
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Types of Financiers Risk/Return Portfolios Specialized Investment Current Status
Areas
Venture Capitalists
Venture capitalists usually
invest in convertible
preferred stock because this
instrument greatly increases
upside potential.
Because venture capitalists
provide risk capital to fledgling
ventures that often have nothing
more than ideas, many of their
investments are unsuccessful. In
exchange for bearing this risk,
venture capitalists expect to earn
unusually high returns—in the
range of 40 percent after taxes.
Venture capitalists specialize
in funding startup companies,
including those that develop
energy technologies. They might
not be suitable investment
partners for small CMM project
developers, however, because
they invest in companies rather
than projects and given the
active role they take in running
companies. CMM project
developers that partner with
venture capital firms might
have to be willing to cede some
control of their companies.
In recent years, venture
capital investments have
been rushing toward
clean or alternative energy
technologies.13 According
to the United Nations
Environment Programme
(UNEP), sustainable energy
venture capital and private
equity investment were up
more than 30 percent in the
second quarter of 2008 in
comparison with the same
period in 2007.14
Pension Funds, Insurance Companies, and Other Institutional Investors
Pension funds, mutual funds,
and other institutional
investors are large, regulated
companies that pool money
provided by smaller investors
and then make investments.
They control billions of
dollars of U.S. investment
funds.
Most institutional investors are
strictly bound by U.S. Securities
and Exchange Commission (SEC)
laws and their own covenants
and restrictions, which dictate the
types of investments the investors
might make.
Almost all money under
institutional management
must be invested in highly
rated, publicly traded stocks,
bonds, and other highly liquid
securities.
Institutional investors have
limited appetite for projects
and, therefore, generally
do not represent potential
capital sources for CMM
projects.
Investment Bankers
Investment bankers provide
a wide variety of financial
services (e.g., advice on
corporate/project financing
alternatives; arrange debt/
equity public offerings and
private placements; assist
in transactions such as
mergers, acquisitions, and
divestitures).
Investment bankers have
minimum size requirements and
are unlikely to be interested in
project financing less than $25-50
million.They might, however, be
able to place equity with private
investors.
Investment bankers could
be useful to CMM projects
because they are able to
identify investors interested
in investing in oil and gas
projects, not bound by
investment restrictions, and
able to invest in smaller
projects. Investment banks also
might be able to help project
developers identify suitable
partners such as oil and gas
exploration companies.
To date, a number of CMM
projects have been financed
through private investments.
Numerous investment banks
have arranged CMM project
financing, while others,
although they have not been
involved in CMM projects,
have worked with energy
project developers and are
interested in assisting CMM
projects.
13 Wald, Matthew L. "Venture Capital Rushes into Alternative Energy." The New York Times. April 30,2007. www.nytimes.com/2007/04/30/business/
30energy.html?_r=1&oref=slogin
14 UNEP. "Clean Energy Investments Charge Forward Despite Financial Market Turmoil." June 2008. www.unep.org/Documents.Multilingual/
Default.asp?DocumentlD=538&ArtidelD=5849&l=en
•19
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Types of Financiers Risk/Return Portfolios Specialized Investment Current Status
Areas
Multilateral Sources (Examples)
• The Asian Development
Bank (ADB), a multilater-
al development organi-
zation, strives to improve
the social welfare of
people in the Asia and
Pacific regions.
• The Global Environment
Facility (GEF) works
through three imple-
menting agencies — the
World Bank, the United
Nations Development
Programme (UNDP), and
the UN Environment
Programme (UNEP) — to
provide cost-sharing
grants and concessional
funding to help develop-
ing countries fund proj-
ects and programs that
protect the environment,
such as climate change
mitigation projects.
• The World Bank provides
funding for projects that
are consistent with its
mission to fight poverty
and improve the living
standards of people in
the developing world.
The International Finance
Corporation (IFC), the
private sector arm of
the World Bank Group,
provides financing for
a variety of sustainable
energy and climate
change mitigation ven-
tures. IFC financing can
include both debt and
equity finance of private
ventures.
