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Generating Carbon Credits from Energy Efficient Buildings

Generating Carbon Credits from Energy Efficient Buildings

EXECUTIVE SUMMARY

Why this Project?

This paper explains the reasoning behind the Building Virtual Power Stations (BVPS) Project and how various stakeholders can gain from their involvement.

The world is undergoing enormous changes in climate, with the primary reason considered to be due to the emission of Greenhouse gases into the atmosphere from our use of fossil fuels from industrial activities. Activities such as generating and using electricity, transportation of goods and people, and even from our commercial scale agricultural activities.

What is a Virtual Power Station?

Part of the response to those outcomes are to reduce or modify the activities that generate those emissions. When reductions in energy usage are sufficient (we are using 1000MW coal burning power station as a standard power station size and type), either in an individual project or via the aggregation of multiple reduction activities, then it removes the need for construction of a new power station to cater for that energy usage. Therefore, by saving that energy usage, it can be considered that there has been a Virtual Power Station created; hence the Project is called “Building Virtual Power Stations”. And for every 1000MW of energy saved, there is a reduction of between 6M and 10M tonnes of CO2 (depending on the coal type used). For the purposes of this Project, a standard 8M tonnes of CO2 emission are saved every year for every 1000MW “Virtual Power Plant” built.

Energy Saving Areas

One area that is considered ripe for opportunity is in the reduction of energy usage (and resultant reduction in CO2 emissions) from commercial buildings and other business-related facilities. For example, Governments and businesses the world over (including Malaysia) are promoting Green Buildings standards, both for new buildings and for retrofitting, as well as encouraging energy reductions across business generally. Right now in 2010, the Malaysian government is providing funding through the Green Technology Funding Scheme (and other schemes) to enable businesses to increase the use of more energy efficient materials and practices. Many other countries are doing the same.

The opportunity presented in this paper is to use that lower energy environment to not only encourage the continued growth of the Green Building industry and the other sectors, but to capture the positive by-product of those activities; (i.e. the reduction in CO2 emissions), to create a pool of saleable Carbon Credits.

Aggregation and “Feed-In”

The way that would be done is to aggregate the CO2 savings generated under a UN Clean Development Mechanism (CDM) project, as the individual savings from any one building or facility are insufficient to warrant the costs involved in developing a CDM project. The emission reductions from “greening” buildings and facilities could be available from any developing nation (see more on the potential countries below).

A “feed-in base” will be established by partnering with Environmental Consultants who conduct environmental audits and reviews and recommend energy efficiency measures for governments and industry. As they finalise audits and recommendations are implemented, the savings will be “fed-in” to the Project for aggregation purposes. A similar approach has been taken in the forestry area, where farmers are paid to plant stands of trees and the resulting CO2 reductions are aggregated into a pool managed by the CDM project owner.
Again, micro projects in Africa where wood burning stoves have been replaced with solar stoves, provide another example of aggregation.

By branding the CDM Project “Building Virtual Power Stations” or BVPS, (a term coined by the Asian Development Bank for a similar project, although the ADB project was not aimed at “banking” carbon credits), the concept will be easily understood by government, business and the general public, allowing support to be gained from all sectors.

Benefits for Stakeholders and the broader community

The Project will be a hybrid social improvement and profit driven entity, and will derive revenues from the sale of the aggregated carbon credits. Business will have the opportunity for CSR branding, i.e. their owned buildings or the buildings they lease being a BVPS building, indicating both energy efficiency and social awareness. 35% of earnings will be used to fund social improvement projects in developing nations.

Environmental consultants will have opportunities to leverage off their existing activities, add value to their client transactions and improve their own brand image.

The Process
The process for establishing the BVPS CDM Project consists of:

1. Developing the Project Framework

2. Registering the Project with the UNFCCC

3. Undergoing the UNFCCC CDM Project Methodology Review

4. Gaining the partnership of Environmental Consultants currently conducting energy efficiency reviews for government and business clients

5. Creating an Energy Efficiency Review Data Management web based platform which enables Environmental Consultants to enter baseline and post-review implementation data into the system to assess energy savings and CO2 emission reductions.

Revenue Streams

Carbon Credit Unit (CER) Sales – The Project will aggregate the small CO2 emission reductions from multiple commercial sites and create a pool of saleable CERs. This pool will be made available to the market for those entities that require CERs to meet their mandatory compliance situations.

Government Grants and other funding – There are numerous grants and other types of funding available from Governments around the world – where relevant, the Project will apply for those funds to assist in the growth of the feed-in base.

Locations for Energy Efficiency Projects

CO2 emission reductions from all non-developed nations that are classified as Tier 2 countries under the Kyoto Protocol can be used in the aggregation process.

These include (but are not limited to) Malaysia, Indonesia, Singapore, Taiwan, Vietnam, Thailand, Philippines, Korea, China, all African countries and most South American countries. As can be seen, the scope for gaining feed-in projects is very large.

Competition & Challenges

Competition
Competition is always in place for any sector with profit potential. However, there are no known direct competitors providing this service; if there were, it would make the marketing and branding of the service even easier as there would be some awareness in the market. However, even with any current or future competitors, the market is so large that there is sufficient to share, and collaboration is even a viable option.

Challenges
Other challenges include:
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Gaining UNFCCC approval and accreditation of the Project – it is believed that there are no inherent grounds for rejecting a Project application of this nature, however it is intended to use very experienced consultants to tailor the Project proposal to suit the UNFCCC CDM criteria.

Gaining sufficient “Feed-In” collaborators – as this project will provide consultants, governments and business with a convenient opportunity to participate in a program that uses already generated “products” (i.e. carbon credits or CERs), and will offer social community benefits and CSR / branding benefits for those organisations, it is believed there will be sufficient collaboration generated to achieve significant outcomes.

Funds Being Sought and Utilisation of those Funds

Projected Company Valuation
The valuation of the company (post-funding) based on 2 Virtual Power Plants being built every year (from Year 2) is USD$96M (based on 16M tonnes of CERs being available for sale at a wholesale price of USD$5 per tonne and nett margin of USD$2 per tonne x 3 years earnings).

Funds Being Sought
The funds being sought from investors are USD$1M, which will gain the investors 10% equity in the company. Based on the projected post-investment valuation of USD$96M, this is an 85% discount on the projected value for a stake of this size. Alternatively, a trade partner may agree to provide working capital as required for a negotiated percentage, or as a means of accessing funding via the Malaysian Government Green Technology Fund.

Use of Funds
In the case of direct investor funding, the promoter will receive USD$100,000 as payment for work and services performed in the establishment and ongoing management of the business. The remaining $900,000 will be utilised to as working capital to gain the UNFCCC accreditation for the Project, to build the collaboration networks for large scale “feed-in” and for marketing and branding to establish the Project as the leader in its field. The business will be self-funded from that point from CER sales revenues.

Alternative funding avenues will see a negotiated outcome for the Promoter.

Return on Investment and Investor Exit Strategy

Potential Exit Options
It is planned to explore potential synergy partners within the first 3 years of operation to locate trade sale and other exit options for investors. These partners may be environment related companies wishing to enhance their client value offering, or companies from other sectors who find the association with such a project of value to them.

Projected Returns
The investment of USD$1M will see dividends paid from year 3, with the intention at that time to retain 25% of earnings for future enhancements and expansion, while returning 75% of earnings to investors as dividends.

At year 3, investors may choose to utilise the entry of identified trade sale partners to exit with a projected payment of USD$9.6M for the 25% stake (based on projected value of $96M at that time) Alternatively, investors may opt to remain as longer term shareholders, should they see the future growth of the business as promising.