CDM Developers Feel the Heat as DOE Fees Hiked

A threefold increase in fees charged by Designated Operational Entities (DOEs) is pushing smaller projects out of the Clean Development Mechanism (CDM), market participants have told Carbon Finance.

Between June and October last year, prices for project validations tripled in some cases, said Belinda Kinkead, head of implementation for London-listed developer EcoSecurities. “It becomes unfeasible to work on projects that don’t have the volume to return the costs,” she said – a situation which is exacerbated by historic lows in secondary certified emission reduction (CER) prices, which has hit developers’ profit margins.

The increases were led by “the big three” – TÜV Süd, SGS and DNV – but others seem to be following, she said. The three firms are responsible for validating more than 70% of the 4,475 CDM projects in the pipeline, according to the latest update from UNEP Risø.

“At COP, both TÜV Süd and SGS said the prices were going up to accommodate the validation and verification manual [VVM],” said Leo Perkowski, Florida-based director of regulatory affairs and quality assurance at AES Climate Solutions. He added that the extra work arising from implementation of the VVM – guidelines for project developers and DOEs adopted by the CDM Executive Board (EB) at the end of November – combined with the suspension of DNV is adding to delays in the project registration cycle. DNV was suspended at the end November for non-conformities in internal procedures. 

(“The workload that has been put on them has meant higher prices,” said Simon Shaw, chairman of London-based EEA Fund Management which acts as an adviser to carbon fund Trading Emissions. He noted that prices now are more than double what they were last year.

Kinkead agreed that the VVM is adding to the DOEs’ workload as, instead of checking for projects’ compliance with the rules, the DOEs are being asked to look for non-compliance and have to justify why the project complies. “If you’re a normal auditor, to the question ‘is the door red?’ you can answer yes or no – for the CDM, the VVM introduces a different element … it’s more of an investigative process.”

Depending on the complexity of the project and methodology, a validation can cost around €25,000 ($33,100), said Kinkead. But she confirmed reports of “express timelines”, where fees can double if the DOE expedites the validation. One source, who asked not to be identified, said that in China some DOEs have charged as much as €90,000 – “that’s the three- or fourfold factor”. This tends to happen more when a project is already operating – and is thus losing potential CERs through not being registered.

“If you look at a project that should yield 100,000 CERs a year, that’s 2,000 CERs a week. At €5 per CER, you’re losing €10,000 a week as long as the project’s not validated,” the source added.

Perkowski also said that some of the increase in prices has been necessary to allow DOEs to pay their staff more, to prevent them being headhunted by the very firms that use the verifiers (“I don’t have a problem paying more to retain good people, but I do have a problem paying more for the VVM,” he said.

Robert Dornau, head of the climate change programme at SGS, defended the fees, and said the increase has mostly been in China due to “supply and demand”. “Prices are more driven by the demand side – the clients – than the DOEs,” he added. “It’s in China where people are willing to pay a premium for getting a priority service.”

However, he did acknowledge that there had been some increase to compensate for the extra work required by the introduction of the VVM and also to build capacity. Javier Castro, head of certification with TÜV Süd, added that the costs are based on the workload: “Changes to the system mean changes to the workload, which means changes to the fees.”