Maximising the value in energy from waste projects

Written by: Nick Churchward | Published:
Nick Churchward, partner in the energy team at Burges Salmon

In all its forms, Energy from Waste (EfW) remains an essential part of the UK's waste management strategy. It has an important role to play in helping the UK unlock the benefits of a decarbonised economy.

This is all very well but continued investor confidence in the sector is vital for continued growth.

On one hand, there are a number of stories in the public domain of operational waste sector PPP/PFI projects in or nearing distress, restructuring or litigation of some kind. Whether the cause is budgetary, performance related or something else, rightly or wrongly, this can dent general confidence in the sector.

The merchant market has not been without its casualties. However, an increasing number of funders and investors (and their advisers) have a more sophisticated understanding of merchant waste sector risks. Deal flow shows that new recycling, waste to energy and fuel processing plant is being backed.

This and the continued interest in consolidation and restructuring opportunities in relation to fuelled renewables projects, as well as in the waste sector more generally, indicates the level of confidence in the sector.

This summer's Tolvik report commented that "the recent strengthening of the residual waste market (both in terms of tonnages and gate fees) and the successful financing of key projects has led to a renewed interest in larger scale EfW facilities."

With the many political and economic challenges ahead - and the potential to impact the waste sector - we are at an interesting juncture for EfW projects in the UK. There remains the opportunity for value creation but (like all good things) this is not without its difficulties.

Assuming that later this year the government implements its planned refresh of the non-domestic Renewable Heat Incentive, some higher tariffs will be available for waste based biogas and biomethane projects in the run up to 2020.

Bidding in the second CFD auction is nearly upon us. While we hope for some success for waste technologies, bidding against off-shore wind for the available funding will be challenging. The renewable transport fuel obligation regime can offer an alternative revenue stream for biogas producers.

While waste fed renewable energy technologies remain eligible to some of the (for now) available subsidy revenue streams, competition is fierce and the direction of travel continues towards fewer energy based subsidies being available to support the development of new EfW projects. So to create value, the sector is continuing to innovate.

Arguably, one of the positives coming out of the various policy tools that have restricted the availability of subsidies (including the CFD) has been the incentives of projects to cultivate viable, long-term industrial energy off-takes.

In relation to heat infrastructure, while many fuelled renewables plants have had to develop their own private connections, more financial support is now available from the Government for heat infrastructure development. Local authorities now often pick up the baton on developing local networks.

On the demand side of the meter, large energy users have been dealing with year-on-year increases in their electricity bills – with no end in sight. Much of this increase is down to non-energy cost rises (rather than wholesale energy prices) – fuelled by the pass through of renewable energy subsidy and grid charges.

Industry forecasts show this is not about to change, creating an opportunity for waste to energy. Larger energy users are looking for greater certainty over the wholesale costs and to take some of their energy supply off grid, avoiding non-energy charges altogether. As a result, corporate PPA and private wire structures have gained credence and EfW technologies are benefitting.

As generators of baseload, renewable power, these heat and power structures seem to be some of the most encouraging developments for waste to energy plants. It’s always easier to just export to grid but in a more challenging revenue environment, these structures can offer the potential for alternative long-term stable cash flows.

With the right counterparty, they can provide fundable project revenues. They can also play their part in realising wider benefits as we all get used to implementing more circular economy practices.

Delivering value is likely to mean a combination of ensuring that assets are more efficiently operated, financed and packaged so that value within existing projects is not lost. For new projects, the challenge will be to identify and deliver cashflows that can form part of the revenue stack to make new projects viable in the 'low subsidy' or 'no subsidy' world.

To download our Guide to Operational Waste Projects, or find more information on corporate PPAs, heat supply and private wire, please visit www.burges-salmon.com/energy

Nick Churchward is a partner in the energy team at independent UK law firm Burges Salmon and head of the firm's resource and waste Management team.


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