LAWR

March 2015 Local Authority Waste & Recycling 19 energy recovery Paul Levett is a member of the Eternity Capital investment committee, director of Waste Transition and a non-exec board member of a number of other companies in the environmental sector. erence plant processing similar waste ● Construction contract which includes over-arching performance guarantees [EPC (Engineering Procurement and Construction) "wrap"] ● Comprehensive market due diligence on available waste and potential com- petitive capacity ● Feedstock contracts with credible counter parties for a percentage of plant capacity ● Confidence that proposed gate fees are competitive with export market ● Confidence regarding meeting criteria for energy incentives e.g. ROCs or CfD ● Confidence that relevant regulations will be enforced Intelligent investment is based on understanding, quantifying and mitigat- ing risks to ensure a viable rate of return. It is also important to avoid projects which could result in the loss of the capi- tal invested. Most risks can be addressed by compliance with the project criteria listed above, however probably the most difficult residual risk is that of changes in the policy or regulatory context. Examples of uncertainties could include new taxes, laws requiring tech- nology changes, changes to green energy incentives, abolition of landfill tax with- out a compensating landfill ban. Upsides could include increases in overseas gate fees or plant closures in Netherlands or Germany. EfW capacity Having outlined the investment context, let's examine how much capacity will be developed, which technologies will be used and who will invest. The main export markets are Netherlands and Germany, due to spare EfW (energy-from-waste) capacity, Scandinavia due to CHP (combined heat and power) requirements and other coun- tries including Latvia which need SRF (solid recovered fuel) to substitute for fossil fuels in cement kilns. Unless there are major increases in domestic waste generation in the coun- tries concerned, it is likely that their demand for imported RDF will contin- ue. Low gate fees can be justified on a marginal basis for existing plants, however it seems very unlikely that new plants would be investable in Netherlands and Germany particularly. As such, the growing volume of RDF in UK should underpin investment in 'some' UK thermal treatment capacity. However, it should be recognised that exports will continue on a significant scale. Assuming that the Government is adequately funded to enforce export rules [properly prepared RDF, not simply unprocessed waste], the materials will follow the lowest cost supply chain to UK or export markets as appropriate. UK plants will typically have the advantage of lower processing costs as baling and shrink wrapping will not be necessary. Transport costs and administration will also be less as shipping and TFS pro- cedures will not be required. However, gate fees for a new thermal treatment plant will necessarily be higher than the prices charged for spare capacity at older overseas plants. The vast majority of existing UK thermal treatment capacity consists of large-mass-burn incineration plants. Such plants have the benefit of economies of scale and require no pre-treatment of feedstock. These plants have often suf- fered public protests and planning delays due to their size, the traffic implications and sites which have often been too near to residential properties. Future merchant plants are likely to be smaller [no MSW contracts] and better located e.g. in industrial areas. The likely smaller size of these plants supports con- sideration of gasification technology as this is modular and qualifies for ROCs (renewable obligation certificates) and/or CfD (contracts for difference). There is increasing evidence overseas of gasification technologies success- fully treating a range of waste types. Pre-preparation to create consistent feedstocks is crucial, but good quality RDF is likely to be close to what is required. Following many years of mar- ket consolidation, we have seen the waste industry's major players commit huge sums to investment in PFI /MSW contracts to the extent that some of them have been capital constrained and less active in the development of merchant facilities. As a result we have seen significant activity from smaller players, technology companies, landowners, and companies from the energy and construction sec- tors. In a period when banks have been shrinking their lending, we have seen funding being provided by private equity firms, mezzanine debt providers and asset finance/leasing firms.

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