• The European Bank for
Reconstruction and De-
velopment (EBRD) uses
investment tools to help
build market economies
and democracies in coun-
tries from central Europe
to central Asia.
• ADB provides projects
with technical assistance,
grants, and loans. In recent
years, ADB has focused on
supporting clean energy
projects under its Energy
2000 policy, which seeks to
reorient the energy sector
in member countries to
address regional and global
environmental effects.
www.adb.org
• The GEF Operational
Strategy requires that any
GEF-funded activity relating
to climate change be fully
compliant with the direc-
tives of the UN Framework
on Climate Change Con-
vention (UNFCCC).www.
gefweb.org
• Projects that are smaller
than the World Bank's
preferred minimum lending
threshold of -US$50 million
may be bundled with other
development activities to
construct a finance pack-
age of adequate size. www.
worldbank.org
• EBRD and the European
Investment Bank(EIB)
established the Multilateral
Carbon Credit Fund (MCCF)
to assist its 27 member
countries in securing carbon
emission reductions for
eligible projects. Although
it does not specifically
mention methane emission
reduction, it does sup-
port fuel-switching from
carbon-intensive (e.g., coal,
heating oil, oil shale) to less
carbon-intensive fuels such
as natural gas.
www.ebrd.com
• ADB has been a sig-
nificant supporter of the
world's largest CMM-
based power generation
project at the Jincheng
Coal Mining Authority's
Sihe Mine in Shanxi Prov-
ince, China.
• Jincheng project cash flow
also will be supplemented
by the sale of carbon
credits (4.5 tC02e) to the
World Bank's Prototype
Carbon Fund.
• IFC has successfully con-
cluded an agreement to
purchase credits via ING
Bank from a project that
generates power using
methane captured from
coal mines in Ukraine.
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Types of Financiers Risk/Return Portfolios Specialized Investment Current Status
Areas
Bilateral Sources (Examples)
The Japanese Bank for
International Cooperation
(JBIC), as the international
wing of the Japan
Finance Corporation
(JFC), contributes to the
sustainable and sound
development of the
international and Japanese
economies.
JBIC provided $20 million
in loan financing for the
Jincheng project above.
JBIC also recently signed
a memorandum of
understanding (MOU)with
The Energy and Resources
Institute (TERI) of India in
the development of GHG
reduction projects in India.
www.jbic.go.jp/en/index.html
Electric Utilities
Historically, electric utilities
have been required to
purchase power from
independent power
producers (IPPs) with
"qualifying facility" status
(for which many CM M
projects would be eligible).
While competition in the
electricity industry has
reduced IPP business to
some extent, it also might
create increased electric
utility interest in the CMM
market.
This strategy serves two strategic
purposes (in addition to the
retention of a large customer).
First, by taking a customer "off-
line," the utility will reduce the
burden on its own transmission
and distribution system, thereby
enabling the utility to defer
significant investment. This type
of saving could be important in
a more competitive environment.
Second, taking a large load off-
line also will free up the utility's
own generating capacity so that it
will be able to compete for more
business in new markets.
Increased competition means
that utilities will have to find
creative new ways of serving
the energy needs of customers.
This is where CMM projects
might be valuable: The utility
might find that the best way to
retain a client is to provide the
client with the equipment and
financing they need to self-
generate. The utility thus would
earn profits by financing and
selling equipment, providing
O&M services, and selling
backup power, rather than
through the traditional method
of selling kilowatt-hours.
Under a more competitive
industry structure, all utilities
will be looking to develop
low-cost electricity sources
wherever they might find
them. CMM projects might
represent relatively low-cost
generating sources, and as
such might provide a way
for higher cost utilities to
compete in low-cost regions.
Equipment Vendors /Turnkey Developers
Some equipment/
technology vendors/
providers are also planning
to provide full turnkey
service, including carbon
financing for offsets/
emissions avoided.
So far, VAM mitigation or
energy recovery technologies
are the first in this market
niche.
