Making cleaner power pay off

• Last Updated: November 07. 2009 6:12PM UAE / November 7. 2009 2:12PM GMT

In a little under a year, if all goes well, the operator of a power station in Taweelah will start getting paid to go green.

A Dh39.6 million (US$10.7m) investment by Emirates CMS Power Company in technology that recycles waste heat will make the plant more efficient. But efficient savings alone would not have justified the investment, which has been made possible by a UN-administered programme that puts a monetary value on the estimated 120,000 tonnes of carbon dioxide it will keep out of the atmosphere every year.
Documents published on the website of the UN Framework Convention on Climate Change (UNFCCC) show the project would not have gone ahead without Dh1.3m in annual revenues from the international carbon market.

Even under a conservative assumption for the price of carbon, the cash lifts the internal rate of return from 11 per cent to 14.1 per cent, putting it above a minimum benchmark for profitability of 13 per cent set by the Abu Dhabi Water and Electricity Authority.

Across the UAE’s industrial sector, firms are looking at turning carbon emissions to their financial advantage by marketing pollution cuts to buyers overseas.
Masdar, the Abu Dhabi Government-owned clean energy firm that helped CMS register the Taweelah project, is leading the charge into the so-called carbon credit sector, followed closely by a number of service firms. Together, they hope to earn hundreds of millions, even billions of dirhams through a UN-administered programme that channels funds into efforts to reduce emissions.

But transforming that potential cash into an income stream requires reams of paperwork and the approval of auditors and UN officials, plus a strong stomach for risks that a project could be changed or the regulations modified. Last week’s report that Masdar had cancelled and planned to resubmit applications for carbon credits on four oil and natural gas projects illustrated some of the inherent challenges of crafting a viable business model from a highly bureaucratic process.

Led by opportunities to cut carbon emissions from oil and gas emissions and increase energy efficiency, the Gulf represents a huge potential market, said Shibu Davis, the Middle East manager for TUEV, a carbon auditing firm.

“The Gulf countries have the highest potential for this carbon trade, because they stand in the highest rating in carbon production,” he said. “It’s a very good potential market for carbon capture and the carbon trade business.”

Nearly all earnings from credits in the UAE would come through the UNFCCC’s Clean Development Mechanism (CDM), a certification process that verifies emissions cuts in developing countries and awards credits for each tonne of greenhouse gas kept out of the atmosphere.

The credits can be sold on the international market at a current price of between €13 (Dh70) and €13.50 per tonne.

Firms in developing countries go through a multi-step process involving applications, audits and inspections to demonstrate that the project actually reduces emissions and would not have been viable without carbon credits. The process often takes a couple of years and requires external auditors, new levels of transparency as well as approval of government authorities.

The CDM was included in the Kyoto Protocol on global warming as a means to boost the economics of clean energy projects in developing countries, which were not bound by mandatory emissions reductions targets.

Firms in industrialised countries can buy the credits to offset emissions under their mandatory limits, often at lower cost than investing directly in solar panels, for example, or improving energy efficiency.

For Masdar and other firms, the CDM represents an important stream of income that could defray the costs of expensive clean energy projects and even become a service business in itself.

They are following in the footsteps of a number of companies in China, India and other developing countries that earn tens of millions of credits each year.
Masdar has met some early successes: it has registered two of its own solar power plants, and is developing an additional consultancy role with the energy efficiency project at Taweelah. If all goes according to plan, it expects to earn its first credits in June.

Sam Nader, the director of the firm’s carbon management unit, says Masdar has an additional eight projects for which it is crafting initial project design documents, and two projects at the advanced validation stage.

But some projects have proven more difficult to register. The firm pulled CDM applications on four oil and gas projects and planned to resubmit them after design changes, Mr Nader says. All the projects involve the capture and reuse of natural gas that is currently wasted at the Abu Dhabi National Oil Company (ADNOC).
“The owner decided to pull out of these projects and change the scope,” Mr Nader says. “Whenever you have any change in the scope of the project as submitted you are not able to continue.”

Mr Nader says such changes are a normal part of the application process and are already factored into Masdar’s carbon credit strategy.

Experts say the viability of the CDM process across the world is vulnerable to changes in engineering, as well as fluctuations in the price of carbon on the open market.

“The biggest role in implementing a CDM is relying on the engineering for the project,” says Mr Davis. “Sometimes it can even happen that you are not able to meet the [intended] reduction.”

Masdar has registered a 100 megawatt solar thermal plant, to be called Shams 1, to be built in Madinat Zayed in Al Gharbia. It will be the first deployment of this technology in the Gulf. A recent report by MEED, the London-based business publication, quoted contractors saying the project location would be moved. Masdar was not available to comment.

If Masdar were to build the plant in another location, it would need to redo parts of the lengthy registration process, according to rules set down by the UNFCCC.
All CDM projects are also exposed to risks that fluctuations in the carbon price will make a project less viable once the registration process is under way. After rising above €20 per tonne in the summer of last year, prices for certified emissions reductions (CERs) sank below €10 in February, putting many projects on hold.
As prices have recovered to between €13 and €13.50, they are high enough for some projects, says Emmanuel Fages, a carbon market analyst at SG Orbeo, a French emissions trading firm.

“You can start new projects if you are able to hedge” and sell expected credits to outside investors even before they are issued, he says.

But prices remain far below the levels needed to make many clean energy projects – including solar power plants – economical in the UAE, he says. Registration documents for Shams 1, published on the UNFCCC website, illustrate the economic challenges that face the development of renewable energy in the UAE.

It would cost $157 to generate a megawatt-hour (mwh) of electricity at the Shams 1 thermal solar plant over its lifetime, including the project’s capital costs, maintenance and fuel costs for a backup natural-gas turbine, according to the registration documents. By contrast, it costs about $27 to generate 1 mwh from a conventional gas-fired plant.

The operator of the solar plant would not be able to raise electricity prices, since rates are set by the government, so it would need some other form of support, either through subsidies or the international carbon market.

But Mr Fages says CER prices will have to rise to between €20 and €30 per tonne to allow the carbon credit market alone to support solar energy development in the UAE. Carbon credits will help, but they are not likely by themselves to make renewable energy competitive with subsidised gas-fired power plants. The larger question facing CDM projects is what will happen after 2012, when the Kyoto Protocol expires.

Executives expect the CDM to continue and has been agreed by all major parties in drafts of a new climate change treaty. But CDM investors still face risks that rules and procedures for awarding credits could change, Mr Fages says.

For example, European regulators have discussed new rules that will require credit buyers in Europe to prioritise projects in the world’s least developed countries. This could adversely affect demand for credits from the Gulf, he says.

cstanton@thenational.ae