Carbon finance cannot be successfully applied to every project that sells cookstoves. The project screening tool can be used to make an initial assessment of whether your improved cookstove project is eligible for carbon credits, and if developing a carbon project is likely to be financially viable. If the results from the project screening tool are favorable, the next step would be to make a detailed feasibility study for your project, including developing your own financial model.
This section will provide background information and tips to help in the design of a feasibility study for a cookstove project. Evaluating the feasibility of a cookstoves carbon project requires a careful review of the project design, the technology, and the requirements to participate in carbon markets. Feasibility assessments also strengthen project management and improve project planning.
Feasibility studies can be organized in a variety of ways, we will use three broad areas of assessment:
- Technology assessments
- Sales approaches and marketing techniques
- Record keeping, tracking sales, data management systems
Information from these three areas of assessment is then used to build a financial model to describe the project.
The Financial Model
A quality feasibility assessment must include a carefully constructed financial model that paints a picture of how money will flow through a project using estimates of key project parameters (such as each stove’s lifespan or the future price of carbon credits). These variables are carefully estimated and used to build a financial model, which forecasts all the costs and revenues associated with the project over time. With this forecast, a project developer can understand essential information such as how much money will be required to start the project, at what future price of carbon the project will break even, etc.
The financial model is then be tested with different sets of assumptions about the future such as the quantity of stoves distributed, the quantity of stoves that can be tracked (and the associated costs of tracking), the fuel the stoves will save, stove durability, stove appropriateness, and appeal of the stoves.
A project financial model should accurately predict the costs of operating the project and the revenues that the project will generate.
Tips for Financial Modeling:
- Cover at least the number of years that the project will generate carbon credits, i.e. at least 7 or 10 years.
- Estimate the important parameters listed below at least annually, or as often as monthly. Make realistic or conservative assumptions about the possible changes of important parameters as the project unfolds.
Model Testing: The financial model should be built with the understanding that the predictions we make are unlikely to be exactly accurate. With this in mind, the model should be tested according to the following key assumptions (this is called “sensitivity analysis”, to see how sensitive the financial results are to different changes):
- The number of credits each device will create in a year
- The number of devices the project will distribute
- The time required to generate and sell carbon credits
- The cost of operating the program
- The price at which the credits will ultimately be sold
These key parameters can be difficult to estimate and should be broken into manageable sections to facilitate the assessment. The parameters associated with a project can be grouped into Technology and Product Performance, Distribution Assessment, and Operational Capacity Risk.
Technology and Product Performance
To assess the stove’s potential to reduce greenhouse gas emissions, it is important to understand the performance of the technology in comparison to that of the baseline technology. Assessments of stove durability, adoption by target end users, and fuel type will also be key factors that drive emission reduction estimates, and should be taken into account in the evaluation of the technology for carbon crediting.
- Performance: The performance of a stove is the main factor in assessing the potential to generate carbon credits, and there are various ways to assess performance:
- The efficiency of a stove can be tested in a laboratory by performing a Water Boiling Test (WBT). The efficiency of the improved stove can then be compared to the efficiency of baseline stoves, either by conducting similar tests on baseline stoves or assuming a 10% efficiency for unimproved stoves.
- Alternatively the performance of the technology can be measured in the field in comparison to baseline technologies using a Controlled Cooking Test (CCT) or;
- Kitchen Performance Test (KPT), which measure the amount of fuel used to meet certain cooking requirements.
A comparison between the performance of the project technology and that of baseline technology can be used to estimate the emission reductions per technology. In early stages of testing, stove performance may be evaluated by surveys and user perception, however these methods are less accurate and thus, as the project progresses, the above tests will need to be conducted.
- Acceptability/Adoption: The project developer should assess end-users’ perceptions of the stove and estimate the adoption and drop-off rate of the technology. This can be done by surveying the percent of aging technologies still in operation or assuming drop-off rates of the stoves from previous studies of similar technologies in similar contexts.
It is important to test technologies in the field and survey end-users as to their perception of the stove in order to ensure that technologies are locally appropriate. It will also be important to identify if end-users will use the technology for all cooking needs. If users only use their stove for certain cooking needs, emission reduction calculations need to be adjusted accordingly.