For example, Biothermica
is developing a project
using their VAM oxidation
technology at a JWR mine
in Alabama, including a
negotiated deal for carbon
credits (see page 12).
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Types of Financiers Risk/Return Portfolios Specialized Investment Current Status
Areas
Carbon Financing
In countries that are
participating in the Kyoto
Protocol (notably China),
carbon financing is an
important source of project
revenue and is closely
considered part of the
overall project financing
and economics. In the
United States, there is a
rapidly emerging voluntary
carbon market that is
having a growing impact on
CMM project development.
Regulatory (compliance)
markets:
• Kyoto Protocol—Clean
Development Mechanism
(COM) and Joint Implemen-
tation (Jl)
• Australia New South Wales
(NWS) Trading Scheme
• European Union Emissions
Trading Scheme (EU ETS)
Voluntary markets:
• Chicago Climate Exchange
(CCX) (voluntary trade &
cap); currently includes two
U.S. coal mining companies
as participating members
and one gas company (in
theCBM/CMMfield)asan
offset provider.
• Over-the-counter (OTC)
offset/carbon credit scheme
involving retailers, whole-
salers or aggregators, and
brokers.
Emerging cap-and-trade
systems:
• Regional Greenhouse Gas
Initiative (RGGI), does not
include methane at this
point.
There are currently 55
projects at various stages
in the COM pipeline with
a total potential for 121
million tonnes of carbon
dioxide equivalent (MtC02e)
through 2012. Two other
CMM projects have been
issued certified emission
reductions (CERs) totaling
638,000 tC02e. In the U.S.
voluntary market, CMM is
a major source of offset
credits, accounting for
approximately 30 percent of
CCX transactions.
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APPENDIX D: RESOURCES
SELECTED REFERENCES
Carpoor, K. and P. Ambrosi. State and Trends of the Carbon
Market 2008. Funded by the World Bank Institute. May 2008.
http://carbonfinance.org/docs/State_Trends_FINAL.pdf
Hamilton, K., M. Sjardin, T. Marcello, and G. Xu. Forging a
Frontier: State of the Voluntary Carbon Markets 2008. A report
by Ecosystem Marketplace & New Carbon Finance. May 8, 2008.
www.ecosystemmarketplace.com/documents/
cms_documents/2008_StateofVolunta ryCarbonMarket2.pdf
Kollmuss, A. (SEI-US), H. Zink (Tricorona), and C. Polycarp
(SEI-US). Making Sense of the Voluntary Carbon Market: A
Comparison of Carbon Offset Standards. Published by WWF-
Germany. Prepared by Stockholm Environmental Institute (SEI)
and Tricorona. March 2008. www.sei-us.org/wwf_
standcomp_08030S%20_web.pdf
U.S. Environmental Protection Agency (U.S. EPA). A Guide
to Financing Coalbed Methane Projects. EPA430-B-97-001.
January 1997. Contact CMOP to obtain a copy.
U.S. EPA. Global Anthropogenic Non-C02 Greenhouse Gas
Emissions: 1990-2020. EPA430-R-06-003. June 2006.
