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EcoSecurities’ woes prompt CER rethink

20 November, 2007

EcoSecurities’ dramatic downwards revision of its carbon credit portfolio has caused wider ripples in the carbon market, with some analysts slashing their predictions for the number of certified emission reductions (CERs) expected to be available over 2008–12.

The largest of the listed project developers, EcoSecurities suffered an almost 50% drop in its share price after it released a trading statement on 6 November. It blamed a slowdown in project approvals and credit issuance by the Executive Board of the Clean Development Mechanism (CDM) for a cut in its expected output of CERs by almost a quarter, to 142 million (up to 2012) from the 185 million it estimated at the start of September.

CEO Bruce Usher said: “The CDM registration and issuance process has slowed significantly. This trend is disappointing for the entire carbon market and is restricting CER issuance and our short-term revenues.”

The company said that more projects were being “sent for review” – around 50% now, compared with 10% in May – thus delaying project approvals. Half of all requests for issuance of CERs were now being reviewed, compared with 2% in May.

UBS bank analyst Per Lekander said EcoSecurities “was representative of the overall market” and slashed the bank’s estimate for the entire CER supply in 2008–12 by 20% to 1.6 billion tonnes. With fewer CERs available to buyers in the EU Emissions Trading Scheme, he raised forecasts for EU allowance prices in 2010 to €30 ($44)/t from €20/t, rising to €35/t in 2012.

However, others did not dramatically revise their forecasts. Emmanuel Fages, carbon analyst at Société Générale in Paris, said a slowdown in project registration and issuance was not so surprising, “now that we are entering the stage of the CDM where there are more projects, the projects are becoming smaller, and the methodologies are becoming more complex”.

He predicts 2.5 billion tonnes of CERs to be available in the 2008–12 period assuming that, overall, 70% of today’s project credits will actually be delivered.

Milo Sjardin at analyst New Carbon Finance, said he was surprised by UBS’s readjustment. He estimates that 25% of CER volumes will be rejected overall for current and future projects, and that 2.2 billion CERs will be available up to the first quarter of 2013.

EcoSecurities blamed its troubles on the performance of the CDM’s Executive Board, but others said that project developers should shoulder some responsibility. Axel Michaelowa, a member of the CDM registration and issuance team and co-founder of consultancy Perspectives, noted: “The quality of project design documents [PDDs] is not improving. Normally you would expect project developers to learn from experience. Maybe they should take on fewer projects and focus on getting the PDD right.”

EcoSecurities’ co-founder Marc Stuart explained that, with only 60 months of CER income available to the end of 2012, each month a project is delayed means a 1.5% drop in the expected income for that project. But he stressed the company is on a sound financial footing, holding more than €100 million in cash and carrying no debt.

Institutional investor Aegon sold its entire stake, representing 5% of EcoSecurities’ free float, on 6 November, sending the stock tumbling to £1.375 ($2.03) a share at the end of the day. But equity analysts said the shares had been oversold and, in the ensuing days, the price recovered, rising to £1.965 on 15 November. Analysts at ABN Amro and Dawnay Day gave the stock a buy rating, with target prices of £2.42 and £3.82 respectively.

Another London-listed project developer, Camco, had on 31 October downgraded its portfolio by around 15%, but has not suffered such a dramatic sell-off.

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