Waste to energy – challenges and opportunities in the UK and abroad

November 2016  |  SPECIAL REPORT: ENERGY & NATURAL RESOURCES

Financier Worldwide Magazine

November 2016 Issue

In this article we will consider the current challenges to developing waste to energy projects in the UK and ask whether there are opportunities for projects in the Middle East and the Far East.

Why should governments encourage waste to energy?

Without government intervention, sending waste to landfill will always be the cheapest option for anyone disposing of waste. However, the combination of pressure on available public space and the desire to reduce pollution mean that continuing with mass landfill is not a realistic long term waste management strategy. In addition, governments are often subject to international pressure or even legally binding agreements to reduce landfill. For example, the Landfill Directive places legally binding obligations in relation to landfill on all EU member states (which continues to include the UK, for now).

One way to reduce landfill is through waste to energy – in other words the process of generating energy (electricity and/or heat) through waste treatment methods such as burning or anaerobic digestion. As well as reducing landfill, waste to energy projects generate energy, and do so more predictably than other sources of renewable energy such as wind or solar, which are reliant on exploiting the right weather conditions. Despite this, waste to energy is not the only, or even the most desirable way of reducing landfill. The waste hierarchy (which forms part of EU waste policy and is widely used in other jurisdictions) ranks waste management options according to what is best for the environment. Prevention, re-use and recycling waste are all environmentally preferable options to recovering energy from waste, which is only preferred to landfill and other similar disposal without recovery. However, these are not always realistic options – for example, most food waste cannot be re-used – and so waste to energy has an important part to play in waste management. A well-managed waste to energy mechanism can reduce up to 90 percent of the waste going to landfill, while also delivering energy.

Waste to energy in the UK

The UK has targets in place to reduce waste sent to landfill. In particular, by 2020 biological municipal waste must be reduced to 10.2 million tonnes, equal to 35 percent of 1995 levels (the 2020 BMW target). The principal encouragement for achieving these targets is through a landfill tax. In 1996 this was initially set at £45 per tonne for most types of waste, with an annual escalator meaning that it had reached £82.60 per tonne by 2015-2016. There is a much lower rate of £2.60 for inactive waste, which covers various building materials, such as most forms of concrete, brick, glass, soil and gravel, but little else. The ever increasing cost of landfill has helped to make other forms of waste management, including waste to energy, cost competitive.

In 2006, DEFRA established the Waste Infrastructure Delivery Programme and started to take various steps to reduce the amount of waste being sent to landfill, such as providing guidance, producing model contracts and releasing £1.7bn of private finance initiative (PFI) credits to 28 local authorities to develop a number of waste infrastructure projects. These policies were widely considered successful and helped to support the growth of a steady pipeline of waste to energy projects.

However, in 2010, as part of the government spending review, further PFI credits were largely abolished and DEFRA decided to withdraw the provisional allocation of PFI credits from seven projects, on the basis that they were not needed to achieve the 2020 BMW target. This pattern continued with PFI credits withdrawn from several projects in 2013. Many of these decisions were widely criticised, not only for the obvious impact on the development of waste infrastructure projects, but the late timing of some of the withdrawals had serious cost implications; for example, Norfolk County Council became liable to pay its contractor more than £30m in compensation when PFI credits were withdrawn and a project was cancelled.

Since the withdrawal of PFI credits in 2010-2013, there has been little to no support from government for the development of waste to energy projects and many people in the industry believe that the government’s unspoken policy is to hope that the private sector develops waste to energy plants without central government support. Some further waste to energy projects are expected in the coming years, but they will be smaller scale and not part of a planned pipeline.

Brexit impact?

