Cash into trash: Energy recovery projects turning investors’ heads
The UK waste management sector continues to present attractive opportunities for investors and a number of energy-from-waste (EfW) projects have been backed by huge investments in the past few years. Here, Alon Laniado explores what causes investors to dig deep into their pockets.
In energy from waste (EfW), we expect to see further funding available for waste plants treating fuels such as refuse derived fuel (RDF), wood waste and other biomass as well as food waste.
A more expensive export market combined with landfill taxes, subsidies and other regulations aimed at contributing to EU environmental targets and to UK energy policy, implies that EfW in the UK is becoming more viable and therefore more fundable.
The landfill diversion regime coupled with rising raw material prices and the emergence of new recycling technologies, offers exciting opportunities for treating more complex waste streams including, rigid plastics, glass and valuable e-waste.
Beyond this favourable macro picture, several stars must align in order for projects to attract investments and to hopefully deliver on their promise.
That’s because new investment opportunities also present new challenges in comparison to more traditional, private finance initiative (PFI)-type projects.
Commercial and industrial
New projects often focus on commercial and industrial as well as construction waste, whose contracts are usually shorter which means there is less visibility on feedstock availability and prices.
Similarly, novel technologies are often required to treat new waste streams and to benefit from higher Government subsidies.
Successful investment models therefore aim to strike an adequate balance between interdependent factors such as feedstock strategy, plant design, technology choice, engineering, procurement and construction (EPC) arrangements and wider revenue streams in a way that effectively balances risks and rewards for all project partners.
For example, getting reassurance on feedstock is not just a question of securing a long-term contract. Firstly, it depends on choosing a strategic site location with a good supply of local feedstock, as cost of haulage plays an important factor in preventing waste to travel beyond a catchment area and therefore in providing visibility on feedstock.
A long-term feedstock contract has little underlying value if the waste supplier cannot sustainably secure the waste stream.
Secondly, investment models consider the optimal plant size, balancing the benefit of scale economies against the need to secure sufficient feedstock. Some companies opt for a smaller plant to ensure it can obtain permits to be located nearby a waste producer.
Thirdly, firms also ensure the proposed plant is sufficiently flexible in anticipation of certain trends, such as change in feedstock composition or changes to the relative attractiveness of certain waste streams.
Fourthly, it depends also on successful models to develop long-term relationships with feedstock suppliers by involving them as partner in the project or as consumers of the plant’s output.
Once a robust feedstock strategy has been developed, contractual arrangements depend on several factors that must be balanced. Long-term contracts with one supplier provide certainty – especially for larger projects which require debt funding.
However, keeping a proportion of feedstock, which is not, contracted lowers dependency on one supplier and allows for potential upsides to be gained.
Councils can also play an important role in unlocking feedstock, thereby promoting projects in their regions.
This includes collection arrangements, in particular the level of separate collection that helps ensure visibility and consistency of feedstock, including projects that aim to source merchant waste.
Beyond feedstock supply, another key pillar in the investment model is the choice of technology and associated construction contract.
In relation to waste to energy, Government support often rewards more advanced technologies. Renewable Heat Incentive (RHI) support for anaerobic digestion (AD) which inject gas to the grid are higher than Feed-in Tariff (FIT) support for electricity-producing AD projects.
Similarly, Renewable Obligation Certificates (ROCs) for advanced conversion technologies such as gasification are also more lucrative than ROCs for more traditional combustion techniques.
However, more advanced technologies are often less deployed and therefore present a larger degree of risk that must be ‘weighed’ against their rewards.
For an advanced technology to gain commercial success, it must first be able to demonstrate references from which investors can draw conclusions. In terms of “how proven” must it be, many project sponsors recognise that advanced technologies are rarely “fully proven”.
For example, some technologies have a reference site, but outside the UK and/or with slightly different waste streams and under different regulations.
In many cases, it is less a matter of whether the technology will work or not but rather the extent to which it will work, for instance in terms of throughput availability.
Project sponsors must therefore take a technical and financial view based on the evidence available, choose technologies where there is a sufficient comfort and then agree a price that works for everyone.
Attractive technologies are those that can take a long-term view on their economic returns and therefore offer sufficiently attractive terms for their earlier projects in order to gain in the long-term. This usually requires being supported by a strong financial backer.
In addition to this, successful advanced technologies also develop effective partnerships with EPC providers. These providers, who are usually required to wrap the performance of a technology as part of their EPC contract, must have time to familiarize themselves with the technology. We also see integration across the supply chain, with some technology providers playing the role of EPC providers.
Moreover, advanced technologies must focus on gaining scale rapidly. More projects on the ground means they are to benefit from scale economies, for example deploy ground staff across several projects, thereby driving cost down across the supply chain and gaining in competiveness.
Alternatives to conventional revenue streams
The economic attractiveness of projects can further be boosted if they are able to secure revenue streams beyond the traditional ones. This is particularly important considering the general trend is towards declining gate fees, implying that projects which are over-reliant on high gate fees are more vulnerable and therefore less attractive.
Waste-to-energy projects that can partly secure private off-take [agreement entered between a producer and a buyer to buy/sell a certain amount of the future production] of the energy produced have an edge against projects than projects that fully inject into the grid.
Similarly, successful niche recyclers try to derive further value from the waste stream. In certain WEEE and plastics streams for example, there exist cost-effective sorting technologies that further sort and separate components to become closer to virgin substitutes and to thereby attract higher output prices.
A final key factor driving investment decision is skill set. Successful projects require a variety of development, technical, commercial and financial expertise to deal with issues such as permits, technical questions during the construction and operations phase and the suite of contractual agreements.
Effective project sponsors are good at identifying which skills they have in-house and which expertise must be complemented, for example by sub-contracting out or by hiring experienced staff.
To develop an attractive investment model, project developers and companies must consider how best to factor these various aspects, including striking a right balance where there are trade-offs to be made.
Investors like Eternity Capital who are sector-focused usually bring more than funding to the table. They can bring specific expertise for example in contract negotiation and experience from similar investments, and therefore usually prefer working closely with the sponsors in shaping successful projects towards financial close.
Once a viable model has been developed, investors also try to repeat it across multiple projects in order to benefit from further efficiencies during project development and from the relationships developed with the various project partners.
Alon Laniado is director at Eternity Capital, a specialist group that provides funding to waste-to-energy specialists and recycling specialists.
This article first appeared in edie’s sister title, LAWR. For more waste industry news and features, click here.
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