New com­mod­ity could net bil­lions

Finweek English Edition - - Business strategy - GUGU­LAKHE MASANGO

RE­DUC­ING POL­LU­TION in SA – the big­gest pol­luter on the African con­ti­nent – is mov­ing at a snail’s pace. Though main cul­prits Eskom and Sa­sol could re­duce gas emis­sions, they haven’t taken real steps to do so.

Too bad that SA is los­ing out on the fi­nan­cial ben­e­fits of trad­ing a new com­mod­ity cre­ated by the Ky­oto Pro­to­col on Cli­mate Change known as car­bon cred­its. Fi­nance for car­bon cred­its is chan­nelled through the clean de­vel­op­ment mech­a­nism (CDM) cre­ated by the pro­to­col.

Ac­cord­ing to a 2005 Price­wa­ter­house­Coop­ers study, SA stands to gen­er­ate about $400m (R2,8bn) from gas emis­sions re­duc­tion projects. SA’s Des­ig­nated Na­tional Author­ity (DNA), a struc­ture that reg­u­lates and pro­motes the im­ple­men­ta­tion of CDM ac­tiv­i­ties, has re­ceived 44 CDM project ap­pli­ca­tions. Sev­en­teen of th­ese are real projects or project de­vel­op­ment doc­u­ments (PDDs) that are un­der re­view, but they are not big money spin­ners and the rest are project idea notes (PINs). Shock­ingly, there are only five reg­is­tered CDM projects in SA. Eskom has sub­mit­ted five PINs for re­new­able en­ergy, fuel switch­ing and en­ergy ef­fi­ciency projects. Sa­sol has sub­mit­ted two PDDs for the coal to nat­u­ral gas fuel switch­ing project, which are await­ing ap­proval from the DNA.

Asked about the in­volve­ment of Eskom and Sa­sol in CDM projects, Stan­ford Mwaka­sonda, a se­nior re­searcher at the En­ergy Re­search Cen­tre at the Univer­sity of Cape Town, says: “We have seen some ac­tion from Sa­sol but they know they can do bet­ter. We have yet to see some ac­tion from Eskom. I don’t know what ace they have up their sleeve, they have just been very in­ac­tive on CDM.”

Kim Fraser, gen­eral man­ager: Sa­sol Safety, Health & En­vi­ron­men­tal Cen­tre, says: “Sa­sol is em­bark­ing on nu­mer­ous projects with pos­si­ble CDM op­por­tu­ni­ties. How­ever, th­ese projects lack ap-

proved method­olo­gies.”

Asked if Sa­sol, as one of the big­gest pol­luters in the coun­try, thought it was do­ing enough to re­duce gas emis­sions in SA, Fraser said: “We do not ac­cept the as­ser­tion that Sa­sol is ‘one of the big­gest pol­luters in the coun­try’ as this as­sumes a very nar­row view of pol­lu­tion. Once the na­tional frame­work for in­dus­trial emis­sions has been es­tab­lished, we ex­pect to see many new ini­tia­tives that will fur­ther min­imise gas emis­sions from in­dus­tries through­out SA.

“We’re aiming for a 10% im­prove­ment in green­house gas in­ten­sity by 2015 and a 15% im­prove­ment in en­ergy in­ten­sity by 2015, with 2000 as the base year.”

Fraser said Sa­sol was screen­ing many projects to de­ter­mine whether they could at­tract CDM fund­ing.

Wendy Poul­ton, gen­eral man­ager: cor­po­rate sus­tain­abil­ity at Eskom, says: “Eskom is con­fi­dent there’s ben­e­fit to be de­rived from the CDM mar­ket. How­ever, the process is com­plex, so Eskom would sup­port stream­lin­ing it as far as pos­si­ble.”

Poul­ton, who has the sup­port of the Eskom board to iden­tify CDM projects, is faced with a chal­lenge of long lead times for project ap­proval and high trans­ac­tion costs.

