Not a waste of money

Written by: Alon Laniado | Published:


Despite uncertainties around government support for energy from waste projects, there are many ways in which the sector can continue to develop and innovate, says Alon Laniado

In recent years the UK energy from waste (EfW) market has seen a significant surge in activity.

A favourable government support regime sat behind the construction of hundreds of facilities, using conventional and more advanced technologies, treating organic material, biomass and black bag waste.

Recent events, however, have put a spoke in the EfW wheel.

In the first place, an increase in plant capacity has shifted the balance of feedstock that is accessible at a decent price.

In anaerobic digestion (AD), developers are finding it more difficult to build new facilities without stepping on someone else’s toes; not least because food waste is often less readily available than anticipated.

Increased competition for food waste in turn makes short-term merchant contracts more difficult to rely on.

In biomass, some question whether a tipping point has been reached now that a sizeable amount of boilers and gasifiers are in place, against the available wood waste and the demands of the export market.

Second and more fundamentally, the EfW industry is faced with significant uncertainties regarding government support for new projects, as reflected by the lack of clarity around the future of contracts for difference (CfDs) that support advanced treatment technologies as well as by the termination of some key subsidies that were fuelling new AD facilities.

Increase in new build?

While some EfW projects are continuing to be developed – including those that can still benefit from the renewable obligation regime in time – a surge in new builds is unlikely unless the government provides more clarity on its future support to the industry. The recent autumn statement provided some clues about the government’s ongoing financial support for new EfW projects, but not sufficiently to draw firm conclusions. For instance, it was announced that the budget for the renewable heat incentive (RHI) would rise to £1.15bn by 2021.

First, this in fact represents a drop of almost 40% against the original plan.

Second, whether or not this will be enough to fund new AD biomethane-to-grid facilities depends on how much of this budget has been committed to existing facilities and on the allocation of any surplus across competing – waste-derived and other – new renewable projects.

Third, any subsidy allocation to new AD facilities will need to be translated into a specific tariff regime and conditions.

Until these issues are clarified in the coming months, a surge in investment in new AD biomethane projects against the slowdown experienced in recent months should not be anticipated.

Similarly, projects using advanced technology to treat black bag waste are effectively put on hold until the date of the next CfD auctions is announced.

Despite this uncertain environment, and perhaps in view of it, other opportunities are being explored by companies and investors which can help the sector develop.

A number of companies have turned their attention to waste treatment operations that are less exposed to UK subsidies. The production of higher quality fuels – refuse derived fuel (RDF) and solid recovered fuel (SRF) – for European incinerators and cement kilns is well under way.

More recent trends include exploring mechanical treatment technologies able to achieve superior recovery rates from black bag waste, refocusing AD on higher-value fertilisers and solutions to process new waste streams such as straw for use in existing EfW facilities as an alternative to traditional organic feedstock.

Innovation can also take place in relatively established parts of the market, for example the development of smaller-scale facilities to process biodiesel that is likely to be more suitable for many local applications.

Consolidation

In the AD market, some operators hoped to build a sufficiently large portfolio of facilities to run cost-effective operations, but may now not be able to in view of government decisions on subsidies.

Some owners are also finding it more complex and difficult to run AD facilities than originally envisaged.

These experiences may trigger a trend of consolidation, where fewer and stronger players either provide operations services to other facilities, or acquire them outright.

There is also room for consolidation among collectors of commercial and industrial waste as well as of construction and demolition waste in many parts of the country where these markets are still fragmented.

Players who have control of larger volumes of waste stream would in turn be in a better position to secure funding to develop further processing facilities in their part of the country.

Getting the most out of collection

While often overlooked, waste collection can be further improved. Lots of food waste that arises from the hospitality sector ends up mingled with other streams, yet there are win-win opportunities to offer savings to waste producers while making more food waste available to AD facilities.

Developing a cost-effective collection solution for food waste is likely to require some form of integrated solution with other waste streams produced by the hospitality sector, e.g. glass or oils.

It also requires collectors to work closely with AD operators and processors of the other waste streams they collect in order to devise suitable supply contracts.

Aggregators can also play a role stabilising supply contracts, as is currently taking place in the waste wood sector, thus providing more visibility for prospective AD plant developers.

More regulatory certainty

Waste companies cannot do it all alone and ultimately rely on sufficient visibility from government.

Even if government cannot commit to large expenditures to support the industry, it should at least consider how best to provide certainty to investors by minimising sudden changes in policy that make it difficult to plan ahead.

UK EfW plc has benefited from a strong reputation among investors in view of the certainty around its support regime for energy from waste.

However, government recently made a number of sudden announcements which are not consistent with this brand and which have not gone unnoticed among the investor community.

For instance, the removal of the climate change levy exemption to EfW projects has meant that projects already in operation at the time of the announcement have lost a material part of their profit streams that were anticipated at the time of financial close.

This is particularly relevant in a context where government aims to set subsidy targets at levels that ensure investors do not make extraordinary returns on such projects.

The same applies in the AD sector, where a number of recent policy changes have significantly affected investors’ appetite to deploy resources looking for new projects, let alone fund them.

These include the termination of the pre-accreditation regime for feed-in tariff and the ability for government to change the sustainability criteria at levels which in turn could make some AD facilities currently in operation no longer viable. While recent industry news left many investors wondering what role is left for them to play in EfW, risk capital remains essential to deliver the type of alternative growth options described above.

And while many investments in EfW are done on a project-by-project basis, some opportunities described above require investments to be made in the parent company to ensure the interest of companies’ owners and investors remain fully aligned.

Other options

Some waste companies question letting a third party in and prefer instead to grow organically or sell altogether.

It is possible however for owners to secure capital without losing control of their business and yet benefit from accelerating their growth ambitions. Investors, especially those with expertise investing in the waste sector, can also be a valuable strategic partner in driving a business forward.

For example, sourcing external funding and working with a funding partner to acquire companies is often likely to be a more secure route to gain rapid scale and to improve margins from synergies. Such benefit should outweigh the cost of securing capital.

Investors with sector expertise can also support waste companies in other ways – for example, in key contract negotiations when building new facilities or in the acquisition process of operational plants.

The sector will have to continue to progress without having to wait for better news.

- Alon Laniado is investment director at Eternity Capital, a private equity fund focused on making investments dedicated to the EfW and waste recycling sector. To be part of the EfW debate, visit www.efwconference.com and find out details of the Energy from Waste Conference that takes place in London on 24-25 February


This material is protected by MA Business Ltd copyright.
See Terms and Conditions.

Comments
Name
 
Email
 
Comments
 

Please view our Terms and Conditions before leaving a comment.