www.epa.gov/climatechange/economics/downloads/
GlobalAnthroEmissionsReport.pdf
World Bank Carbon Finance Glossary of Terms,
http://go.worldbank.org/HZGVW3QN20
SELECTED ORGANIZATIONS
Chicago Climate Exchange (CCX) is North America's only
cap-and-trade system for all six GHGs, with global affiliates and
projects worldwide. CCX Members are leaders in GHG manage-
ment and represent all sectors of the global economy, as well as
public sector innovators. Reductions achieved through CCX are
the only reductions made in North America through a legally-
binding compliance regime that includes independent, third-
party verification, www.chicagoclimatex.com
The Climate Action Reserve (Reserve) is a national 501 (c)
(3) nonprofit organization representing international interests in
addressing climate change and bringing together participants
from the government, environment and business sectors. It
works to ensure integrity, transparency, and financial value in
GHG emissions accounting and reduction and the progressive
GHG emissions policy movement nationally and in the western
United States. The Reserve is parent to three programs: the
California Climate Action Registry, Climate Action Reserve, and
Center for Climate Action, www.climateactionreserve.org
Climate Leaders is a U.S. EPA industry-government partner-
ship that works with companies to develop comprehensive
climate change strategies. Partner companies commit to reduc-
ing their impact on the global environment by completing a
corporate-wide inventory of their GHG emissions based on a
quality management system, setting aggressive reduction goals,
and annually reporting their progress to U.S. EPA. Through pro-
gram participation, companies create a credible record of their
accomplishments and receive U.S. EPA recognition as corporate
environmental leaders, www.epa.gov/climateleaders
The Energy Information Administration (EIA), a statistical
agency of the U.S. Department of Energy, provides policy-neutral
data, forecasts, and analyses to promote sound policymaking,
efficient markets, and public understanding regarding energy
and its interaction with the U.S. economy and the environment.
EIA administers the Voluntary Reporting of Greenhouse Gases
Program, established by Section 160S(b) of the Energy Policy Act
of 1992, which provides a means for organizations and indi-
viduals that have reduced their GHG emissions to record their
accomplishments and share their ideas for action.
The Environmental Markets Association (EMA) is the pre
miere trade association for environmental industry professionals
who are active or interested in the market-based solutions to
combat pollution and create a sustainable environment. EMA
members include large utilities, emissions brokers and trad-
ers, consultants, financiers, members of the press, government
agencies, nonprofit organizations and academics.
www.environmentalmarkets.org
The International Emissions Trading Association (IETA)
is a nonprofit business organization created to establish a
functional international framework for trading in GHG emission
reductions. lETA's membership includes leading international
companies from across the carbon trading cycle, www.ieta.org
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The Pew Center on Global Climate Change brings together
business leaders, policymakers, scientists, and other experts to
bring a new approach to a complex and often controversial issue.
Pew's approach is based on sound science, straight talk, and a be-
lief that multiple entities can work together to protect the climate
while sustaining economic growth, www.pewclimate.org
Under partnership between the World Resources Institute
(WRI) and the World Business Council for Sustainable
Development (WBCSD), the Greenhouse Gas Protocol (GHG
Protocol) is the most widely used international accounting tool
for government and business leaders to understand, quantify,
and manage GHG emissions.www.ghgprotocol.org
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APPENDIX E: CMM PROJECT LENDING
EVALUATION CHECKLIST
PROJECT OVERVIEW
• Project description
• Business plan
• Project financial projections including all assumptions
• Description of principal project risks and risk
mitigation analysis
• Financing plan with detailed sources and uses of funds
(e.g., equipment, financing costs)
- Project cost breakdown
- Evaluation of equity or collateral contributed (e.g.,
cash, prepaid development expenses)
- Leverage (i.e., financing provided by borrower and
financing requested)
• Carbon finance plan (if applicable)
BORROWER INFORMATION
• Corporate documents (e.g., Articles of Incorporation,
Partnership Agreement, LLC Articles, operating
agreement)
• Relevant experience in CMM project(s) and
related technology
• Resume(s) of project development staff
• Audited financial statements (e.g., balance sheet, income
statement, cash flow)-year-to-date, plus 2-3 previous
years, if available
• Three-year pro forma financial statements demonstrat-
ing anticipated results or expected impact of proposed
transaction.
• Corporate tax returns (most recent 2-3 years) may be
required from project developer
PROJECT FEASIBILITY AND CONTRACTUAL
DOCUMENTATION
• Project implementation schedule, showing target dates
for achieving essential project milestones
• Feasibility studies, technical and market reports (suf-
ficient to demonstrate project's technical feasibility), with
detailed information including the following:
- Anticipated gas flow rate (e.g., billion cubic feet/day)
- Projected gas quality (i.e., percent methane
and range)
- For projects at active coal mines: projected mine life,
description of mining plan (e.g., seams to be mined,
planned production levels, seam depth) including
mine maps
- Planned end-use for CMM and documentation about
projected capital, operating, maintenance costs, and
expected performance
• Contractual flow chart (i.e., project participants
and contracts)
• Environmental assessment
• Description of project contracts (i.e., project contracts
to be included such as construction contract), especially
agreement with mine owner /operator (for projects at ac-
tive coal mines), and all agreements with surface owners
and documentation of rights to the CMM.
