Environmental and sustainability issues have never had a higher profile than in recent times. There has been a realization, reflected in legislation, that landfill is not a sustainable solution for the UK’s or any other country’s waste. Add to this a backdrop of volatile energy prices, due to diminishing fossil fuels and geopolitical instability, and waste is now increasingly being seen as a potential renewable energy resource rather than just a problem.
Historically, the UK has lagged behind Europe with regards to landfill diversion. In 2004, the UK sent approximately 70% of its waste to landfill, whereas Germany sent only 20%. While some progress has been made (in 2007 waste to landfill had reduced to 54%), this has largely been achieved through the ‘quick wins’ of recycling. As the UK attempts to catch up with other countries, environmental legislation and public opposition to incineration, together with an attractive government support regime, will make the UK a leading force in advanced waste treatment and technology.
To achieve this, the Institute of Civil Engineers estimates that £10 billion (US$16.6 billion) of investment into waste treatment infrastructure will be required over the next 10 years, with a significant proportion being used to develop WTE.
The market opportunity
The waste sector is considered to be relatively recession-proof and continues to attract strong interest from investors. The move away from landfill, coupled with the push for sustainability has fundamentally disrupted the industry, both damaging some players’ ‘bury it or burn it’ business models and creating great opportunities for others.
Regulatory drivers (detailed below) are making alternative methods of waste treatment increasingly viable on both commercial and economic terms. Policy, driven by social sentiment towards ‘green’ issues, is itself providing substantial opportunities for innovation and entrepreneurship.
This is cementing the UK’s position as one of the most attractive WTE markets in Europe, and will generate significant opportunities for both private companies and investors. One can be fairly confident that these opportunities will increasingly turn into transactions through 2010. As we continue to see developers with viable technology propositions and contracted waste streams entering the market, investor sentiment in the sector will continue to harden.
However, despite improvements in debt markets, funding challenges remain for both project-finance funded WTE plants and private equity funded corporate investments. Investors are also wary of backing the wrong opportunity in an evolving market where long-term competitive advantage is hard to judge.
Securing project finance four fundamental factors
As the market opportunities are undoubtedly there the key challenge for many companies is to marry existing opportunities with accessible funding. Those experienced in fund raising for WTE projects know that four factors are key to securing investment:
1. Waste streams
Municipal waste contracts provide stable revenue steams which are more attractive to the more risk-adverse investors such as banks. Commercial waste streams are inherently more uncertain and are usually only contracted on a short to medium-term basis. As bank funding is effectively secured on the ability of contracted waste income to service the debt, un-contracted (‘merchant’) waste projects will struggle to secure debt-based funding structures.
Getting planning permission for a waste management site has historically been an extremely lengthy, difficult and expensive process, with traditional incineration projects taking up to 20 years. WTE plants benefit from being smaller and less intrusive, and there is evidence that permission is being granted much quicker these days. Projects that have obtained, or are close to obtaining, full planning consent offer funders increased certainty on deliverability, and are far more attractive to investors.
3. Proven technology
Private equity investors can be as hesitant as banks when it comes to funding unknown quantities, such as innovative waste technologies. It is becoming an increasingly crowded market with many competing claims for the ‘best technology‘ for waste treatment. Without proof of the technology on a commercial scale, it is unlikely private equity will be attracted to such a project.
Additionally, ‘closed loop’ solutions, whereby the ‘waste’ of the process is itself dealt with in a cost effective manner, are much more attractive to investors. There are examples of technologies where the cost of dealing with the output impacts significantly on the returns of a project.
A strong team is essential as the next phase of development of the waste market will be a land grab for territory. A strong commercial strategy, coupled with the ability to win commercial contracts, will be as much a differentiator as technological edge.
The funding solution
In order to meet the challenges of the waste sector, companies seeking finance for projects need to adopt a flexible approach to funding. In the current economic climate, notwithstanding their ability to generate cash, the early stages of projects may have to seek full financing through equity investment in the anticipation that this can be re-financed with cheaper debt when the project becomes more mature.
