Cleantech Investor

First published in Cleantech magazine, November/December 2007. Copyright Cleantech Investor 2007

EcoSecurities downgrade

EcoSecurities shares lost almost half of their value in early November on a warning from the company that delays in the Clean Development Mechanism (CDM) project cycle will hit this year’s revenues and earnings. The problems, specifically the pace of CDM project registration and Certified Emissions Reduction (CER) issuance, have been a cause for concern for some time. Now, however, EcoSecurities has noted a further slowing of activity in conjunction with a growing tendency for projects to be referred for review by the CDM Executive Board (CDM-EB). As a result, the pace of CER issuance by the CDM-EB is slowing.

EcoSecurities has the largest portfolio of projects currently registered in the CDM, so is perhaps the worst hit of the quoted carbon companies by the bottlenecks being experienced at the CDM-EB. The company revised down its gross contract volume to 142 million CERs (as at 31 October) from 185 million CERs (at 5 September). On a net basis, the CER portfolio to 2012 was adjusted to 130 million tonnes at 31 October, from 163 million tonnes at 5 September. The average cost of the CERs in the portfolio is €6.49 compared to €6.76 at 5 September.

The negative implications for earnings are driving EcoSecurities’ focus on alternative ways in which to monetise the portfolio of carbon reduction projects outside of the CDM framework, such as sales into the VER (Voluntary Emissions Reduction) market. Projects which have been delayed or removed from the CDM portfolio may still be eligible for voluntary carbon markets.

The implications for the valuation of the shares was exacerbated by EcoSecurities’ high level of operational gearing. The company has traditionally adopted an aggressive approach to forward selling, in contrast to some of the other operators (notably Trading Emissions, which has been conservative). EcoSecurities had sold forward 35.5 million CERs at the end of October. It has contractual obligations to deliver 28.7 million CERs from 2008 to 2013, while the current inventory stands at just 0.5 million CERs (although even after the downwards revision the project portfolio still stands at 142 million CERs).

One large shareholder, Aegon, had been a seller of EcoSecurities’ shares before the announcement, creating a stock overhang which contributed to the downward pressure on the share price. However other institutions have been buyers of the shares at lower levels, including Morgan Stanley and UBS.

Trading Emissions

Trading Emissions (TEP) has been selected to provide carbon offsets to the UK Government Carbon Offsetting Fund (GCOF). The contract, negotiated on behalf of TEP by EEA Fund Management Ltd, requires that TEP will sell 255,000 tonnes of CERs to GCOF at £9.76p. GCOF has an option to purchase a further 50,000 tonnes of CERs from TEP’s portfolio of small-scale renewable energy and energy efficiency CDM projects. The CERs, when acquired, will be cancelled, thereby offsetting the emissions from the central government’s air travel.

Agcert

Agcert has reportedly notified other carbon companies that they may be infringing upon its patents and that it is seeking to gain a licensing fee for the use of its technology. The patents, which were filed in 2002 and 2003, are pending in the US and are said to refer to methods of aggregating and transferring carbon credits and the “serialisation of emissions credits resulting from those reductions”. The company has stated that it will take the issue to court if the companies it has notified fail to provide compensation.