Chinese offset developers are growing increasingly concerned that regulators may reject a number of domestic projects awaiting approval as government experts show closer scrutiny.
The expert committee advising the market regulator on project approvals has issued comments to several developers suggesting the government will impose stricter demands on issues such as IRR levels and exaggerated CCER price expectations.
“The review criteria … are becoming more and more strict,” said one technical expert with a project developing firm who asked not to be named.
The new guidelines aim to ensure China’s nascent carbon market is not flooded by offsets from unviable projects or schemes with dubious environmental integrity. They resemble additionality rules used in the CDM, but have not been applied to China’s domestic market before.
Among the issues developers are now being warned against is exaggerating expected revenue from CCER sales, which many projects do to achieve benchmark IRR levels.
Sources said most new projects file applications based on earning around 80-120 yuan ($12.90-19.30) per offset, several times higher than the 18-25 yuan those projects actually earn in the market.
Even pre-CDM projects, whose offsets trade at only 5-8 yuan because they are ineligible in four of the seven pilot markets, use similar levels.
“There isn’t any rule about the setting of the predicted CCER price. However, 80-120 RMB is much higher than the real market price. And the NDRC experts all know it,” another developer said.
Failure to meet the IRR benchmark would mean government rejection, according to one note recently issued by the committee, seen by Carbon Pulse.
Projects exceeding the IRR benchmark would not be approved as they would not need carbon finance to be profitable.
EARLY INDICATION
The tighter rules have not been communicated officially and it remains uncertain how strictly they will be enforced.
Developers said a meeting scheduled for Apr. 2, where the regulator will rule on 40 project applications, will give an indication on what to expect.
“The projects that will be discussed at the project review meeting were submitted a long time ago. I think many of them would fail to reach the benchmark even with CCER revenue (of 60-70 yuan),” a third source said.
Several sources said small-scale projects in particular could find it hard to win approvals with the new rules, especially solar and hydro projects.
The root of the problem for developers is China’s slowing economy, which has brought falling power demand and makes it harder for newcomers to enter the rigid, inflexible power market.
The slowdown has also caused banks to tighten their credit lines and raise interest rates, making it even tougher for offset projects to demonstrate their financial viability.
SUPPLY DENT
If implemented strictly, the new guidelines would put a dent in CCER supply to the Chinese market by stopping some of the roughly 500 projects currently in the pipeline from ever coming to market.
The regulator has issued around 14 million CCERs so far, but almost all of them are pre-CDM offsets, which are ineligible in Beijing, Chongqing, Guangdong and Shanghai.
A fifth market, Hubei, is considering to only allow them if they are generated within the province, leaving Tianjin and Shenzhen as the only possible pre-CDM CCERs takers at the moment.
For the rest, there is virtually no offset supply.
By Stian Reklev – stian@carbon-pulse.com
