Energy from waste (EFW) facilities are becoming a popular solution in developed markets. They answer the requirement for higher levels of renewable energy while reducing landfill waste. An established, market tested risk allocation structure and payment mechanism allows for the successful construction and operation of EFW plants by private sector participants.
There is an interesting dynamic at play in developing markets: ongoing urbanization is resulting in an ever-increasing need for energy and a growing volume of waste. Is EFW the answer in these emerging economies as well? It’s worth considering the following points from a legal perspective when reviewing potential EFW projects in such markets.
Large commercial contracts
EFW plants rely on a constant supply of waste, either commercially generated or from the local population. When originating from residents, it is typically collected and delivered to the plant by the relevant municipal authority.
In countries where that municipal authority “owns” and is responsible for the waste of its residents and has the requisite infrastructure, it is possible to institute an efficient collection system necessary to supply the EFW plant. In these cases, the authority funds the collection by levying a fee by way of tax. In emerging markets, where waste collection might not yet be an established responsibility of the local authority, certainty of waste supply is a significant risk. Developers and lenders need assurance of sufficient waste. If the municipal authority cannot provide such certainty, they either won’t enter into these deals, or will refuse to take on volume risk without a minimum payment guarantee (reducing the value of the deal for the authority).
Project companies in developed countries bolster waste volumes (thereby offsetting any supply risk) by securing large commercial contracts. This could be a solution for emerging markets, but relies again on local companies producing sufficient waste, which may or may not be a dependable outcome.
Dependable energy output
The supply of waste should not only be constant and sufficient but also of a composition that allows for viable energy production. The calorific value of waste directly impacts energy output. While developers and lenders have generally become comfortable with the project company taking composition risk in established markets (owing to a level of certainty regarding calorific values), the willingness to do so in developed markets is unlikely.
Uncertainty surrounding composition will make developers reluctant to commit to any minimum energy output—in direct conflict with the public sector objective to assure a reliable energy source.
Gate fee economics
Notwithstanding the relative lack of supply risk in developed markets, the income stream that a EFW plant can deliver through the sale of energy alone has not generally been considered a bankable proposition. Instead, developers usually require the municipal authority to pay a “gate” or “tipping” fee per tonne of waste the plant accepts. Due to the importance of a consistent income stream, developers may require the authority to commit to providing a certain tonnage of waste per month and make the gate fee payable for that tonnage regardless of whether or not the authority can actually deliver it.
In markets where waste collection is an established (and taxable) function of municipal authorities, those authorities are normally willing to take this risk. But authorities in emerging markets may not be able to afford the fees, nor be willing or able to increase local taxes for collection.
Strong regulatory environment
Strong regulatory and policy support is a necessary condition for successful EFW plants. A fast track planning system and an established and efficient process of obtaining approvals give developers and lenders the reassurance that they can move from conception to financial close in good time. Such a regime is likely to be absent in emerging markets, but its development is crucial to the success of EFW projects in such jurisdictions.
A strong regulatory environment is often backed by governmental or intra-governmental policies that support and incentivize EFW. This fulfills the twin objectives of increasing renewable energy production and reducing landfill. In the U.K., incentives typically represent two-fifths of an EFW plant’s income. (The gate fee also represents two-fifths, and the sale of energy the remaining one-fifth).
However, the likelihood of replicating this model in emerging markets seems slim. In real terms, this means that the payment structure will be highly negotiated and potentially onerous for the municipal authority, with higher gate and energy fees required to make up the incentive shortfall.
Applying the established contractual model in developing markets is likely to prove difficult. New technologies might broaden the composition of acceptable waste and increase the efficiency with which plants can produce energy. This in turn may result in lower gate fees and a reallocation of supply risk.
However, lenders are cautious. In emerging markets particularly, they want to see proven technology being used. For the foreseeable future, municipal authorities in developing countries are likely to have to guarantee supply levels and pay high gate fees—and take risks which are usually carefully negotiated between the parties—to make EFW a viable option in emerging markets.