• Background information on each of the project partici-
pants, including financial information.
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APPENDIX F: GLOSSARY
Additionality: According to the Kyoto Protocol, greenhouse
gas emission reductions generated by Clean Development
Mechanism (COM) and Joint Implementation (Jl) project activi-
ties must be additional to those that otherwise would occur.
Additionality is established when there is a positive difference
between the emissions that occur in the baseline scenario and
the emissions that occur in the proposed project.
* Broker/Trader: A party that mediates between a buyer and a
seller (e.g., for the sale of carbon offsets).
Carbon Finance: Resources provided to projects generating
(or expected to generate) greenhouse gas (GHG) (or carbon)
emission reductions in the form of the purchase of such emis-
sion reductions.
*Carbon Financial Instruments (CFIs): The Chicago Climate
Exchange (CCX) unit of trade, which can be issued as allow-
ance-based or offset credits. One CFI represents 100 tonnes of
carbon dioxide equivalent (tC02e).
Certified Emission Reductions (CERs): A unit of GHG
emission reductions issued pursuant to the COM of the Kyoto
Protocol, and measured in tonnes of carbon dioxide equivalent
(tC02e). One CER represents a reduction of GHG emissions of
one tC02e.
Clean Development Mechanism (COM): The mechanism
provided by Article 12 of the Kyoto Protocol, designed to assist
developing countries in achieving sustainable development by
permitting industrialized countries to finance projects for reduc-
ing GHG emissions in developing countries and receive credit for
doing so.
*Discounted Cash Flow Method: The sum of a project's net
cash flows over the project's life is discounted to the present
(i.e., the net present value [NPV] of the project). The discount
rate used to make this calculation represents the investors'
cost of capital. If a project's NPV is positive, then the project is
deemed capable of yielding the minimum required return.
Emission Reduction Units (ERUs):A unit of emission reduc-
tions issued pursuant to Jl. This unit is equal to one tC02e.
European Union Allowances (EUAs): The allowances in use
under the European Union Emissions Trading Scheme (EU ETS).
An EUA unit is equal to one tC02e.
internal Rate of Return (IRR): Discount rate at which the
NPV of the project's net cash flow is zero. In other words, it is
the rate that equates the present value of future cash flows
with the initial capital investment. The expected IRR on a project
can be compared to return rates on alternative investment
opportunities.
Joint Implementation (Jl): Mechanism provided by Article 6
of the Kyoto Protocol, whereby a country included in Annex I of
the United Nations Framework Convention on Climate Change
(UNFCCC) and the Kyoto Protocol might acquire Emission
Reduction Units when it helps to finance projects that reduce
net emissions in another industrialized country (including coun-
tries with economies in transition).
*Retailer: Refers to parties who sell relatively small amounts
of carbon offset credits to individuals or organizations and have
ownership of a portfolio of credits.
Renewable Energy Certificates (RECs): Tradable environ-
mental commodities in the United States which represent proof
that 1 megawatt-hour (MWh) of electricity was generated from
an eligible renewable energy resource.
*Turnkey: A project or contract that provides for the complete
design, procurement (of equipment), construction, and start-up
of a facility—by a date certain—for a fixed sum and at guaran-
teed performance levels.
Verified Emission Reductions (VERs): A unit of GHG emis
sion reductions that has been verified by an independent audi-
tor. This designates emission reductions units that are traded on
the voluntary market.
Compliments of the World Bank Carbon Finance Glossary of Terms http://go.worldbank.org/HZGVW3QN20), except indicated by an asterisk (*).
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