EPA-400-D-09-001

Coal Mine Methane (CMM) Finance Guide Updated July 2019

Introduction such as the Kyoto Protocol’s Clean Development Mechanism and Joint Global methane emissions from the coal Implementation originally created financial mining sector can be reduced through markets and incentives to develop projects recovery and utilization projects that collect that reduce GHG emissions, and the California methane gas from coal mines for productive and Quebec Cap-and-Trade programs have use or through destruction when an economic expanded to include CMM offsets. More use is not feasible. recently, Article 6 of the Paris Agreement The U.S. Environmental Protection Agency’s provides a pathway for international (EPA’s) Coalbed Methane Outreach Program cooperation through markets and carbon (CMOP) is a voluntary program with the goal pricing associated with Nationally Determined of reducing methane emissions from coal Contributions. Third, multinational mining activities. Our mission is to promote collaborative initiatives such as the Global the profitable recovery and utilization of coal Methane Initiative (www.globalmethane.org) mine methane (CMM), a potent greenhouse have focused on overcoming policy, gas (GHG) that contributes to climate change regulatory, legal, and technical barriers that if emitted to the atmosphere. When collected inhibit project development. and used for energy, CMM is a valuable fuel Often, the critical barrier to developing CMM source. projects is securing financing. This is due, in CMOP estimates that more than 200 CMM part, to the lack of awareness of the sources projects exist worldwide. Many more project of finance and limited understanding of the opportunities exist in emerging market requirements to secure financing. In fact, countries and also in developed economies.1 many funding and investment sources Several factors have prompted the resurgent emphasize sustainable development, interest in CMM projects around the world. environmental protection, and climate change First, the steep growth in global energy mitigation as strategic objectives and demand has catalyzed the search for new, important components of projects that they unconventional sources of natural gas and finance. CMOP has developed this guide to power. Second, emissions trading programs address this information gap for project hosts, project developers, and investors who are interested in pursuing CMM project 1. GMI. 2019. Global Methane Challenge. It’s Time to opportunities. In addition, the CMM Finance Take Action! Removing Fugitive Methane Gas from Underground Coal Mines and Using It in Profitable and Guide can also be used to inform government Practical Ways Can Improve Worker Safety, Enhance decision-making to support CMM project Mine Productivity, Increase Revenues, and Reduce development. Greenhouse Gas Emissions. Global Methane Initiative. Available: https://globalmethane.org/sectors/index.aspx?s=coal. This guide summarizes the market potential Accessed 6/3/2019. for CMM projects (e.g., sources/uses of CMM),

www.epa.gov/cmop i project economics, types of financing, and (a) Make any warranty or representation, risk mitigation in the United States and expressed or implied, with respect to the internationally. Particular attention has been accuracy, completeness, or usefulness of paid to the emerging markets of carbon the information contained in this report; credits as potential project funding. or that the use of any apparatus, method, or process disclosed in this report may not Disclaimer infringe upon privately owned rights; This version of the Coal Mine Methane Finance (b) Assume any liability with respect to the Guide is an update of the 2016 edition use of, or damages resulting from the use prepared by EPA. This analysis uses publicly of, any information, apparatus, method, available information in combination with or process disclosed in this report; or information obtained through direct contact imply endorsement of any technology with mine personnel, equipment vendors, and supplier, product, or process mentioned in project developers. The EPA does not: this report.

Table of Contents

Coal Mine Methane (CMM) Finance Guide Updated July 2019 ...... i

Introduction ...... i

Disclaimer ...... ii

Overview of Methane Capture and Use Projects ...... 1

Why Target Methane? ...... 1 CMM Project Development ...... 3 CMM Project Feasibility ...... 4

CMM Project Economics ...... 6

CMM Project Revenue Streams ...... 6 CMM Project Costs ...... 6 Assessing Financial Feasibility ...... 8 CMM Project Development Risks ...... 9 Mine Operation Risks ...... 10

CMM Project Financing ...... 10

Traditional Sources of Financing ...... 11 Supplemental Financing Sources and Other Incentives ...... 13 Carbon Financing ...... 13 Other Incentives ...... 15 Challenges of Carbon Financing ...... 16 Investor Engagement ...... 17

Risk Mitigation Support ...... 18

Loan Guarantees ...... 18 Political Risk and Credit Insurance ...... 19

Conclusion...... 19

Appendix A: CMM Project Participants ...... 21

Appendix B: Key Elements of Feasibility Studies ...... 23

Appendix C: CMM Project Funding Sources ...... 24

Appendix D: Resources ...... 29

Appendix E: CMM Project Lending Evaluation Checklist ...... 32

Appendix F: Glossary ...... 33

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Overview of Methane Capture and Use Projects

Why Target Methane? from longwall mines through the ventilation system and a combination of gob wells, Methane, one of the principal greenhouse pre-mine drainage wells, and in-mine gases (GHGs), is second only to carbon boreholes. dioxide (CO2) in its contribution to climate change. Globally, it accounts for Recovery and Use of CMM approximately 20 percent of total global Specific CMM end uses essentially depend on 2 GHGs. Methane is a potent GHG that is more gas availability (i.e., gas quality, quantity, than 28 to 34 times more effective in trapping and market access). Worldwide, CMM is most 3 heat than CO2 over a 100-year timeframe. often used as a primary fuel for power Global average atmospheric methane generation, district heating, boiler fuel, concentrations have more than doubled – flaring, and town gas.6 It is also sold to from approximately 700 to 1,853 parts per natural gas pipeline systems. Other uses of billion by volume – over the time period from CMM include: 1750 to 2016, an increase of 257 percent.4 • Coal drying Sources of Coal Mine Methane • Heat source for mine ventilation air Coal mines are a primary source of methane, • accounting for an estimated 9 percent of Supplemental fuel for mine boilers global anthropogenic methane emissions by • Vehicle fuel as compressed or liquefied 5 2020. Methane and coal are formed together natural gas (CNG/LNG) during the conversion of vegetation into coal. • Manufacturing feedstock Coal mine methane (CMM) refers to methane released from the coal and surrounding rock • Direct gas sales to industrial or other end strata due to mining activities. In users underground mines, it can create an explosive In addition to drained CMM, mine ventilation hazard to coal miners, so it is removed air methane (VAM) can also be captured and through ventilation systems. In some used, or destroyed. VAM refers to the very instances, it is necessary to supplement the dilute methane stream in mine ventilation air ventilation with a degasification system to that is generally less than 2 percent methane remove methane from the mine. Figure 1 and often less than 1 percent methane. illustrates how methane may be removed Despite this low-methane concentration, VAM is the single largest source of CMM emissions. 2 IPCC. 2014. Climate Change 2014: Synthesis Report. Absent a cost-effective use, destruction of Contribution of Working Groups I, II and III to the Fifth Assessment Report (AR5) of the Intergovernmental Panel methane still presents significant on Climate Change [Core Writing Team, R.K. Pachauri environmental benefit due to the reduction of and L.A. Meyer (eds.)]. Geneva, Switzerland. GHGs. 3 Ibid. 4 WMO. 2017. WMO Greenhouse Gas Bulletin: The State of Greenhouse Gases in the Atmosphere Based on Global Observations through 2016. World Meteorological Organization, Geneva, Switzerland. October 30.

5 EPA. 2012. Global Anthropogenic Non-CO2 Greenhouse Gas Emissions: 1990–2030. Revised December. U.S. Environmental Protection Agency, Washington, DC. Available: https://www.epa.gov/sites/production/files/2016- 6 Town gas refers to local use of non-upgraded CMM gas 05/documents/epa_global_nonco2_projections_dec2012.pdf. (typically 30–40 percent methane) for heating and Accessed 6/3/2019. cooking.

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Figure 1. Removal of CMM from Longwall Mines

Methane may also be present in non-coal • Drainage systems: Globally, the greatest mines, usually in adjacent strata including volume of CMM recovered and used is sandstone, limestone, shale, and other from drainage (degasification) systems at coalbeds. Longwall mining introduces active underground coal mines. methane into the mine through collapse of Degasification systems are employed at the roof and floor or where conduits within some of the most gassy coal mines in the subsurface provide a transport pathway many countries. for methane into the mine. To differentiate • Ventilation air methane (VAM): VAM from CMM, gas in non-coal mines is projects are currently operating in sometimes referred to as waste mine two countries: China and the United methane. Examples include deep gold mines, States (U.S.). trona (soda ash) mines, and salt mines. • Abandoned underground mines: Several CMM Project Market countries with declining coal production It is estimated that over 200 CMM projects are effectively capturing and using the worldwide in 17 countries, in total, recover methane from their closed abandoned and use more than 5.5 billion cubic meters of (closed) underground coal mines, gas annually from active and abandoned coal including France and Japan, where active mines, thereby avoiding 77 million metric underground mining has ceased. tons of carbon dioxide equivalent (MtCO2e) of GHG emissions each year.7 Project Opportunities There are three main types of CMM recovery Drained gas is the methane captured or projects: recovered from degasification systems at

7 GMI. 2015. Internal Program Information. Global Methane underground coal mines. Pre-mine drainage Initiative. December. produces very high-quality gas with methane

www.epa.gov/cmop 2 concentrations that can exceed 90 percent. Although several technologies have been Gob wells generally produce lower-quality gas proposed, only regenerative thermal oxidizers due to entrained air and other impurities. (RTOs) have been proven at the industrial Methane concentration in gob gas varies scale. RTOs have been used for many years in widely, from less than 25 percent in some other industries to destroy volatile organic Chinese mines to 80 percent in some compounds and the technology has been U.S. mines, depending on the age of the well successfully adapted to destroy VAM and how carefully the air intrusion is emissions. In addition to destruction controlled. Currently in the U.S., purposes, the heat can be recovered for use 25 underground coal mines employ in mine heating, district heating, power degasification systems, liberating about generation, and desiccant cooling. The 40 billion cubic feet (Bcf; 1.13 billion cubic economic feasibility of these projects on a meters) in 2017. Of this amount, about commercial scale is currently being 32 Bcf were recovered and utilized for demonstrated in Australia, and projects are in energy.8 In addition, another 560 million operation or under development in China and cubic feet (mmcf) of VAM were destroyed the U.S. using regenerative thermal oxidation. Other VAM abatement technologies, including Globally, most drained gas is used in internal regenerative catalytic oxidizers, rotary kilns combustion engines to generate power. Many mixing VAM with a combustible fuel such as countries including Australia, China, the pulverized coal, and lean-burn microturbines Czech Republic, Germany, Russia, Ukraine, have been laboratory tested on a small scale and the United Kingdom have projects of this or demonstrated in the field, but have not yet type. Boiler fuel is another common use of operated at a commercial site. CMM in many countries. In the U.S., natural Even where active mining no longer occurs, gas pipeline sales are the most common CMM abandoned or closed underground coal mines use, largely the result of a very mature and can still produce significant methane extensive natural gas transportation system emissions [known as abandoned mine and the common practice of pre-mine methane (AMM)] from diffuse vents, fissures, drainage that produces pipeline-quality gas. or boreholes. This methane can be Other common uses for drained gas include deliberately extracted and used to generate locally distributed town gas, coal drying, mine power or for other end uses. There are shaft heating, vehicle fuel, flaring, and several thousand abandoned coal mines in industrial uses. Flaring in particular has the U.S. Of these, EPA has identified some become a more accepted GHG mitigation 400 abandoned mines that are considered practice in recent years as safe flaring has “gassy” and developed profiles for abandoned been demonstrated and the coal industry has mines that might be good candidates for grown more comfortable with the flaring project development.9 practice.