- Durability: The durability or lifespan of the stove will need to be estimated to evaluate the period of time over which each technology will be generating emission reductions. Durability can be tested in a laboratory using various techniques, or monitored in the field, if the technology has been disseminated to end users in the past. See Cookstove Durability Testing (Webinar PDF)
- Fuel Type: Consideration of the type of fuel used in the baseline and project scenarios will also be factors that project developers will need to take into account, as baseline and project fuel types will influence the amount of emission reductions generated by a technology per year.
An assessment of whether a project can achieve distribution numbers at the projected cost is a key component to any feasibility assessment. Key factors to be considered are:
- Market Size: How big is the market for the product being introduced?
- Product Attractiveness: Does the product have shelf-appeal?
- Willingness to Pay: How till people pay for the stove?
- Competitive Analysis: Are there competitors that have, or might bring similar products to market?
The distribution assessment should assess the probability that the number of products distributed will meet project requirements. By answering the above questions, your assessment should identify whether there is an adequate market for your product, the degree of market saturation, whether customer interest and awareness is sufficient, and if there is sufficient willingness to pay (in the event that this is not the case, there will need to be adequate consumer financing mechanisms in place to facilitate adoption).
Operational Capacity Assessment
Accurate record keeping is critical to ensuring that a project will be able provide verifiable evidence as to the number of technologies that have been distributed under the project, and that no double counting of technologies has taken place. This is to preserve the integrity of carbon credits being claimed.
It is essential that systems are in place to track sales and end-user information. All financial transactions across the entire supply chain should be documented and recorded. Additionally end-users’ information will need to be tracked, along with each end-user’s detailed contact information to ensure that they may be located during monitoring. It is the use of cookstoves by individuals that generates carbon credits. Therefore, the carbon credits generated by cookstove are first owned by the users of those stoves .
In order to aggregate those rights to make a carbon financed cookstove project possible, end users must be informed that the ownership rights to the emission reductions generated by their use of the cookstove are being transferred to the project developer in exchange for the stove being made available to them. This should be clearly communicated and documented to demonstrate that end-users are aware emission reductions are being claimed by the project developer. Examples of methods to communicate that the project developer is claiming the rights to carbon emissions include signed carbon right waivers, leaflets communicating that by purchasing the cookstove the end-user is agreeing to waive their rights to emission reduction, or community meetings, but project developers should select the most locally appropriate method. When selecting a method to communicate emission reduction rights project developers should take into account the target population’s literacy, education level, local language, as well as any other factor that may prevent end-users from understanding the rights to emission reductions.
In addition to informing end users that the emission reductions from the technologies will be claimed by the project developer, there will also need to be evidence that all participants along the supply chain are aware that they cannot claim the rights to the reduction in greenhouse gas emissions generated by the technology. This can be achieved through a variety of methods including contractual agreements or carbon rights waivers, but the project developer should select a method that is locally appropriate and which clearly communicates ownership rights to emission reductions generated by the project technology. All records should be accurate and verifiable. In addition to the waiver of rights by end users, there will also need to be evidence that all participants along the supply chain are aware that they cannot claim the rights to the reduction in greenhouse gas emissions generated by the technology (a Carbon Rights Waiver (CRW) can be used for this purpose). All records should be accurate and verifiable.
There are different stove tracking requirements for CDM or Gold Standard which should be taken into account when assessing tracking systems for a project. Below is an outline of the requirements, but when assessing the feasibility of a carbon project it is recommended that each sale is recorded along with detailed end-user information. All data should be stored electronically in a master database as well as in hard copy form. Where database systems are lacking, these resources should be planned for and established in advance of project implementation.
|CDM Tracking Requirements||Gold Standard Tracking Requirements|
Project developers should consider that all technologies sold or distributed may not be eligible for crediting. This will depend on the crediting date and the nature of the project documentation (for example if particular technologies or geographical areas are specified). There are also various tracking and record keeping tools and software which project developers can use to organize and track technologies. Examples of software options include Excel, Quickbooks, Keep and Net Suite. Projects should be sure to estimate the cost of tracking and record keeping (including man hours, tracking software, etc) to ensure that these are fully supported by the project budget.