She be­lieves the late ar­rival of the DNA in 2004 caused an ad­di­tional de­lay in Eskom sub­mit­ting CDM projects. “Eskom has been ac­tive in the de­vel­op­ment of the CDM, and be­fore the DNA was put in place, ex­ten­sive work was car­ried out in­ter­nally to de­fine po­ten­tial projects.”

Eskom is also a par­tic­i­pant in the In­ter­na­tional Emis­sions Trad­ing As­so­ci­a­tion, but the ques­tion re­mains why the com­pany is lag­ging be­hind in de­liv­er­ing CDM projects. Poul­ton re­sponds: “The low num­ber of projects is due to very strong com­pe­ti­tion from other de­vel­op­ing coun­tries such as China and In­dia. Given the scale of de­vel­op­ment in th­ese coun­tries, it’s not sur­pris­ing they at­tract most at­ten­tion.”

She says that as a re­sult of the new fo­cus on Africa, SA will at­tract more CDM projects. While it’s still mov­ing slowly in de­liv­er­ing CDM lo­cally, Eskom is asses- sing op­por­tu­ni­ties to col­lab­o­rate with other African util­i­ties to pro­mote green­house gas emis­sions re­duc­tions.

But an­a­lysts are con­cerned about the num­ber of reg­is­tered CDM projects in SA and say the in­dus­try would be thrilled to see Eskom and Sa­sol bring their CDM projects to mar­ket.

“It’s wor­ry­ing that not much is hap­pen­ing in SA re­gard­ing CDM projects,” says Mwaka­sonda, adding that the lack of an emis­sion re­duc­tion tar­get might be the rea­son. “It might be that cor­po­rates such as Eskom and oth­ers are play­ing a wait­ing game, know­ing that SA is very likely to have emis­sion re­duc­tion tar­gets in the next com­mit­ment pe­riod and that this would be the right time for them to come aboard,” Mwaka­sonda says. They’re prob­a­bly think­ing that if they act now it will be more ex­pen­sive for them to re­duce emis­sions later, when they have bind­ing re­duc­tion quo­tas from the Gov­ern­ment.”

The Ky­oto Pro­to­col com­mits in­dus­tri­alised coun­tries to re­duc­ing emis­sions of green­house gases from 2008 to 2012. “We feel the birth pains of the South African CDM mar­ket stem from a lack of fo­cus on ‘the abil­ity to ex­e­cute’ by project de­vel­op­ers when de­cid­ing when and how to un­der­take a CDM project,” says Henk Sa, EcoSe­cu­ri­ties SA’s coun­try di­rec­tor.

He says the pro­to­col win­dow be­comes 1,5% shorter ev­ery month, mak­ing time the most ex­pen­sive com­po­nent of the CDM. The shorter the win­dow, the more project de­vel­op­ers will start look­ing for part­ners with a proven track record re­gard­ing their abil­ity to ex­e­cute.

How­ever, Ge­of­frey Stiles, the prin­ci­pal at Marbek Re­source Con­sul­tants, says af­ter some ini­tial birth pangs, SA’s pro­ce­dure for ap­proval of CDM projects seems to be work­ing fine. “We are cur­rently iden­ti­fy­ing CDM projects for a large in­ter­na­tional pool of com­pa­nies in Europe and Ja­pan that wish to buy car­bon cred­its from SA projects.”

To at­tract in­ter­na­tional play­ers, Mwa- ka­sonda says Gov­ern­ment should pro­vide more in­cen­tive in cer­tain CDM in­vest­ment ar­eas, such as for re­new­able en­ergy projects. He adds that Gov­ern­ment could pro­vide some form of cap­i­tal sub­sidy but warns that “there’s a limit to how far th­ese fi­nan­cial in­cen­tives can go, es­pe­cially if they in­volve pub­lic funds”.

De­spite the prom­ise of in­vest­ments in CDM projects, it’s prov­ing dif­fi­cult to con­vince com­pa­nies that there are real ben­e­fits from de­vel­op­ing projects and sell­ing the re­sult­ing car­bon cred­its. “Be­cause the mar­ket is new and very volatile, busi­ness of­ten sees it as high-risk and feels it adds lit­tle real value to their projects,” says Stiles.

Screen­ing projects.


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