Due to its low methane concentrations, VAM CMM Project Development destruction is very dependent on non- For CMM projects, project development traditional revenue streams at many sites. generally entails some or all steps from

8 Compiled from the EPA Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990–2017 (available: 9 EPA. 2017. Abandoned Coal Mine Methane Opportunities https://www.epa.gov/ghgemissions/inventory-us- Database. U.S. Environmental Protection Agency, greenhouse-gas-emissions-and-sinks-1990-2017, Washington, DC. July. Available: accessed 6/3/2019) and the Greenhouse Gas Reporting https://www.epa.gov/sites/production/files/2016- Program (available: https://www.epa.gov/ghgreporting, 03/documents/amm_opportunities_database.pdf. accessed 6/3/2019). Accessed 6/3/2019.

www.epa.gov/cmop 3 conceptualization to operation. This includes and analyses are typically funded by the defining and refining the project concept, project developer; investors; and in some negotiations with the project host, modeling cases funding assistance may be available in gas availability, evaluating the technical and the form of grants from government- economic viability of the project, designing supported agencies or multilateral and financing the project, and acquiring development organizations, including the equipment and services. It also entails project U.S. Trade and Development Agency construction, installation, and commissioning. (USTDA), the U.S. Agency for International A developer will also identify end-use markets Development, the U.S. Environmental and secure off-take agreements. Protection Agency (EPA), Australia’s Commonwealth Scientific and Industrial Typical project participants include the mine Research Organisation, Australia’s national owner/operator, the project developer (if government, the Asian Development Bank different from the mine owner/operator), (ADB), the Global Environment Facility (GEF), equipment suppliers, EPC (Engineering, the International Finance Corporation Procurement, and Construction) contractors, (IFC)/World Bank Group, the European Bank regulatory agencies, and the end user or for Reconstruction and Development (EBRD), energy buyer. Project structuring is very and the Japan Bank for International important in project development. In some Cooperation (JBIC). cases, project developers create a defined legal entity solely to build and operate the Project Idea Note or Project Concept Paper CMM facility. This practice of “ring-fencing” The first step in the project development projects can provide certain legal protections pipeline is often an internal memorandum or to the project’s partners; establish clear roles a project idea note (PIN). The PIN is intended and responsibilities for the project’s to be a brief and cursory project summary for construction and operation; ensure that initial decisions at an early stage before too project partners have a say in decision- much time and money is spent pursuing making commensurate with their investment; project development. A PIN will typically and add transparency for purposes of taxes, identify the project, the project host, the royalties, profit distribution, and share value. expected energy production and/or However, providing sufficient detail on project environmental attributes (e.g., carbon credits structuring is beyond the capacity of this or renewable energy certificates) to be document. For the purpose of this guide, the generated from the project, and the focus is on assessing the initial project prospective off-takers of any energy or economics (e.g., costs) and securing environmental commodities. Project financing for CMM projects. opportunities and risks are reviewed at a very CMM Project Feasibility general level, and the PIN may include so- called “back of the envelope” calculations of A project developer or investor must project economics. A PIN is not required in demonstrate a CMM project’s technical every case, especially where reliable data feasibility and financial viability in order to exist and much is known about the host mine secure project financing. The project’s and the relevant markets. In these instances, technical viability can be demonstrated a project sponsor may choose to begin with a through a combination of the following: PFS or move directly toward a full FS. preliminary feasibility or pre­feasibility studies (PFSs); full­scale, comprehensive feasibility Pre-Feasibility Studies and Feasibility Studies studies (FSs); and technology demonstrations The PFS is a first­order analysis of possible or pilot installations. These critical processes project configurations including location, size,

www.epa.gov/cmop 4 technology to be employed, market(s) to be some technical expertise in identifying served, costs, and revenues. The PFS technically and economically feasible projects, identifies options that appear to be technically particularly in international markets where feasible and economically attractive. there is a potential market for U.S. goods and Typically, the PFS will be conducted at a level services. EPA has supported several CMM pre- of detail adequate to broadly identify feasibility and comprehensive feasibility financing requirements and considers the studies as part of its support for the GMI (see potential capital structure, taking into account https://www.epa.gov/cmop/international- expected project cash flows under various activities). scenarios. PFSs are usually based on conceptual engineering designs and typically have expected accuracy margins of plus or minus 20 percent. 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 financial as well as technical, legal, regulatory, and environmental elements of the potential project. Accuracy margins of plus or minus 10 percent are expected in the FS based on a higher level of engineering design than typically found in the PFS. Key elements of a comprehensive 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 collection from mine site personnel are required. Such a study can typically take several months to a year or more to complete.

Historically, U.S. government agencies such as the USTDA10 and EPA11 have provided

10 The USTDA provides funding to facilitate the export of U.S. technologies, products, and services to developing and transitional countries. USTDA has provided grant funding for CMM studies in Poland, China, Ukraine, and Colombia (see https://www.ustda.gov/). 11 EPA has funded a number of CMM pre-FSs and comprehensive FSs as part of its support for the Global Ukraine (see https://www.epa.gov/cmop/international- Methane Initiative (GMI), including in China, India, activities). Kazakhstan, Mongolia, Poland, Russia, Turkey, and

www.epa.gov/cmop 5 CMM Project Economics

This section identifies the primary revenue structures to encourage use of CMM and streams and costs for typical CMM projects, AMM.12 as well as some of the risks associated with • Tax credits: In certain jurisdictions, tax these projects. credits might be available for the CMM Project Revenue Streams development or recovery of CMM projects.13 • Revenues: CMM projects might generate revenues through the sale of gas or CMM Project Costs electricity, and/or realize cost savings Four general categories of costs are from avoided energy costs. associated with CMM projects. • Carbon credits (e.g., GHG offsets, Capital Costs emissions reductions): CMM projects capture and utilize methane that would Capital costs include costs associated with the otherwise be vented into the atmosphere, development, construction, and financing of thus reducing GHG emissions. These the project. Typical capital cost components emission reductions, if properly verified, are listed in Table 1. might be considered GHG offsets and sold Total capital costs of a CMM project to as “carbon credits.” The financing produce and sell pipeline-quality gas are likely opportunities associated with carbon to be several million dollars. Projects credits are discussed further in the Carbon involving enrichment, power production Financing section on 13. (electricity generation), or equipment • Renewable or Alternative Energy Credits conversion may be more expensive, (RECs/AECs): In certain U.S. states, the sometimes involving initial costs of more than implementation of renewable or $10 million, even with an existing gas alternative portfolio standards has created recovery system. RECs or AECs that may be sold to Operating Expenses electricity producers to satisfy requirements for the generation of A project’s operating costs depend on the electricity from renewable or alternative project’s complexity and the end product that sources. A handful of states now include is being sold. Operating costs for gas sales CMM as a renewable or alternative fuel. projects using high-quality gas from pre-mine Other incentives for “clean” energy drainage are generally lower than gas sales development include feed-in tariffs or projects involving gas upgrade or enrichment, green energy tariffs that provide a higher which, in turn, is lower than operating costs rate for alternative energy. Such tariff for electricity generation projects. Operating structures may also mandate that the costs components include: power grid accept all energy supplied by the alternative energy source. Countries including Germany and the United Kingdom have used green power tariff 12 EPA. Undated. Coalbed Methane Outreach Program (CMOP). U.S. Environmental Protection Agency. Available: https://www.epa.gov/sites/production/files/2016- 03/documents/cmop-emerging-incentives-flyer.pdf. Accessed 6/3/2019. 13 Please contact legal and accounting advisors to determine if tax credits apply.

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• Personnel, maintenance, and operation of gas recovery systems.

• Annual operating costs for compressors, a water/gas separator, and equipment maintenance and insurance.14 Royalties, Fees, and Other Expenses

Royalties are assessed for the gas used by project developers who are not the owner of the gas rights. Generally, royalties are only assessed where the project generates revenues from energy and/or carbon credit sales. However, mineral rights owners may seek royalties on the lost mineral resource even when no revenue is generated because CMM is used onsite. On U.S. federal lands, the prevailing royalty rate is 12.5 percent, subject to individual contract negotiations. On private lands/leases, the royalty rate is negotiated but is typically at or near 12.5 percent.

14 For more project­specific information on capital and operating costs, please see EPA’s Coal Mine Methane Project Cash Flow Model at https://www.epa.gov/cmop/cmm-cash-flow-model. For more detailed information on gas upgrade costs, see EPA’s document, Upgrading Drained Coal Mine Methane to Pipeline Quality (2008), at https://nepis.epa.gov/Exe/ZyPDF.cgi/P1004NI6.PDF?D ockey=P1004NI6.PDF.

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Table 1. Royalties, Fees, and Other Expenses Capital Cost Component Description of Activities and Equipment Degasification system Drill, install, and complete wells and boreholes, including water disposal. Project developers may view this as a “sunk” cost and not consider capital expenditures for a CMM use/destruction project because the mine must install the degasification system for safety, irrespective of the CMM project. Gas collection and gathering system Blowers, compressors, lines. Gas processing system Separators, dehydrators. Engineering, design Project design and engineering. Land fees One-time charges for securing site access. Civil and electrical engineering Construction of the road, pad, fencing, and other necessary site preparation; and electrical connection. Permits, registrations, authorizations, One-time fees for construction and operation permits, environmental permits, and other legal fees legal filings, etc. Procurement of equipment to use or Equipment procurement, delivery, installation, and commissioning. destroy CMM Procurement of measurement and Purchase and installation of methane monitors, flow meters, temperature and monitoring equipment and systems pressure monitors, and automated systems for accurate recording of emissions reductions. Off-take agreements One-time costs associated with securing off-take agreements for environmental and energy commodities generated by the project, including project validation costs for environmental markets.

