September 25th, 2015
by Chris Cullen
The market for residual waste treatment is about to experience some significant changes. As we move closer to the point where Eunomia’s Residual Waste Infrastructure Review forecasts suggest that the amount of treatment capacity will equal the amount of residual waste available, the key price benchmark for facilities will no longer be the cost of landfill. Instead, it will be the gate fee offered by operators of other residual waste treatment plant – many of them energy from waste (EfW) facilities. A key question for any developer, then, is what will allow a facility to be competitive over its lifespan of 25 years or more.
Historically, residual waste treatment infrastructure has been financed on the back of long-term local authority (LA) waste supply contracts. Many also received support from central government in the form of PFI credits. Facilities funded this way are relatively insulated from the wider market, as they have pretty secure income streams for the majority of their feedstock, and can potentially supplement this with merchant waste at a price that simply covers their marginal cost.
Increasingly, though, facilities are reaching financial close on the back of waste supply contracts solely with private waste management companies. These companies may control some LA waste, but the majority of their material is commercial and industrial (C&I) waste, sourced through relatively short-term contracts. These facilities will be much more exposed to the vagaries of the market as competition for waste increases.
A key question for these merchant facilities in particular will be how to secure a competitive advantage. One relevant factor is the technology that is selected – not particularly due to the characteristics of the thermal technologies themselves, but because of the subsidy system for renewable energy.
There has been a concerted effort to try and develop more “advanced” conversion technologies (ACTs) to thermally treat residual waste, primarily in the shape of gasification and pyrolysis. It’s a cluttered field, with many different technology developers behind the 1.2 million tonnes per annum (tpa) of ACT capacity currently being built around the UK – and the further 5 million tpa that has planning consent. Clearly, some ACTs now appear to be reasonably bankable, and sufficiently competitive to attract investors.
Competition in the EfW market will primarily be in respect of gate fees charged for processing waste, but these are not the only source of revenue that contributes to investor confidence. The energy output of a facility also provides income, and the higher the revenue from energy sales, the lower the gate fee can fall whilst still allowing for profitable operation. For ACTs (and incineration, in the rare cases where it has combined heat and power (CHP) recovery in place) this income is bolstered by the renewable energy incentive schemes: the Renewable Obligation (RO), and Contracts for Difference (CfD).
Best paid schemes?
The RO scheme, due to close in April 2017, offers two ROCs to ACT facilities (and 1 ROC for incineration with CHP) for each MWh of renewable electricity sent to the grid by eligible facilities. Each ROC is currently worth about £40, which is broadly equivalent to the price of a MWh of electricity on the grid. Under the RO, the ‘deemed’ assumption for the level of biomass in residual waste feedstocks is 50%. Therefore, accredited ACT facilities effectively earn one ROC for every MWh of electricity they produce, thereby doubling the revenue they earn from electricity generation.
As part of Electricity Market Reform (EMR), the RO is being replaced by the rather complex CfD scheme. The outcome of the first CfD allocation round was announced in early 2015, with three ACT and two incineration with CHP facilities amongst the recipients. ACTs were awarded strike prices of c. £115 and £120 per MWh of electricity generated, and incineration with CHP was awarded £80 per MWh – thereby giving the ACTs something of an edge over their incineration rivals.
Back of an envelope calculations suggest that an ACT facility utilising either incentive scheme would be able to offer gate fees that are around £20 to £30 per tonne lower than the same facility without a subsidy, while maintaining the same level of revenue overall. Provided that the financing and operating costs of these ACT facilities are not dramatically higher than their existing incineration (electricity only) competitors, these subsidies will allow them to enjoy a clear competitive edge in the merchant waste market, and a greater prospect of successfully obtaining feedstock once it is in short supply.
That’s how we can expect the market to work – it remains to consider whether it’s a good thing that ACT should enjoy this level of support. Originally, the extra subsidy was intended to stimulate investment in the development of the technology – but it is now pretty well advanced. Advocates of ACTs claim that, if coupled with gas engines (rather than steam turbines) they are able to convert waste to energy far more efficiently than more traditional incinerators, and that they produce lower levels of emissions. However, it is debatable whether these benefits can reliably be delivered in practice.
One undeniable advantage of ACTs is that they can be deployed more cost-effectively at smaller scale, mainly due to needing less flue gas cleansing to reach Industrial Emissions Directive standards, which provides the opportunity for more district-scale schemes with lower visual impacts. Again, practice departs from the principle, as many of the ACTs being built are on a scale where an incinerator would have been equally viable.
However, there are concerns about whether the subsidy schemes represent good value for the amount of renewable energy they really produce. Only the energy derived from the biomass fraction of waste is classed as renewable. As mentioned above, the RO is deemed at 50% biomass, but the CfD scheme appears to be deemed at a level of 63.5%. It’s surprising to say the least that DECC has decided that the share of biogenic material in waste has gone up. Setting a low deemed level would have been preferable in policy terms, as it provides no incentive for facilities to report actual data in order to claim subsidy.
Indeed, the real level of energy derived from biogenic waste appears to be much lower – in energy terms it is often below 40% (and closer to 30% with better managed waste collection systems). Food waste is one of the largest components of the residual waste stream by weight, but has a low calorific value (CV) due to its high water content. Plastics are a smaller contributor of tonnage, but have a much higher CV. If paper, card and food are moved out of the residual stream at a faster rate than plastic to help meet higher recycling targets, the share of waste that comprises biogenic fuel can be expected to decrease still further.
There is a real risk, then, that the subsidies that support both ACT and incineration with CHP are based on excessively optimistic assumptions about the renewable component of the energy they will contribute. Therefore, if their competitive edge depends on flawed assumptions in the subsidy system, that’s a problem. It means money intended to support renewable energy generation will instead promote energy recovery from fossil-derived materials (i.e. waste plastics). However, as Government ‘strives’ to meet its targets under the EU Renewable Energy Directive, whilst cutting support for wind and solar PV, it appears that fiddling the numbers on waste is an attractive option.
A further question mark against the subsidies is their impact on waste management. By effectively making residual waste treatment cheaper, the Government is undermining the financial case for waste to move further up the waste hierarchy. The same level of funding dedicated to subsidising recycling or reuse would deliver significantly greater environmental benefits.
Competition from new facilities, alongside the RDF export market, is beginning to dramatically change the residual waste treatment market. It’s therefore time that Defra and DECC joined up their thinking. DECC is giving ACTs an advantage over incinerators for which there’s no clear justification. It is basing payments on an unrealistic estimate of the biogenic content of waste, which has been uprated from the outgoing RO scheme for no apparent reason. This risks both skewing the waste treatment market and overstating the UK’s renewable energy production, and urgently needs revisiting before the next round of CfD allocations.