Much of the UK’s waste management, renewable energy and other environmental legislation is derived from EU regulations and directives, including the 2020 BMW target. However, the importance of Brexit in relation to waste to energy should not be exaggerated. As noted, the UK is still a member of the EU and it is likely to be more than two years before that changes. The British government has recently stated that it intends to pass a bill repealing the European Communities Act 1972 and thereby repeal the primacy of EU law in the UK. The same act will enshrine all existing EU law into British law and enable Parliament to amend or cancel any unwanted EU legislation. However, it is not widely expected that the UK will seek to undo legislation relating to waste or renewable energy. Indeed, the UK has often gone much further than required by the EU in its support of renewable energy and both public opinion and international treaties mean that this is likely to continue.

Waste to energy in the Middle East and the Far East

European nations are recognised as global leaders in the waste to energy market, but with the markets there already saturated, European developers have started looking elsewhere for new opportunities. In the Middle East and parts of the Far East, waste to energy is an emerging sector and has immense growth potential owing to the high waste generation per capita and high growth rate of both the population and the economy. Many nations have an interest in reducing dependence on fossil fuel and face shortages of landfill space.

Urban waste generation in the Middle East region has now passed 150 million tons per year, which has forced policymakers to look for sustainable waste management solutions. For example, the UAE has set a target of reducing landfill waste by 75 percent by 2021, through a range of measures, including waste to energy. To this end, Dubai announced in June that it will build a waste to energy facility for around £400m, with the first phase of the plant set to receive 2000 tonnes of waste per day to produce 60MW of power. Similarly, Sharjah recently announced plans to build a facility that will eventually convert 400,000 tonnes of waste per year into 80MW of electricity and in 2015 Abu Dhabi announced plans to develop a 100MW waste to energy facility near the sea port of Mussaffah. However, progress on delivering projects has been mixed and in the past several projects have been planned, only to be cancelled during the procurement stage. There are also plans to develop waste to energy plants in several other Gulf states, including Bahrain, Kuwait and Oman. These are also at an early stage and it remains to be seen which of the projects can be successfully delivered, but there is some optimism that the market is improving.

In the Far East, both Malaysia and Thailand have established waste to energy markets and are providing reasons for optimism that these markets will continue to grow. Thailand already has over 300MW of waste to energy capacity and is currently running a tender for a series of small scale plants of up to 9.9MW each.

The Malaysian waste to energy sector is currently less developed, with an installed capacity of 7MW, but there are several projects in the pipeline. In November 2015, Cypark Resources Bhd won a 25-year concession to develop an integrated waste management facility including a waste to energy plant to be built in the Negeri Sembilan region. Plans to develop a 1000 tonne per day waste to energy facility in the Kepong district of Kuala Lumpur are also progressing, with a shortlist of preferred bidders soon due to complete the final round of the tender process.

Conclusions

There are challenges and opportunities in the waste to energy sector in any market. The fact that some form of government or subsidy support is generally required to make waste to energy projects viable means that developers will always be vulnerable to changes in policy or funding squeezes, as we have seen in the UK. Nonetheless, ever increasing volumes of landfill mean that all governments face pressures to improve waste management and the waste to energy market is almost certain to grow significantly around the world in the next decade or so. If governments want to encourage the development of waste to energy projects, they should create a supportive policy framework to facilitate this and maintain this framework long term.

A few Gulf states might procure waste to energy projects directly, but public-private partnerships are likely to be the main delivery model in most places. Governments and developers need to negotiate the terms of these partnerships carefully, to ensure that projects are both value for money and financially viable. This can present a challenge in jurisdictions with a less developed public-private partnership market than the UK, but the potential gains that can follow from being the first developer to successfully deliver a project in any market, means that the risks are often worth taking.

 

Thomas Wigley, James Hawkins and Martin Amison are partners at Trowers & Hamlins LLP. Mr Wigley can be contacted on +44 (0)20 7423 8034 or by email: twigley@trowers.com. Mr Hawkins can be contacted on +44 (0)20 7423 8330 or by email: jhawkins@trowers.com. Mr Amison can be contacted on +971 4302 5102 or by email: mamison@trowers.com.

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BY

Thomas Wigley, James Hawkins and Martin Amison

Trowers & Hamlins LLP

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