Project Development Costs return (IRR) are the most widely used tools for evaluating cash flow streams. NPV and In absolute terms, project development and IRR are the principal financial metrics used to up­front financing costs are roughly the same assess the financial feasibility of a CMM irrespective of the project’s size, in project, but other metrics exist: percentage terms; however, they are a much bigger burden on smaller projects. A number • NPV: The sum of a project’s net cash of organizational and transactional costs are flows over the project’s life is discounted associated with project development, which to the present. The discount rate used to might represent upward of 25 to 30 percent make this calculation represents the of the total capital costs. These costs include: investors’ cost of capital. If a project’s NPV is positive, then the project is • Conducting due diligence or examining deemed capable of yielding the investor’s and verifying the assertions and records of minimum required return, and the other project parties. investor usually undertakes the project. If • Other significant recurring non-operational the NPV is negative, the investor is likely expenses include: to reject the project. In the case of ‒ Taxes (federal, state) mutually exclusive projects, the investor ‒ Financing-related costs (including will typically select the project with the interest) highest positive NPV. ‒ Royalties. • IRR: The IRR on a project is the discount Assessing Financial Feasibility rate at which the NPV of the project’s net cash flow is zero. In other words, it is the Discounted cash flow analysis is the standard rate that equates the present value of a method used to evaluate an investment. The project’s cash outflows with the present net present value (NPV) and internal rate of

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value of a project’s cash inflows. A electricity prices. A sound financial analysis project’s expected IRR can be compared should at a minimum include base, high, and with return rates on alternative low cases based on reasonable assumptions investment opportunities. Investors will for all three cases. typically undertake projects where the IRR The Coalbed Methane Outreach Program is greater than the opportunity cost of (CMOP) has developed the Coal Mine Methane capital (i.e., the IRR exceeds the hurdle Project Cash Flow Model,15 a web-based rate). Hurdle rates vary and are specific to cost­benefit analysis tool to assist project each investor. In addition to the cost of developers in evaluating the potential capital, factors considered in defining the economic viability of recovering and hurdle rate include project risk, country beneficially using CMM. The model is intended risk, counterparty risk, and currency risk. to present an initial high-level assessment of The greater the risk, the higher the hurdle project costs and returns, rather than a rate to compensate for the increased detailed analysis. If the model shows the probability of an investment loss. Project potential for positive returns, project sponsors developers and investors may specify should then utilize a more rigorous project hurdle rates as “pre-tax” and “post-tax” to financial model tailored to support detailed clarify expectations. project feasibility studies necessary for • Payback period: The length of time financing. Project financial models (also (e.g., years or months) required to known as pro formas) should be sufficiently recover the initial investment in a project detailed to provide a reasonable and is its payback period. Since the payback defensible projection of project revenues, period does not measure profitability, it is costs, and returns. At the same time, a generally not used by itself to make an project financial model should be clearly investment decision. Shorter payback organized and auditable with clear supporting periods are preferred to longer payback documentation. Project sponsors can expect periods, and projects are often accepted if to share their model with any prudent and the payback period is less than a pre- serious investors during due diligence ahead specified number of years. The discounted of financing. payback period follows the same concept except it uses discounted cash flows to CMM Project Development Risks calculate the payback period. Thoroughly identifying and understanding the • Profitability index (PI): PI is the present risks associated with CMM projects are value of a project’s future cash flows necessary for any successful project. divided by the initial investment. PI, which Financing, in particular, is greatly impacted is closely related to NPV, will be greater by project risks because the level and cost of than one when NPV is positive. The financing are largely dependent on the actual financial attractiveness of a project and perceived risks associated with the increases as the value of the PI increases. project. A value lower than one indicates the Identification and assessment of risks and project's present value is less than the adoption of a risk mitigation plan are not only initial investment, and a PI of one critical steps in designing and operating the indicates a break-even point. A sensitivity analysis should also be carried out to examine the impact of risks on project 15 EPA. 2019. Coalbed Methane Outreach Program CMM Cash Flow Model. Available: returns. Risks could include changes in key https://www.epa.gov/cmop/cmm-cash-flow-model. financial variables such as gas production or Last updated February 19. Accessed 6/3/2019.

www.epa.gov/cmop 9 project, but also in securing finance. Project coal operations in terms of safety and developers may start with a very general risk flexibility, as well as the risks of the project analysis graduating to a thorough and itself. Possible risks for mine operations detailed analysis. A systematic approach may include: also be employed to standardize completion • Interference with mining operations: of risk assessments within an organization. Coordinating gas production and use with For CMM projects, project development risks coal operations require both detailed can include: planning and great attention to implementation, which could potentially • Inability to obtain agreements with the distract from or interfere with coal mining company and adjacent land production, or both. owners. • Reduction in mine planning flexibility: • Indications of marginal gas resource (such Mine operators might be concerned that as gas quality, rate of flow, and gas operations will limit their ability to longevity). change plans at a given mine or to close • Inability to negotiate energy sale or sell a mine (e.g., contracts requiring agreements. delivery of specified amounts of gas over a given timeframe could infringe on the • Inability to obtain permits. ability to alter coal mining operations). • Insufficient development capital. CMM Project Financing • Inability to secure financing. Often, the critical barrier to developing CMM Project risks change depending on the stage projects is securing financing. In part, this is of the project: development, construction, or due to the lack of awareness of the sources of operation. The equity investor generally bears finance and limited understanding of the the development risks of a project – those requirements to secure financing. In fact, risks associated with the developer’s ability to many funding and investment sources complete the project and receive project cash emphasize sustainable development, flows. In this case, the developer/investor environmental protection, and climate change would be unable to recover “sunk” costs, such mitigation as strategic objectives and as legal or consulting fees incurred. important components of projects that they Construction and operations risks might also finance. The arrival of carbon finance be associated with substantial losses. provided much-needed risk capital to Project developers should identify and underwrite wide-scale deployment of CMM prioritize the risks that present the greatest projects [e.g., leading to the construction and threats to the project, and develop a risk operation of 64 projects between 2005 and management plan that identifies mitigation 2012 in the Clean Development Mechanism 16 strategies for each of these risks. (CDM) and Joint Implementation (JI)]. However, in recent years many investors Mine Operation Risks have pulled back or exited the market altogether due to uncertainty over the future Mine operators might encounter a separate direction of international and set of potential risks than project developers and/or investors. Mine managers are primarily concerned with the productivity and 16 Ruiz, F., R. Pilcher, and C. Talkington. 2014. Addressing Barriers to Global Deployment of Best Practices to Reduce profitability of their mining operations. Mine Methane Emissions from Coal Mines. 7th International operators are also concerned about potential Symposium on Non-CO2 Greenhouse Gases. Amsterdam, the risks that the CMM project could pose to their Netherlands. November.

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U.S. environmental markets. While sources of established with the developer as a funding remain, project sponsors interested in managing partner and other investors CMM, including coal mining companies and being limited partners. Typically, a project developers, should be prepared for fund will hold contributions from increased competition for development pension funds, foundations, high net- capital. worth individuals, and other sources with sustainability goals and specific Project financing options include direct project investment targets. investment in the form of capital and/or in- ‒ Compliance buyers in the European kind contributions (equity and equity Union Emissions Trading Scheme (EU financing), loans (debt financing), and ETS), Japan, and other markets structured trade financing (carbon finance, continue to initiate and invest in offset export trade finance, etc.). Actual project projects to meet their current or structuring will likely consist of a mixture of anticipated regulatory obligations. these financing options, which can be grouped ‒ Commodity trading houses that have into traditional and supplemental sources of not exited the market may seek assets financing as discussed below. that produce emissions reductions for Traditional Sources of Financing their trading platforms, and with industry consolidation underway, • Financing off the balance sheet: Coal many trading firms have looked to mining companies and developers with take equity stakes in projects or significant asset bases are able to finance developers, or even acquire the CMM projects off their balance sheets. In developer outright. effect, this means that a company can ‒ Private equity, including venture secure a loan with little or no collateral, capital, is also possible, but private which can occur when an established equity firms generally show limited investor holds assets of such scale that an interest in carbon offset projects in equity investment or debt instrument will today’s market. Private equity typically not threaten the solvency of the company. has a very short investment horizon of Smaller developers may look to approach three–seven years with high return some of these companies with a proposal expectations, and the relatively small to partner on specific projects. In practice, scale of many projects does not meet many CMM projects developed in the U.S. investment criteria for these firms. have been financed through corporate One possibility is to aggregate a resources rather than project-specific portfolio of projects presenting a larger equity and debt. The potential advantages investment opportunity. Most likely an are lower financing costs and quicker equity investor will want to see that turnaround. the project sponsor has a financial • Equity: Securing equity is the most likely stake in the project. The advantage of option for developers, and can come from equity financing for CMM projects is several different sources: that it is more likely to be available ‒ Project developers and investors may than debt financing, and it strengthens have capital available for investment, the balance sheet by minimizing debt. although industry consolidation has Any project developer accepting made access to capital more equity, however, must recognize that competitive. This capital may come equity shareholders may expect from corporate equity or through significant input into the project. management of an investment fund

