Back in the early-to-mid 2000s, the major hurdle for new incinerator projects in the UK was to obtain planning consent. Interest in advanced conversion technologies (ACTs), which include various forms of gasification and pyrolysis, swelled as they appeared to address some of planners’ key concerns: they were perceived to result in lower emissions of particulates and dioxins (as a result of higher process temperatures) than incinerators, and could be built at smaller scale.
A number of new market entrants sought to develop ACT plant across the country, largely via competing in local authority procurement processes.
However, most failed to attract the investment required and were abandoned. The reasons are various, but perhaps most significant was the lack of proven success in respect of mixed waste streams, which was seen as presenting a technical risk.
Now there is a renaissance of interest in ACTs. Cleantech investors and developers are seeking alternatives to wind and solar photovoltaic (PV) projects, as the early closure of the Renewable Obligation (RO) to these technologies, drastic cuts in the feed-in tariff (FiT) and exclusion of the former from the new Contract for Difference (CfD) support mechanism makes them less attractive. By contrast, CfD support is available to ACT projects: in the first CfD auction round three projects received offers of contracts; and the government has just confirmed that ACT projects will also be eligible for the April 2017 CfD round.
CfD support levels are set by auction, but the upper limit (or ‘administrative strike price’) for ACT is £125/MWh, payable only on electricity generated from the biomass fraction of the feedstock.
This is significantly greater than the current price of power which might be received by an operator via a power purchase agreement (PPA) with a supplier. It also exceeds the level of support which was available to ACT projects under the RO.
Incineration projects can bid for CfDs, only if they meet the criterion for good quality combined heat and power (CHP). No such stipulation applies to ACT. Few UK incineration facilities have been able to find an appropriate, bankable long-term heat offtaker, so most are ineligible for CfDs.
If an ACT benefits from CfD support, it potentially reduces the gate fee needed to make the project profitable, and offers the opportunity for greater project revenues. As waste to landfill diminishes, it could enable them to out-compete incineration facilities and those ACT plant without a CfD.
For the April 2017 auction, ACTs will remain in the ‘less established’ technologies ‘pot’, alongside offshore wind, biomass CHP, tidal and geothermal energy. Eunomia’s analysis, using our in-house CfD pricing model, suggests that some ACT projects may out-compete all of these technologies, including offshore wind, and are thus likely to secure subsidy.
BEIS has placed a 150MW cap on the ‘fuelled’ projects (which includes ACTs and biomass combined heat and power (CHP)) that the CfD round will fund. High-level assumptions suggest this equates to around 1.5 million tonnes of ACT capacity.
Government has also recently highlighted the potential for ACTs to produce synthesis gas (‘syngas’) which could be used in industrial heat, transport fuel, injected into the gas network, or for higher value applications including the manufacture of chemicals. It has therefore suggested that the CfD (which incentivises electricity production) might not be the most appropriate support mechanism for ACT, and has asked for views on how the CfD scheme could be used to promote the development of innovative ACT projects which will help develop a ‘circular economy’ using waste as a fuel.
It is no secret that ACT facilities are easier to operate when supplied with a consistent, homogeneous feedstock. Globally, ACTs have so far been far more effective, with less downtime, when utilising wood as a feedstock – whether virgin material or waste. However, the vast majority of UK ACT facilities currently being developed are designed to use waste derived fuels, largely due to the high associated gate fee that operators can charge.
There are two types of waste derived fuels: refuse derived fuel (RDF) and solid recovered fuel (SRF). The former generally refers to residual (household or commercial) waste that has undergone some form of pre-treatment, such as removing metals for recycling, shredding and potentially baling for transportation. The latter is a feedstock which has been produced to a stringent specification, typically covering calorific value, chlorine and ash content.
Investing in SRF
ACT plant are best suited to SRF, but its production requires investment in specialist mechanical equipment. For new, unproven plant, finding a contract with a third party supplier to produce SRF to a specification will often entail accepting lower gate fees and potentially severe penalties for non-acceptance.
Some developers have invested in their own pre-treatment equipment; but this brings its own risks, as significant volumes of ‘reject’ material may still need to go to landfill or RDF, which must be paid for by the operator.
Alongside technical considerations, the availability of feedstock (specifically residual waste for RDF or SRF production) is a critical piece of an ACT facility’s project development jigsaw. The future availability of residual waste for a given ACT plant depends on a number of factors including potential growth in total waste arisings, future recycling rates, how much competing capacity is developed and the ability of the ACT facility to compete for feedstock on price. With around three million tonnes per annum (tpa) of RDF being exported from England and Wales to thermal treatment facilities in continental Europe, it is no longer sufficient to look at the UK position alone.
The availability of residual waste determines the gate fee which might be charged by an ACT facility. Lenders need to have confidence that sufficient feedstock (at the right gate fee) will be available for the full period over which debt is repaid, which might be 10 to 15 years or more.
Going it alone
While the prospect of greater returns from CfDs (or the RO) is attracting new investors to ACT projects, Eunomia’s financial modelling demonstrates that some UK projects can generate sufficient revenue from gate fees and electricity sales alone so as to be attractive without any government support. Consequently, while the forthcoming CfD auction will be critical for some projects, not all that fail in the auction will be ruled out.
There are 12 ACT facilities either operational, or under construction across the UK. In the absence of new forms of support or significant market or technical changes, though, the rate of construction is likely to slow. While over five million tonnes of ACT capacity has been granted planning consent, much of this has been unable to reach financial close for several years as a result of perceived or real technical and/or feedstock risks.
Despite the renewed interest in ACTs, recent developments are threatening investor confidence. Prominent ACT developer Energos has recently entered into administration, but the company’s troubles appear to be more down to cash-flow (associated with
trying to concurrently deliver several UK projects) than the sort of technical issues that drove the former Air Products’ gasification plant on Teesside to cease operations this year.
Nevertheless, there are several indications that the investment landscape may become more favourable. The weakening pound has raised the gate fees at continental incinerators, making domestic facilities more competitive – at least in the short term. Meanwhile, Brexit calls into question the UK’s commitment to current and future EU waste rules. If this leads to lower than projected recycling rates, more residual waste would be available for treatment.
Should several of the plant currently under construction successfully operate in the near future, investor interest is likely to grow. Lenders may become comfortable with the technical risk of ACT and the likelihood of securing sufficient feedstock at attractive commercial terms. Even if CfD auctions beyond April 2017 were to be closed to non-CHP ACTs, the sector may be able to generate interest and confidence in the other forms of energy generation that ACTs can offer.
Although ACTs have had a rough ride, their future may be brighter. Overcautious investors could lose out if they prove to have written them off just as they are reaching maturity.
Eunomia published a special report called ‘Investment in Advanced Conversion Technologies’ in November 2016 which looks at whether the time for ACT has finally arrived. It offers a market overview, key considerations for developments and a summary of current ACT key players. The report is available at http://www.eunomia.co.uk/reports-tools/investment-...