New challenges for UK’s transitioning EfW market

A panel of energy-from-waste experts came together this week, at an inspiratia breakfast briefing hosted by Pinsent Masons, to discuss the intriguing results from the recent CfD auction and the new wave of merchant deals on the horizon 

The UK's recent contracts for difference (CfD) auction saw six advanced conversion technology (ACT) waste projects come away with subsidies, in addition to two biomass CHP plants and three offshore wind farms.

The result – in which the fuelled technologies came within an inch of their 150MW maximum cap – was generally regarded as a surprise, not just because of the low strike prices (around £40 per MWh cheaper than round one) but because ACT made it in at all.

Five ACTs won contracts at £74.75 per MWh, while a sixth came away with a lowly – and perhaps uneconomic – £40 per MWh deal.

"The market chat beforehand was suggesting we wouldn't be able to compete with offshore wind, so having eight projects under the fuelled technology cap was fantastic news for the sector," Chris Holmes, managing director at the Green Investment Group (GIG), said in London on Tuesday [26 September].

The £74.75 contract will act as a "useful uplift" for projects, the inspiratia panel said, equating to a roughly £10-15 per tonne upside compared to those plants without CfDs. The increase in gate fees over the last two or three years, and in particular since the Brexit vote, was said to be a key driver for the lowball bids.

Indeed, only "brave projects" would be structured so that the CfD underpinned everything, according to John Bruce, partner at Pinsent Masons.

"[The CfD] was almost seen not quite as an optional extra but a benefit to get it – but not actually utterly crucial – so I think that also played into where people made their bids," he added.

The challenge for the six winning ACTs now will be to raise equity or debt financing within the CfD's set timelines – something only two of the five EfW or ACT plants from round one have managed to do, two-and-a-half years since signing their contracts.

Meanwhile, those projects that missed out in round two may still have a future. The GIG's Chris Holmes said, "Those which are able to tap into ancillary revenues – that might be private wire, steam or other aspects – and can create an economic case for their project without subsidy, that's the exciting thing for this sector."

Merchant plants

Following the end of the UK's PFI scheme, the EfW market has also had to turn its attention to merchant development. The next wave of projects will be built without long-term municipal waste contracts – with supply instead coming from predominantly commercial and industrial sources.

While this is not new – certain merchant facilities have been in operation for two decades or more – it represents a different proposition for investors and financiers that have been used to funding plants backed by local authorities.

This transition also comes amid the growth and increasing success of independent EfW developers, such as Wheelabrator and Covanta.

"We have this new era of merchant every five or more years, but people forget SELCHP [35MW EfW plant in London] was built as a merchant plant 20 years ago," said James Samworth, partner at Foresight Group.

"It's not like this is revolutionary, but certainly the timing has been right with some new players coming into the market."

Covanta's Rookery South facility, which is currently being financed on a merchant basis, has Veolia as waste supplier and equity partner, and Tom Koltis, executive director at Covanta, said the overall structure of that deal is seen as "more robust" than one with public waste contracts.

"The key is aligning the interests," he said. "When you have a private investor operating a plant for a local authority and doing all sorts of other services, sometimes the interests aren't exactly aligned to operate the plant to its maximum efficiency."

The merchant shift means developers will have to think more about their fuel supply. Locking in a portion of your waste stream "gives you that core base in terms of financing," said Stephen Othen, technical director at Fichtner Consulting Engineers.

"The other thing it does do is gives you a bit more confidence about what the waste is going to be," he added. "If you're a fully-merchant plant and you're saying you're going to go and buy any waste, in reality then you'd design your plant to take a variety of waste compositions, unlike a PFI/local authority one where ideally you'd have some form of waste composition protection."

As well as the waste majors, there are also regional suppliers that may not have the same balance sheet strength but could be more appropriate for the smaller ACT projects, the panel said.

Waste dynamics

The conversation touched upon the UK's broader need for waste infrastructure, and the market's analysis on how much new capacity is required.

The vast majority of reports conclude that there is a capacity gap, with the exception of Eunomia which continues to forecast overcapacity – though the panel noted the difference of opinion has narrowed over time.

Interestingly, the Environmental Services Association (ESA) – the trade body for the waste industry – is currently attempting to produce one overarching report that would serve as the "market's view" on the matter, though whether everyone adds their support remains to be seen.

The consensus was that with landfill sites continuing to close, and waste exports plateauing, there are probably more than 10, but fewer than 20, large-scale plants left to build in the UK before it hits capacity.

After that, new EfW opportunities will likely emerge in new markets, such as Asia, Australia and parts of Europe.

"Fundamentally EfW works when people start pricing in the true impact of landfill, and landfill tax is effectively what's – in most cases – allowed the growth of these industries," said Foresight's James Samworth.

"More broadly, as the world goes from seven to 11 billion people, three-quarters of that growth will be in Africa. There will be waste in those geographies that will need treating and not huge amounts of infrastructure there."

You can hear the audio highlights from inspiratia's EfW briefing with Pinsent Masons here, and also listen back to a section of the discussion relating to the UK CfD results

Panel:

• Green Investment Group, Chris Holmes, Managing Director
• Foresight Group, James Samworth, Partner
• Fichtner Consulting Engineers, Stephen Othen, Technical Director
• Covanta, Tom Koltis, Executive Director, Corporate Development
• Pinsent Masons, John Bruce, Partner

Partner: Pinsent Masons

Date: Tuesday, 27 September, 2017