www.epa.gov/cmop 11 • Debt: For smaller companies or for suppliers, combined with a slowdown in companies with a limited operational the market, may further incentivize history, securing debt financing is more suppliers to employ vendor financing. difficult than for larger, more established Individual product vendors and companies. As with private equity, project manufacturers, such as Caterpillar, size becomes a critical issue. The costs to General Electric, and Ingersoll Rand, offer conduct due diligence and extend a range of financing products for financing financing are not that much greater for a of equipment as part of a structured larger project than a small project, but the project finance arrangement, including returns to the investor or lender are capital leases, loans, fixed purchase significantly greater for a large project options, and operating leases. The Thus, there is more incentive to lend to a advantages of vendor financing are that it larger project. While acceptable can be expedited and tailored by a vendor debt-to-equity ratios vary, project familiar with CMM projects. The loan financing using project debt can be highly agreement may also allow for the leveraged, even up to 70 percent or 80 facilitated sale or loan of the project percent of total costs. Supporting equipment should the project cease agreements and creditworthiness of operation at any time in the future. A counterparties, especially for off-take disadvantage may be a higher interest agreements, are necessary; and scrutiny rate for these additional services as well is very high for debt financing, especially as being tied to a specific equipment for non-recourse finance. Lenders may supplier. require onerous terms for lending such as • Multilateral, regional, and bilateral extensive collateral requirements or financial institutions: These institutions personal loan guarantees. The advantage provide a range of debt, equity, and of debt is that the project sponsor retains mezzanine instruments; and CMM projects full “ownership” of the project compared meet many of their social and with equity investment. Debt can improve environmental goals. Although they prefer the financial returns of a project when to finance projects greater than interest rates are very low. Challenges $25 million, they may consider smaller with debt financing include risk exposure if projects. A portfolio or regional approach the project cannot service the loan at any may be more attractive. Given the nature point, fluctuating interest rates that are and purpose of international financial and standard for a commercial loan, and in bilateral financial institutions, project many cases the ability of the lender to sponsors accessing multi-lateral or demand the repayment of a commercial bilateral funds should be prepared to work loan at any time. through a detailed, prescriptive, and • Vendor financing: Another possibility is sometimes time-consuming process that vendor financing, whereby the equipment may entail a public review of the project. supplier takes an equity stake or extends These financing sources also often require a line of credit or loan facility to the that projects meet certain social and project. This is a common model in the environmental objectives. For example, manufacturing sector and has been used developmental impact and environmental in the CMM industry. In some cases, impact assessments will be required as suppliers are backed by private equity may a life-cycle cost analysis inclusive of groups or other investors who are looking social cost-benefit. Depending on the to pair equipment sales or leases with source of finance, lending is often project investment. Competition among government-to-government (i.e., project

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finance must flow through the host U.S. and internationally. Trading volumes government before moving to the were relatively small due to the voluntary project). A key advantage of multilateral nature of the markets and prices remained and bilateral financing is the institution’s low. This changed when the EU ETS ability to provide low-interest rate loans commenced in January 2005 followed by the and take on country risk. They can Kyoto Protocol coming into force in February sometimes provide technical assistance of that year. Together, these two events grant funds to support ancillary project established a liquid international carbon objectives, and have ties to investment market. Prices for international carbon credits

funds that can place equity into a project. (one tonne of CO2 equivalent, CO2e) rose at a The disadvantage to multilateral or rapid pace in anticipation of these new bilateral funds can be the amount of time markets, but declined dramatically following and the process required to secure the the end of the Kyoto Protocol’s first funds. commitment period (CP1) in December 2012.

Supplemental Financing Sources and Other As the markets took hold during CP1, capital Incentives began flowing at a rapid pace and in large quantities to project developers, allowing Many CMM utilization projects can offer them to contract CMM projects in China, financial returns that are sufficient on their India, the Former Soviet Union, and Eastern own merits to attract traditional investors and Europe. In most cases, the availability of lenders. For other projects, supplemental funding for methane-to-energy projects were financing and other incentives may be directly or indirectly tied to the future value of required to make them an attractive the carbon credits generated by the project, investment. The sale of carbon credits from and became known as carbon finance. GHG emissions reductions is particularly useful for improving the cash flow of projects Among industry sectors, interest in CMM was that are otherwise economically marginal and, especially high due in large part to the therefore, unattractive to investors. Other potential scale of emissions at the project incentives are realized through participation level. Moreover, emissions at active mines are in renewable or alternative energy programs; tied to a limited number of specific point federal- and state-sponsored capital sources, making them readily measurable and investment incentives, grants, and tax verifiable; CMM utilization and destruction benefits are also available to facilitate technologies are proven in the field. Also investment in CMM projects. attractive to investors were the contributions to sustainable development, namely mine Carbon Financing safety and localized energy production.

Sufficient capital is necessary to originate, The market in the U.S., by contrast, has design, build, and operate a project. In some evolved quite differently. Initially, without an cases, CMM projects are unable to meet active compliance market available for CMM preferred rates of return on commodity sales offsets, the voluntary and pre-compliance alone. Carbon finance, which is tied to markets were a potential source of carbon project-based GHG reductions, is an finance. However, voluntary prices remained incremental source of finance that has the too low to incentivize projects. Regional potential to generate additional revenues markets have led the way in the U.S., with capable of making these projects “bankable.” the largest and most influential being California’s regulated cap-and-trade program Prior to 2005, voluntary carbon markets were commencing in January 2013. the principal source of carbon finance in the

www.epa.gov/cmop 13 • Kyoto Protocol market mechanisms: The emissions reductions from “early action” second commitment period of the Kyoto projects commencing between January 1, Protocol (CP2) runs from 2013 to 2020. As 2007 and December 31, 2014, and of May 3, 2018, only 112 of the necessary registered with an OPR. Early action 166 countries have ratified the Doha projects in CAR and Verra must have been Agreement needed to make the emissions listed with the OPR by December 31, 2014 reduction targets under CP2 legally and verified by September 30, 2015. binding.17 Without any real demand, the Emissions reductions achieved by early value of Kyoto credits [certified emissions action projects totaled 2,879,684 tonnes

reductions (CERs) and emissions reduction CO2e. In addition, CMM compliance units (ERUs)] has remained below €1 per projects have been issued offset credits

tonne, and the credits are not typically for 2,983,324 tonnes CO2e as of May used in various national or subnational 2019.18 emissions trading schemes and voluntary All project types are eligible, with programs. one notable exception. Natural gas • California Cap-and-Trade Program: This pipeline sales projects at active program started in 2012 and entered into underground mines are ineligible to its first compliance period beginning on participate in the California Cap-and-Trade January 1, 2013. There are currently Program because CARB considers such three approved offset project registries projects to be business-as-usual and not (OPRs) for the California Cap-and-Trade additional. Pipeline sales projects at program for issuance of California abandoned mines are eligible, except in Compliant Offsets, which are discussed instances where a pipeline sales project more below: Verra, formerly the Verified existed prior to abandonment. Carbon Standard (VCS), the Climate • Verra, formerly VCS: Launched in 2006, Action Reserve (CAR), and the American the VCS is a multiple registry system Carbon Registry (ACR). within the voluntary carbon market, which The California Air Resources Board (CARB) includes three international registries: APX adopted the Mine Methane Capture (MMC) Inc. in North America; Caisse des Depots Protocol on April 25, 2014. The protocol, in Europe; and Markit in the United which became effective on July 1, 2014, States, United Kingdom, and Asia Pacific includes MMC projects that capture and region. These registries work with the destroy methane from mining operations Verra project database to issue, hold, at active underground and surface coal transfer, and retire Verified Carbon Units. and trona mines, and abandoned Verra follows the CDM methodologies and underground coal mines in the U.S. also provides a framework to develop new Verra methodologies or revise existing The MMC Protocol applies to mines that CDM methodologies. Verra accepts CMM install equipment to capture and destroy projects, including pipeline sales, boiler methane extracted through methane use, electricity generation, flaring, and drainage systems or VAM collection VAM. Verra approved modifications to systems. To be eligible as a compliance, a CDM methodologies to accept surface project must have started on or after mine methane and AMM projects. July 1, 2014, with the exception of verified

18 CARB. 2019. Offsets Credits Issued. Available: 17 UNFCCC. 2018. Doha Amendment. Available: https://www.arb.ca.gov/cc/capandtrade/offsets/issuance https://unfccc.int/process/the-kyoto-protocol/the-doha- /arb_offset_credit_issuance_table.pdf. Accessed amendment. Accessed June 8, 2018. 6/5/2019.

www.epa.gov/cmop 14 • CAR: Launched in 2008, the CAR is a the World Bank estimates surplus supply in carbon offset registry for the North the CDM and JI pipeline on the order of three American carbon market. Fourteen to five times expected demand through project-specific protocols currently exist, 2020.20 Prices in the EU ETS for EU including CMM. Under the CMM Protocol, allowances (EUAs) have been on an upward offset credits called Climate Reserve trajectory since 2013, surpassing the Tonnes are issued to projects that destroy €25.00 mark in 2018 for the first time since methane that would have otherwise been 2011.21 However, offset (CERs and ERUs) vented to the atmosphere from active prices have fared much worse, with CERs underground coal and Mine Safety & falling below €1.00 in late 2012 and below Health Administration-classified €0.25 since early 2017.22 Category III gassy trona mines in the U.S. In the U.S., allowances in the California cap- and its territories; surface and abandoned and-trade scheme are trading for around mines are excluded. Qualifying project $15/tCO e and offsets are around $14.23 The activities include the use of CMM for 2 adoption of the MMC Protocol by the CARB electricity generation and flaring for will likely spur increased development of mine projects destroying VAM. However, methane projects throughout the U.S. In projects selling CMM to commercial voluntary markets, the volume of offsets pipelines are not eligible, and CMM to transacted market-wide from projects power projects only receive credit for the declined by 26 percent from 2015 to 2016, methane destroyed (i.e., no additional while average prices over the same period credits for displacing grid-based decreased by 9 percent from $3.30 to electricity). 24 $3.00/tCO2e. Reported prices in voluntary • ACR: Launched in 1996, the ACR is a markets that accept CMM projects – Verra, voluntary carbon offset program in the CAR, and ACR – were $3.29, $2.60, and 25 U.S. The ACR considers methodologies $4.30/tCO2e, respectively, in 2015. from other standards and systems that are consistent with the ACR Technical Standard, including CDM and VCS. The

ACR announced the public comment 20 World Bank. 2014. State and Trends of Carbon Pricing period for its new Methodology for 2014. World Bank, Washington, DC. Capturing and Destroying Methane from 21 QUANDL Intercontinental Exchange (ICE) EU ETS EUA U.S. Coal and Trona Mines in October Price History. Available: https://www.quandl.com/data/CHRIS/ICE_C1-ECX- 2018. The registry accepts CMM projects EUA-Futures-Continuous-Contract-1-C1-Front- as a CARB OPR, and 11 projects have Month?utm_medium=graph&utm_source=quandl. been listed on the registry as of June Accessed 9/14/2018. 22 2018, with offsets issued to 5 of these QUANDL. Intercontinental Exchange (ICE) EU ETS CER 19 Price History. Available: projects. https://www.quandl.com/data/CHRIS/ICE_CER1-ECX- CER-Emission-Futures-Continuous-Contract-1-CER1- On a volume basis, the CDM market peaked Front- in 2012 with 3,403 GHG mitigation projects Month?utm_medium=graph&utm_source=quandl. Accessed 9/14/2018. registered (all sources) and 339 MtCO2e in 23 emissions reductions. Today, demand for California Carbon. 2018. Price for Golden California Carbon Offset (CCO) Available: Kyoto credits has tapered considerably and http://californiacarbon.info/. Accessed 6/3/2019. Golden CCOs are guaranteed by the seller.

24 19 Forest Trends Ecosystem Marketplace. 2017. Unlocking American Carbon Registry. 2018. Public Registry. Potential: State of the Voluntary Carbon Markets 2017. Available: https://acr2.apx.com/myModule/rpt/myrpt.asp?r=111. 25 Forest Trends Ecosystem Marketplace. 2016. Raising Accessed 6/5/2018. Ambition: State of the Voluntary Carbon Markets 2016.

www.epa.gov/cmop 15 Other Incentives – used for compliance was $12.16 per megawatt-hour (MWh) in 2017.28 Prices for In the U.S., 37 states have renewable or voluntary RECs are much lower, averaging alternative energy portfolio standards in around $0.35 per MWh in 2016.29 place, which require electricity providers to obtain a minimum percentage of their power Outside the U.S., other incentives have been from eligible energy resources by a certain used, including favorable tariffs such as feed- date. Five states – Pennsylvania, Ohio, Utah, in power tariffs or green tariffs combined with Indiana, and Colorado – currently include mandatory offtake requirements to provide CMM as a renewable or alternative energy certainty of revenue for CMM and AMM source.26 By including CMM as a renewable projects. Germany and the United Kingdom, energy resource, electricity generated from for example, have been successful in CMM could generate RECs, which are used to stimulating and maintaining CMM and AMM demonstrate compliance with the portfolio projects as a result of green tariff programs. standard and can be sold or traded separately In many countries, regular power tariffs are from electricity. Some states have also increasing to levels that can support CMM adopted programs to provide grants, tax projects. In these instances, mandatory credits, or loan guarantees that are applicable offtake requirements alone can sustain CMM to CMM recovery projects (e.g., Pennsylvania projects. One example is in Shanxi Province, and Ohio), while other state and federal China, where some projects are operating agencies have approved or are considering solely on power revenues and are not royalty relief for CMM utilized or destroyed participating in carbon markets in any way. onsite (e.g., Colorado, Utah, Wyoming).27 For additional information on emerging state and Challenges of Carbon Financing federal financial and regulatory incentives for CMM emissions reduction projects, visit Several challenges are associated with https://www.epa.gov/cmop/project- securing carbon credits for CMM projects: resources. • Lack of standardized methodologies: The benefits of such incentives to CMM Because there is no one universal carbon project developers will depend on the unique trading program, GHG reduction projects circumstances of each project. Prices for RECs are subject to different standards. are difficult to determine and depend on • Ownership of credits: In order to buy or several factors, such as the volume sell credits, proof of ownership must be purchased, the location of the generator, or demonstrated and legally transferred to whether the RECs are bought to meet the other party following the transaction. compliance obligations or serve voluntary Under most circumstances, credit retail consumers, to name a few. In ownership will be recorded under the Pennsylvania, where REC prices are required appropriate trading mechanism to be disclosed, the weighted average price of (e.g., CARB, EU ETS), but in the absence a Tier I AEC – Pennsylvania’s version of a REC of clear reporting [i.e., over-the-counter

26 EPA. 2018. Coal Mine Methane Developments in the 28 Pennsylvania Alternative Energy Credit Program. 2018. United States. EPA 430-R-18-002. U.S. Environmental Available: https://www.pennaeps.com/reports/. Accessed Protection Agency. February. Available: 6/5/2018. https://www.epa.gov/sites/production/files/2018- 29 03/documents/cmm_developments_in_the_us.pdf. NREL. 2017. Status and Trends in the U.S. Voluntary Accessed 6/3/2019. Green Power Market (2016 Data). Technical Report NREL/TP-6A20-70174. National Renewable Energy 27 EPA. 2011. Financial and Regulatory Incentives for Laboratory, Golden, CO. October. Available: U.S. Coal Mine Methane Recovery Projects. EP-W-10-019. https://www.nrel.gov/docs/fy18osti/70174.pdf. Accessed U.S. Environmental Protection Agency. August. 6/3/2019.

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(OTC) markets], a contract specifying profitability. CARB and Canadian carbon ownership of the resultant carbon credits markets have set floor (and ceiling) prices should be obtained. to help stabilize prices. • Process for project validating: The Kyoto Investor Engagement mechanisms and some other trading schemes and voluntary programs require Project sponsors should anticipate an that projects be reviewed and validated extremely thorough due diligence process by before generating credits. This process investors. It is not unusual for investors or can be time-consuming and there is an lenders to demand that a project be “shovel associated cost. The development of ready” to minimize risk and streamline due “performance-based” CMM protocols in diligence. A shovel-ready project also CARB and Canadian carbon markets have demonstrates an early financial commitment eliminated the need and cost of the by the developer. validation process. In preparation for engagement of potential • Verification of credits: The verification of financial backers, project sponsors should carbon credits is necessary to transact expect that investors will want to see (1) a and monetize the credits. A verification sound business plan supported by an program requires having an acceptable auditable financial model and credible market methodology and independent third-party analysis; (2) demonstration of sufficient and verifiers. These mechanisms allow the consistent gas availability for the term of the market to impose some discipline by project; (3) engineering, equipment, ensuring that credits are valid. procurement, construction, feed-stock, and off-take agreements with credit-worthy • Carbon off-set price fluctuation: The price partners with sufficient remedies for non- of carbon is dependent on government delivery or non-performance; (4) possession policy, regulation, and intervention; and of all required licenses, permits, intergovernmental compacts and treaties. authorizations, or approvals; and (5) proof of This causes significant variation in the the developer’s ability to deliver the project price of carbon, adding uncertainty to the with close scrutiny paid to the developer’s impact on a project’s revenues and experience, qualifications, and balance sheet.

www.epa.gov/cmop 17 VAM Mitigation: Cutting-Edge Technologies Convert Methane Emissions to Income

Driven by technological advancements and market developments, VAM projects are now being deployed in commercial applications. Below are highlights of several projects, and more are in the project development pipeline.

The world’s first commercial-scale power plant using VAM as the primary fuel operated at the West Cliff Colliery of BHP Billiton in Australia from 2007 to 2017. The plant generated 6 megawatts (MW) of electricity, producing 300,000 MWh and reducing GHG emissions by 2 million tonnes tCO2e during its project life. See https://www.unece.org/fileadmin/DAM/energy/se/pp/coal/cmm/12cmm_oct2017/25_October/10_Mr_Matt us.pdf.

The Blue Creek Mine No. 4, owned by Walter Energy in Alabama, was the first active mine in the U.S. to host a VAM project. The nominal capacity of the RTO is 30,000 cubic feet per minute (cfm) or 14 normal cubic meters per second. The project qualified as an early action credit project under the California Cap-and-Trade program completing the sale of all 80,766 tCO2e. See http://www.biothermica.com/content/1st-us-vam-project-0.

A 160,000 cfm VAM project at Murray Energy’s Marshall County Mine in West Virginia (U.S.), has been operating since May 2012. Through 2013, the project had resulted in net emissions reductions of 152,828 metric tCO2e, and the project is eligible as an early action project for the California Cap-and-Trade Program. See http://www.sindicatum.com/portfolio/mcelroy-vam/.

The Gaohe Coal Mine VAM Project in Shanxi Province, China, owned by the Lu'An Coal Mining Group, began operation in May 2015. All revenue is generated from power sales. The project utilizes 12 RTOs to oxidize up to 1,080,000 normal cubic meters for hour (Nm3/h) of VAM supplemented by CMM. The VAM plant produces up to 300,000 Nm3/h of hot exhaust gas to generate 30 MW of power. The project is expected to reduce GHG by 1.22 million tCO2e per year. See http://www.durr-cleantechnology.com/news-events/trade-presstechnical- articles/news-details/worlds-largest-ventilation-air-methanecoal-mine-methane-oxidation-project-goes-live/.

See CMOP’s VAM page on the EPA website for more resources: https://www.epa.gov/cmop/us-underground-coal-mine- ventilation-air-methane-exhaust-characterization.

Risk Mitigation Support

Raising debt and equity to finance projects in project sponsor that possesses a thorough developing countries can be challenging. A knowledge of these instruments and practices number of risk mitigation instruments will be better prepared to negotiate with facilitate raising private capital in these potential financiers and, ultimately, will be markets. These instruments are designed to more likely to succeed in attracting capital. transfer certain defined risks from lenders and equity investors to creditworthy third Loan Guarantees parties such as guarantors or insurers. In order to reduce political risk exposure Multilateral institutions (such as the World associated with cross-border lending, banks Bank, the ADB, and the Inter-American or other lending institutions might require a Development Bank), export credit agencies loan guarantee to ensure timely repayment. A (e.g., U.S. Export-Import Bank, JBIC, Export loan guarantee is a promise of an acceptable, Development Canada), and political risk creditworthy party to repay all or part of the insurers (e.g., Overseas Private Investment loan in the event (or under certain specified Corporation, Nippon Export and Investment circumstances) that the borrower does not or Insurance, United Kingdom’s Export Credit is unable to repay the loan. In limited Guarantee Department) provide different recourse project finance, project developers types of risk mitigation support. The CMM rarely provide guarantees of loan repayment,

www.epa.gov/cmop 18 although partial guarantees under specified Risk Reduction Assistance circumstances (such as construction Certain institutions offer financial assistance to completion) do occur. Loan guarantees are reduce the risks that domestic companies might typically provided by national governments face when exploring their products or service abroad. interested in catalyzing economic activity in • The Export-Import Bank of the United States their areas (see text box). Depending on the (Ex-Im Bank) provides long-term loans and credit quality of the guarantor, these guarantees, working capital guarantees, guarantees reduce the loan default risk, which political risk insurance tied to the sale of in turn reduces the interest rate on the loan. U.S. goods and service. It also offer certain special financial terms to companies that Some financial institutions have standardized are unable to obtain traditional financial support. www.exim.gov loan application forms that potential borrowers complete; and most, if not all • The Overseas Private Investment institutions, will expect the borrower to Corporation (OPIC) helps U.S. businesses invest overseas by offering support to present a business plan (i.e., project mitigate these risks. OPIC provides a range documents and technical studies). Appendix E of traditional finance resources, such as provides a checklist of the typical lending loans and guarantees. In addition, it offers terms and conditions that financial institutions political risk insurance products for cross- border lending or investing in emerging might use in evaluating CMM projects. This markets. www.opic.gov checklist is intended to provide the CMM • project developer with a good sense of the As a member of the World Bank Group, the Multilateral Investment Guarantee Agency information required before approaching a (MIGA) promotes foreign direct investment financial institution. into developing countries to help support economic growth, reduce poverty, and Political Risk and Credit Insurance improve people’s lives. MIGA addresses investment concerns and political risk Risk mitigation, in the form of political risk perceptions by providing political risk insurance or credit insurance, is offered by insurance, technical assistance, and public (multilateral and bilateral development dispute medication services to help remove obstacles. www.miga.org institutions – see text box above) and private insurance companies. It is often used in international project finance transactions and service default regardless of the cause is available to both lenders and equity investors. Political risk insurance typically transferability of foreign currency, covers the following risks: inconvertibility and expropriation and nationalization, political (i.e., covering both political and commercial violence, and breach of contract. Credit risks), and is often used when a government insurance covers losses in the event of a debt entity is the off-taker of the product. Conclusion

A host of finance and revenue sources are development process in several ways. Some available to CMM project developers provide risk reduction products to mitigate a worldwide. By tapping the appropriate technology or service provider’s concerns sources, funding can be secured for all phases about entering foreign markets. Others of the project development cycle, from provide lending and related financial prefeasibility studies, to technical specification assistance for projects that offer development, to pilot/demonstration studies environmental benefits and contribute to and full implementation. The finance sustainable development and poverty organizations and opportunities outlined in alleviation. Still others purchase carbon this guide contribute to the project credits and thereby could supplement a

www.epa.gov/cmop 19 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.

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Appendix A: CMM Project Participants

Project Role 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. The project developer may have capital available to construct and commission the project or may secure financing from external sources. Many investors will want to see that the developer has some risk capital or equity stake in the project to demonstrate their commitment to the project and their financial viability to ultimately deliver the project. Mine Operator A critical participant and at a minimum, supplies fuel to the project and the project site for an onsite facility. Projects using CMM are located at the host coal company’s mine, typically employing the mine’s degasification or ventilation systems. Projects might take place prior, during or after mining, depending on the technology employed. Often plays an extensive role and may be the primary project developer and operator, or may partner with a developer. Regulatory Agencies Provide permits and approvals, including mine safety and health agency (generally the mine operator must file a degasification plan, state/provincial mining authorities, oil and gas agencies, power regulators including dispatch authorities, and environmental departments). In addition, other agencies such as provincial or federal treasuries and energy ministries may be involved. The developer might also need permits for rights of encroachment on the landowner’s property and for potential environmental impacts related to pipeline rights­of­way, water treatment, and combustion related to gas processing. Local permits may be required for construction, occupation, and noise. 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, electric and thermal energy, LNG/CNG, or other product. 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 completed (known as “acceptance”). Suppliers may extend their warranties through the project life by means of a maintenance contract. Other models include Build, Own, Operate, Transfer (BOOT) and Build, Operate, Transfer (BOT). Project Contractor Responsible for the design, procurement, construction, and/or installation of CMM project equipment. Commonly referred to as the EPC contractor (Engineering, Procurement, Construction) or EPCM contractor (Engineering, Procurement, Construction Management). Either possesses all necessary capabilities in­house, or will enter into subcontracting arrangement with other firms. Some contractors, in conjunction with a system supplier, will provide a project facility on a guaranteed turnkey basis, assuming responsibility for the project’s completion and operational performance. Project Operator Responsible for cost­effective 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 third­party firm under contract to the project owners, or one of the other participants. Major maintenance is usually the function of the system supplier. Energy Provides the CMM project’s revenues from energy delivery. Off-takers include electric Commodity Off- utilities, local gas distribution companies, gas wholesalers/blenders, major natural gas taker 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. In order to obtain debt financing for the project, the project will likely have to contract with the energy product buyer for a period not less than the term of the senior debt, plus a two–three year “tail.” Lenders especially, but also equity investors, will look very closely at the creditworthiness of a project’s off-takers.

www.epa.gov/cmop 21 Project Role Financial Fill multiple roles, from arranging to providing the financing for the project. Institutions/Carbon Financiers Carbon Credit Firms providing validation and verification services act as independent third-party auditors to Validators and ensure that carbon credits generated by a CMM project meet the standards of a specific Verifiers registry or trading program. Carbon Market Off- Buyers of carbon credits and others who facilitate the transactions such as brokers and Takers traders.

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Appendix B: Key Elements of Feasibility Studies

A comprehensive feasibility study (FS) estimates from technology vendors and includes the following key elements: technical experts.

• A summary of mine characteristics based • A detailed assessment of site­specific on information from the pre-feasibility legal, regulatory, and environmental study (PFS) and site visit(s). issues, including the status of gas ownership rights, any issues associated • A detailed assessment of available gas with access to surface lands for resources based on historical gas degasification systems, and other emissions from the mine, data on in-situ restrictions on the potential project gas content, and plans for future mine (e.g., wetlands infringement). activities. This element might include pilot well tests. • A detailed financial analysis for each technically viable scenario based on the • A detailed assessment of degasification market assessment and the overall project technologies and mine drainage objectives with base, high, and low cases. techniques, both those currently in place The financial analysis should be supported and those that could be added to by an auditable financial model. maximize the quality and quantity of the drained gas. • For multilateral and bilateral financial institutions, a review of socioeconomic • A detailed assessment of technical impacts and environmental impacts, and a possibilities to use the gas based on its qualitative or quantitative cost-benefit quality, the overall project objectives, and analysis. the PFS results. End uses to be considered include power generation, gas sales to • A summary of key staff positions and pipeline (with or without upgrade), coal requisite education and experience for drying, and mine heating. those positions.

• A detailed assessment of market • A target schedule for project opportunities for gas and/or power, implementation and operation. including factors such as the distance to • A conclusion section that includes an nearby pipelines, the current and assessment of the project’s overall projected market price of gas, the demand viability, whether financial investment for and price of power generation in the should be made, and any other area, and the possibility of carbon credits. appropriate recommendations. • A detailed assessment of proposed project costs for the project scenarios of interest, using estimates and financial projections. These are based on best available

www.epa.gov/cmop 23 Appendix C: CMM Project Funding Sources

Specialized Type of Financiers Risk/Return Portfolios Investment Areas Status Commercial Banks Commercial banks profit Because banks are generally Bank financing has CMM projects are not by lending money at conservative, they apply risk been used to fund inherently higher interest rates than minimization techniques. A large­scale CMM “unbankable,” despite they pay on deposits. project developer seeking projects that require the lack of bank Banks might provide bank financing therefore major capital participation thus far. short-, medium-, and must be prepared to show investments in both They are generally long­term corporate and the bank’s loan officer all gas recovery systems supported by strong project finance loans at a important project contracts, and contracts, earn margin or spread over a including a detailed business collection/utilization sufficiently high rates benchmark rate such as plan; a credible independent components. Few, if of return, and employ a the London Interbank project technical any, smaller CMM resource that is Offered Rate. assessment; and pro forma projects have been well­characterized. This financial statements bank­financed, last point is especially demonstrating the project’s however, because: true in the case of ability to service debt. The • Most banks are projects at mines with developer also should be unfamiliar with the degasification systems. prepared to discuss its own CMM project market. If banks find a CMM project development • Smaller projects project of an experience and frequently are not acceptable size and creditworthiness, as well as profitable for banks, are willing to lend on a project assets that could even when expected project-finance basis, serve as collateral. pricing is high, due to they could play a more Because banks are the bank’s costs for significant role once regulated at the federal examining and they have greater and/or state levels and are processing the familiarity with the legally restricted from transaction. industry. Banks located making risky loans, they are near gas resources • Collateral requirements conservative lenders, might be good are very challenging for candidates because generally providing senior, smaller projects. secured loans to they are more likely to experienced entities. They have experience with typically do not fund projects the gas industry and, in their development stages, therefore, be more preferring to wait until comfortable with CMM projects are projects. well­characterized. Gas Purchasers Gas pipeline companies These companies often face Gas/purchase sale Gas companies to date and gas distribution “make or buy” decisions: Will contracts can be have played a significant companies are potential it be more profitable to buy negotiated between the role in financing CMM sources of capital for CMM or develop gas resources? By CMM project and the gas projects in the U.S. projects because they are developing CMM and other company such that the interested in securing gas projects, they might be project is profitable and low­cost supplies of gas. able to ensure themselves the gas company pays a long­term, low­cost supplies. relatively low price for gas.

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Specialized Type of Financiers Risk/Return Portfolios Investment Areas Status Venture Capitalists Venture capitalists usually Because venture capitalists Venture capitalists In recent years, venture invest in convertible provide risk capital to specialize in funding capital investments have preferred stock because fledgling ventures that often startup companies, been rushing toward this instrument greatly have nothing more than including those that clean or alternative increases the upside ideas, many of their develop energy energy technologies. potential. investments are technologies. They might unsuccessful. In exchange not be suitable for bearing this risk, venture investment partners for capitalists expect to earn small CMM project unusually high returns – in developers, however, the range of 40 percent after because they invest in taxes. Investment horizons companies rather than for venture capitalists also projects and given the tend to be short; three–five active role they take in years is common. running companies. CMM project developers that partner with venture capital firms might have to be willing to cede some control of their companies. Pension Funds, Insurance Companies, and Other Institutional Investors Pension funds, mutual Most institutional investors Almost all money under Institutional investors funds, and other are strictly bound by U.S. institutional management have limited appetite for institutional investors are Securities and Exchange must be invested in highly projects and, therefore, large, regulated Commission (SEC) laws and rated, publicly traded generally do not companies that pool their own covenants and stocks, bonds, and other represent potential money provided by smaller restrictions, which dictate highly liquid securities. capital sources for CMM investors and then make the types of investments the projects. However, these investments. They control investors might make. investors have taken billions of dollars of equity stakes in CMM U.S. investment funds. project developers and have invested in carbon funds. Investment Bankers Investment bankers Investment bankers have Investment bankers could To date, a number of provide a wide variety of minimum-size requirements be useful to CMM projects CMM projects have been financial services and are unlikely to be because they can identify financed through private (e.g., provide advice on interested in project investors who are investments. Numerous corporate/project financing less than $25– interested in investing in investment banks have financing alternatives; 50 million. They might, oil and gas projects, not arranged CMM project arrange debt/equity public however, be able to place bound by investment financing, while others, offerings and private equity with private investors. restrictions, and able to although they have not placements; assist in Where bankers line up invest in smaller projects. been involved in CMM transactions such as private equity investors, Investment banks also projects, have worked mergers, acquisitions, and investment horizons are very might be able to help with energy project divestitures). short (three–seven years). project developers identify developers and are Expectations on returns can suitable partners such as interested in assisting also be very high to offset oil and gas exploration CMM projects. risk (e.g., a 10-to-1 cash-on- companies. cash return after 5 years).

www.epa.gov/cmop 25 Specialized Type of Financiers Risk/Return Portfolios Investment Areas Status Multilateral Sources (Examples) • The Asian Development • Compared with private • ADB provides projects • ADB has directly Bank (ADB), a multilateral lenders, multilateral with technical supported CMM development development banks (also assistance, grants, and through a project at the organization, strives to known as International loans. In recent years, Jincheng Anthracite improve the social welfare Financial Institutions or ADB has focused on Mining Company using of people in the Asia and IFIs) will often accept a supporting clean energy CMM for power Pacific regions. higher degree of country projects (see generation, industrial • The Global Environment risk at reasonable lending https://www.adb.org/) use, and town gas. ADB Facility (GEF) works rates to encourage • The GEF Operational also sponsored through implementing investment in emerging Strategy requires that feasibility studies at agencies including the economies. However, IFIs any GEF­funded activity several mines in China. World Bank, the United tend to be risk averse. Like relating to climate • The World Bank has Nations Development private lenders, they will change be fully supported CMM Programme (UNDP), the want assurances of a compliant with the (e.g., an $80 million UN Environment project’s legal and directives of the UN loan to the Shanxi Programme (UNEP), and technical viability and the Framework on Climate Coal Bed Methane regional development project team’s competency Change Convention (see Development and banks to provide in delivery such projects. https://www.thegef.org/) Utilization Project that cost­sharing grants and IFI funding can also come • Projects that are smaller is set to conclude in concessional funding to with additional capacity- than the World Bank’s 2016). help developing countries building support to preferred minimum • IFC purchased credits fund projects and enhance the chances of lending threshold of via ING Bank from a programs that protect the project success. ~ U.S. $50 million may be project that generates environment, such as • Environmental and social bundled with other power using methane climate change mitigation criteria are also very development activities to captured from coal projects. prominent in IFI lending, construct a finance mines in Ukraine. • The World Bank provides and applicants should be package of adequate size • The GEF has funding for projects that prepared to meet (see previously are consistent with its thorough, published http://www.worldbank.or underwritten CMM mission to fight poverty criteria. g/). drilling and utilization and improve the living • The operating practices demonstration standards of people in the and procedures at projects in China, developing world. The international financial India, and Russia. International Finance institutions entail a Corporation (IFC), the detailed, public, and private sector arm of the transparent review and World Bank Group, approval process. provides financing for a variety of sustainable energy and climate change mitigation ventures. IFC financing can include both debt and equity finance of private ventures. • The European Bank for Reconstruction and Development (EBRD) uses investment tools to help build market economies and democracies in countries from central Europe to central Asia.

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Specialized Type of Financiers Risk/Return Portfolios Investment Areas Status Bilateral Sources (Examples) • The Japan Bank for Bilateral financing agencies There are no specific funds JBIC provided International provide debt, equity, and directed at CMM projects. $20 million in loan Cooperation (JBIC), as mezzanine finance to However, most bilateral financing for the the international wing projects. In addition to agencies prioritize financing Jincheng project of the Japan Finance financing, they can provide for developmentally and above. JBIC also Corporation (JFC), political risk insurance and environmentally sustainable recently signed a contributes to export credit insurance. projects with considerable memorandum of sustainable and emphasis on climate understanding with sound development of Their goals are typically change, energy The Energy and international and multifaceted: promoting development, and energy Resources Institute Japanese economies. exports of a country’s goods efficiency. The agencies (TERI) of India for the • The U.S. Overseas and services while also tend to have broad development of GHG Private Investment promoting developmental, definitions for these areas of reduction projects in Corporation provides social, environmental, and, in emphasis, allowing a wide India (see investors with some cases, political range of project types to fall https://www.jbic.go.jp financing, political risk objectives. within their financing /en/). insurance, and mandate. Project sponsors support for private Similar to multilateral finance should expect to spend equity investment institutions, bilateral sources considerable effort meeting funds, when will accept country risk but with target financing commercial funding project sponsors must still agencies before formally cannot be obtained demonstrate that they have seeking funding. elsewhere. adequately addressed • KfW of Germany technical, managerial, and finances and supports operational risks. In fact, programs and projects projects are often structured that mainly involve to include financing from public sector players bilateral and multilateral in developing institutions, and in many countries and countries there is close emerging economies. cooperation among the donor KfW maintains a agencies. strong emphasis on clean energy-related projects. Electric Utilities Historically, electric utilities This strategy serves Increased competition Under a more competitive in the U.S. have been two strategic policy means that utilities will industry structure, all required to purchase power objectives (in addition to have to find creative new utilities will be looking to from independent power the retention of a large ways of serving the energy develop low­cost producers (IPPs) with customer). First, by taking a needs of customers. This is electricity sources “qualifying facility” status customer “off­ line,” the where CMM projects might wherever they might find (for which many CMM utility will reduce the be valuable: the utility them. CMM projects projects would be eligible). burden on its own might find that the best way might represent relatively While competition in the transmission and to retain a client is to low­cost generating electricity industry has distribution system, thereby provide the client with the sources, and as such reduced IPP business to enabling the utility to defer equipment and financing it might provide a way for some extent, it also might significant investment. This needs to self­generate. The higher-cost utilities to create increased electric type of savings could be utility thus would earn compete in low­cost utility interest in the CMM important in a more profits by financing and regions. market. competitive environment. selling equipment, Second, taking a large load providing O&M services, off­ line will also free-up the and selling backup power, utility’s own generating rather than through the capacity so that it will be traditional method of

www.epa.gov/cmop 27 Specialized Type of Financiers Risk/Return Portfolios Investment Areas Status able to compete for more selling kilowatt­hours. business in new markets. Equipment Vendors/Turnkey Developers Some So far, VAM mitigation or For example, equipment/technology energy-recovery Biothermica is vendors/providers are also technologies are the first developing a project planning to provide full in this market niche. using their VAM turnkey service, including oxidation technology at carbon financing for a Walter Energy mine in offsets/emissions avoided. Alabama, including a negotiated deal for carbon credits (see page 17). Carbon Financing Carbon financing has been Regulatory There are currently an important source of (compliance) 84 CMM projects project revenue in some markets: registered under the countries, and is closely • Kyoto Protocol—Clean CDM/JI. Of those, 67 considered part of the Development have produced CERs or overall project financing Mechanism (CDM) and ERUs, and total and economics. Joint Implementation (JI) CER/ERU production Internationally, China, • European Union from those facilities is Ukraine, and Poland have Emissions Trading 69.7 MtCO2e through benefited from the Kyoto Scheme (EU ETS) May 2018 (see markets. The California http://www.cdmpipelin Cap-and-Trade program • California Cap-and- e.org/). will be driving new Trade MMC protocol development of CMM Voluntary markets: projects in the U.S. In • Verified Carbon addition, there remains an Standard (VCS) active voluntary carbon • American Carbon market, and some Registry (ACR) participants choose to • Climate Action Reserve trade in these markets. (CAR) • Over­the­counter (OTC) For a detailed summary of offset/carbon credit carbon funds, visit scheme involving https://climatefundsupdate retailers, wholesalers, or .org/. aggregators; and brokers.

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Appendix D: Resources

Selected References http://www.worldbank.org/en/topic/climatefin ance. Accessed 6/3/2019. Finnerty, J.D. 2013. Project Financing: Asset- Based Financial Engineering. 3rd Edition. John Selected Organizations Wiley & Sons, Hoboken, NJ. ISBN-13: 978- The American Carbon Registry (ACR) is a 1118394106. nonprofit offset program operated by Winrock Niehuss, J.M. 2015. International Project International. Founded in 1996 as the first Finance in a Nutshell. West Academic private voluntary offset program in the world, Publishing, St. Paul, MN. ISBN: 978-1-62810- ACR is also an approved Offset Project 134-8. Registry (OPR) for the California Cap-and- Trade program. ACR has 18 years of Razavi, H. 2007. Financing Energy Projects in experience in the development of rigorous, Developing Countries. 2nd Edition. ISBN 978- science-based carbon offset standards and 1-59370-124-6. methodologies; as well as operational UNECE. 2016. Best Practice Guidance for experience in carbon offset project Effective Methane Drainage and Use in Coal registration, verification oversight, and offset Mines. Second edition. ECE Energy Series issuance (see No. 47. United Nations Economic Commission http://americancarbonregistry.org/). for Europe, Geneva, Switzerland. December. The California Air Resources Board Available: (CARB) cap-and-trade program is a key https://www.unece.org/fileadmin/DAM/energ element in California’s climate plan. It sets a y/cmm/docs/BPG_2017.pdf. Accessed statewide limit on sources responsible for 6/3/2019. 85 percent of California’s GHG gas emissions, UNEP DTU. Welcome to the UNEP DTU CDM/JI and establishes a price signal needed to drive Pipeline Analysis and Database. 2015. long-term investment in cleaner fuels and Copenhagen, Denmark. United Nations more efficient use of energy. The program is Environment Programme DTU Centre on designed to provide covered entities the Energy, Climate and Sustainable flexibility to seek out and implement the Development. Available: lowest-cost options to reduce emissions. On http://www.cdmpipeline.org/. Accessed July 1, 2014, CARB’s Mine Methane Capture 11/24/2015. (MMC) Protocol took effect, allowing offsets generated from mine methane projects to be EPA. 2012. Global Anthropogenic Non-CO2 traded (see Greenhouse Gas Emissions: 1990–2030. http://www.arb.ca.gov/cc/capandtrade/capan EPA 430-R-12-006. U.S. Environmental dtrade.htm and Protection Agency, Washington, DC. Revised http://www.arb.ca.gov/regact/2013/capandtr December. Available: ade13/ctmmcprotocol.pdf). https://www.epa.gov/global-mitigation-non- co2-greenhouse-gases/global-anthropogenic- The Climate Action Reserve (CAR) is a non-co2-greenhouse-gas-emissions. Accessed national 501(c) (3) nonprofit organization 6/3/2019. representing international interests in addressing climate change and bringing World Bank. 2019. Climate Finance. Updated together participants from the government, April 2. Available: environment, and business sectors. It works to ensure integrity, transparency, and

www.epa.gov/cmop 29 financial value in GHG emissions accounting U.S. economy and the environment. EIA and reduction. It also offers an approved administers the Voluntary Reporting of Offset Project Registry (OPR) for the Greenhouse Gases Program, established by California Cap-and-Trade program (see Section 1605(b) of the Energy Policy Act of http://www.climateactionreserve.org/). 1992, which provides a means for organizations and individuals that have The Center for Climate and Energy reduced their GHG emissions to record their Solutions (formerly the Pew Center on accomplishments and share their ideas for Global Climate Change) brings together action (see http://www.iea.org/). business leaders, policymakers, scientists, and other experts to bring a new approach to The Environmental Markets Association a complex and often controversial issue. (EMA) is a trade association for Pew’s approach is based on sound science, environmental industry professionals who are straight talk, and a belief that multiple active or interested in market­based solutions entities can work together to protect the to combat pollution and create a sustainable climate while sustaining economic growth environment. EMA members include large (see http://www.c2es.org/). utilities, emissions brokers and traders, consultants, financiers, members of the press, The Climate Markets and Investment government agencies, nonprofit Association is a trade association focusing organizations, and academics (see on the climate, sustainable finance, and http://www.emahq.org/). services community. Its primary area of interest is incentivizing low-carbon and The Global Methane Initiative (GMI) is a resource-efficient investment through market voluntary, multilateral partnership that aims mechanism, pre-compliance markets, or to reduce global methane emissions and to climate and sustainable finance mechanisms advance the abatement, recovery, and use of (see http://www.cmia.net/). methane as a valuable clean energy source. GMI achieves this by creating an international The Coalbed Methane Outreach Program network of partner governments, private (CMOP) of the EPA is a voluntary program sector members, development banks, whose goal is to reduce methane emissions universities, and nongovernmental from coal mining activities. Its mission is to organizations in order to build capacity, promote the profitable recovery and use of develop strategies and markets, and remove CMM, a GHG more than 20 times as potent as barriers to project development for methane CO . By working cooperatively with coal 2 reduction in Partner Countries (see companies and related industries, CMOP helps https://www.globalmethane.org/). to address barriers to using CMM instead of emitting it to the atmosphere. In turn, these The Greenhouse Gas Reporting Program actions mitigate climate change, improve (GHGRP), administered by the U.S. EPA, mine safety and productivity, and generate collects annual GHG information from the top- revenues and cost savings (see emitting sectors of the U.S. economy, www.epa.gov/cmop). including underground coal mines liberating more than 36.5 million cubic feet per year of The Energy Information Administration methane. The GHGRP is the only dataset (EIA), a statistical agency of the containing facility-level GHG emissions data U.S. Department of Energy, provides from large industrial sources across the policy­neutral data, forecasts, and analyses to U.S. EPA is using this facility-level data to promote sound policymaking, efficient improve estimates of national GHG emissions, markets, and public understanding regarding including the U.S. Greenhouse Gas Inventory. energy and its interaction with the

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The data are public and can be found on Its activities on recovery and use of methane multiple EPA websites listed at reduce the risks of explosions in coal mines http://www.epa.gov/ghgreporting/ghg- (see reporting-program-data-sets. For more http://www.unece.org/energy/se/cmm.html). information, visit Founded in 1992 in the context of the Earth http://www.epa.gov/ghgreporting. Summit in Rio, and based in Geneva, The International Emissions Trading Switzerland, the United Nations Association (IETA) is a nonprofit business Environment Programme Finance organization created to establish a functional Initiative was established as a platform international framework for trading in GHG associating the United Nations and the emissions reductions. IETA’s membership financial sector globally. The need for this includes leading international companies from unique United Nations partnership arose from across the carbon trading cycle (see the growing recognition of the links among http://ieta.org/). finance and environmental, social, and governance challenges; and the role financial The Project Developers Forum (PDF) is a institutions could play for a more sustainable collective voice to represent the interests of world (see http://www.unepfi.org/). companies developing GHG emissions reduction projects in international markets Verra supports climate action and sustainable under the CDM, the JI, and other carbon development with standards, tools, and emissions reduction schemes and programs. programs that assess environmental and The PDF is incorporated and its primary aims social impacts, and enable funding for are to improve the efficiency, legitimacy, and sustaining and scaling up these benefits. It is functioning of the regulatory systems one of three approved registries for the governing the development and use of California Cap-and-Trade program and also emissions reduction projects, and update and serves as a registry for voluntary credits (see support independent standards and codes of http://www.verra.org). conduct in order to further improve the Under partnership between the World integrity of the industry (see http://www.pd- Resources Institute and the World forum.net/). Business Council for Sustainable The United Nations Economic Development, the Greenhouse Gas Protocol Commission for Europe (UNECE) Group is a widely used international accounting tool of Experts on Coal Mine Methane is a for government and business leaders to subsidiary body of the Committee on understand, quantify, and manage GHG Sustainable Energy that promotes the emissions (see http://www.ghgprotocol.org/). reduction of GHG emissions from coal mines.

www.epa.gov/cmop 31 Appendix E: CMM Project Lending Evaluation Checklist

Project Overview Project Feasibility and Contractual Documentation • Project description

• Business plan • Project implementation schedule, showing target dates for achieving essential project • Project financial projections including all milestones assumptions • Feasibility studies, and technical and • Description of principal project risks and market reports (sufficient to demonstrate risk mitigation analysis project’s technical feasibility), with • Financing plan with detailed sources and detailed information including: uses of funds (e.g., equipment, financing ‒ Anticipated gas flow rate costs) (e.g., Bcf/day) ‒ Project cost breakdown ‒ Projected gas quality (i.e., percent ‒ Evaluation of equity or collateral methane and range) contributed (e.g., cash, prepaid ‒ For projects at active coal mines: development expenses) projected mine life, description of ‒ Leverage (i.e., financing provided by mining plan (e.g., seams to be mined, borrower and financing requested) planned production levels, seam • Carbon finance plan (if applicable) depth) including mine maps ‒ Planned investments for CMM and Borrower Information documentation about projected capital, • Corporate documents (e.g., Articles of operating, and maintenance costs; and Incorporation, Partnership Agreement, expected performance LLC Articles, operating agreement) • Contractual flow chart (i.e., project participants and contracts) • Relevant experience in CMM project(s) and related technology • Environmental assessment

• Resume(s) of project development staff • Description of project contracts (i.e., project contracts to be included such • Audited financial statements as construction contract), especially (e.g., balance sheet, income statement, agreement with mine owner/operator (for cash flow) – year-to-date, plus two– projects at active coal mines), and all three previous years, if available agreements with surface owners and • Three­year pro forma financial statements documentation of rights to the CMM demonstrating anticipated results or • Background information on each of the expected impact of proposed transaction project participants, including financial • Corporate tax returns (most recent two– information. three years) may be required from project developer

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Appendix F: Glossary

Note: terms with an asterisk (*) are present value (NPV) of the project]. The presented as defined by the World Bank discount rate used to make this calculation Carbon Finance Glossary of Terms.30 represents the investors’ cost of capital. If a project’s NPV is positive, then the project is Additionality*: According to the Kyoto deemed capable of yielding the minimum Protocol, greenhouse gas emissions required return. reductions generated by Clean Development Mechanism (CDM) and Joint Implementation Emission Reduction Units*: A unit of (JI) project activities must be additional to emissions reductions issued pursuant to Joint those that otherwise would occur. Implementation. This unit is equal to one Additionality is established when there is a tonne of carbon dioxide equivalent. positive difference between the emissions European Union Allowances (EUAs)*: The that occur in the baseline scenario and the allowances in use under the European Union emissions that occur in the proposed project. Emissions Trading Scheme. An EUA unit is Broker/Trader: A party that mediates equal to one tonne of carbon dioxide between a buyer and a seller (e.g., for the equivalent. sale of carbon offsets). Internal Rate of Return (IRR): Discount Carbon Finance*: Resources provided to rate at which the net present value of the projects generating (or expected to generate) project’s net cash flow is zero. In other greenhouse gas (or carbon) emissions words, it is the rate that equates the present reductions in the form of the purchase of such value of future cash flows with the initial emissions reductions. capital investment. The expected IRR on a project can be compared to return rates on Certified Emission Reductions (CERs)*: A alternative investment opportunities. unit of greenhouse gas (GHG) emissions reductions issued pursuant to the Clean Joint Implementation*: Mechanism Development Mechanism of the Kyoto provided by Article 6 of the Kyoto Protocol, Protocol, and measured in tonnes of carbon whereby a country included in Annex I of the dioxide equivalent (tCO2e). One CER United Nations Framework Convention on represents a reduction of GHG emissions of Climate Change (UNFCCC) and the Kyoto one tCO2e. Protocol might acquire Emission Reduction Units when it helps to finance projects that Clean Development Mechanism*: The reduce net emissions in another industrialized mechanism provided by Article 12 of the country (including countries with economies Kyoto Protocol, designed to assist developing in transition). countries in achieving sustainable development by permitting industrialized Retailer: Refers to parties who sell relatively countries to finance projects for reducing small amounts of carbon offset credits to greenhouse gas emissions in developing individuals or organizations and have countries and receive credit for doing so. ownership of a portfolio of credits.

Discounted Cash Flow Method: The sum of Renewable Energy Certificates*: Tradable a project’s net cash flows over the project’s environmental commodities in the U.S. that life is discounted to the present [i.e., the net represent proof that 1 megawatt-hour of electricity was generated from an eligible

30 renewable energy resource. http://siteresources.worldbank.org/INTCARBONFINANCE/ Resources/64897_World_Bank_web_lower_Res..pdf

www.epa.gov/cmop 33 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 guaranteed performance levels.

Verified Emission Reductions*: A unit of greenhouse gas emissions reductions that has been verified by an independent auditor. This designates emissions reductions units that are traded on the voluntary market.

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