In an environment where ‘cash is king’, funders are in a position to demand significant equity stakes in initial projects, with this possibly ratcheting downward over time as performance measures are met.
Ultimately the interests of both funders and management will need to be aligned.
Growing private equity interest in WTE
As WTE companies and technologies become increasingly established, interest from private equity investors follows. The market dynamics include all of the key factors that prove attractive:
- significant opportunity for market growth, which is primarily driven by regulatory changes
- contracted revenue streams, often from large ‘blue-chip’ clients or local authorities, and
- technological innovation leading to the ability to develop a roll-out platform.
Private equity investors looking to be involved in the sector will want to fund companies that have a deliverable growth strategy, and broadly speaking, the funding challenge for companies looking for direct investment mirrors that of companies seeking project finance.
New Earth facility, Canford, UK Click here to enlarge image
Key attributes that will help to secure investment include:
- Manageable technology risk either through demonstration units or full-scale operations. Institutional investors will look to support a technology or solution that is bankable and proven, and will be hesitant about supporting technical development without clear routes to market.
- Sound commercial strategy based on realistic commercial assumptions supported by management experience, rather than purely based on ‘expectations’.
- Flexible funding structures waste technology is capital intensive. Companies may have to look for innovative ways of funding the business during early development to bring the company to a position where more established investors will enter.
What does the future hold?
So, given current trends in waste projects and financing several key trends are set to emerge:
- A land grab for territory in the waste market will occur in the short to medium term. Planning consents for waste treatment facilities will continue to be elusive, maintaining a small pool of potential sites.
- Medium-term consolidation of established companies will occur through acquisition by waste groups or creation of companies.
- New technologies will increasingly penetrate the market as they become accepted as ‘proven’ by the investment community. We expect gasification and anaerobic digestion to become bankable and commonplace within the next five years.
- New technologies with planning consents will dominate.
Peter Hemington is a Corporate Finance Partner at BDO LLP
Europlasma test facility Click here to enlarge image
The key regulatory themes driving the economics of the waste to energy (WTE) market in the UK are:
- Landfill taxes of £40 ($67) per tonne for active (non-inert) waste, which will increase by £8 ($13.5) per year until at least 2013/14
- Decreasing allowances for the amount of waste local authorities can send to landfill, and £150 ($252) per tonne penalties for exceeding these allowances
The government’s Renewable Obligation now provides generous support for WTE technologies such as gasification, pyrolysis and anaerobic digestion. These technologies are now becoming price competitive wih more traditional waste treatments.
Case study - Europlasma
Europlasma S.A. is a leading technology company in the waste industry. The group designs and operates a range of advanced technologies, including its flagship product, the plasma torch.
In 2009 Europlasma announced plans to pursue a strategic expansion into the WTE arena through a new company: CHO Power.
It is intended that CHO Power will roll out a series of plants using plasma gasification technology across Europe and North America, each treating approximately 55,000 tonnes per annum and generating 12 MW electricity.
In September 2009, the company announced that it had signed a letter of intent with an investor to finance its first plant with a total investment of £16.8m ($28m).
The successful fundraising is built on the back of:
- Equity funding for a commercial scale demonstration site
- Securing long-term waste contracts with leading collection companies
- Equity funding of development costs including full planning consents
- Proven ability of management team to develop and operate waste treatment plants
Case study New Earth Solutions Group
The New Earth Solutions Group is an established waste treatment provider that uses fully enclosed facilities based on MBT and composting technology. The company has been awarded seven local authority contracts to date with a value of circa £200m ($336m).
Having captured significant waste streams the group is now well-positioned to recover renewable energy from waste and is building a number of projects across the UK.
A key ingredient to this success has been the company’s development of a funding structure that has allowed the group to develop a pipeline of fully funded projects at a low cost of debt.
Subject to securing waste streams, the company uses infra-structure finance to fund the construction of facilities through a combination of senior debt and project equity from the company’s own open-ended retail and institutional investment funds.
To date, New Earth has raised £22m ($37m) in equity investment and £65m ($109m) in infrastructure finance to support the roll out of waste facilities. The innovative financing structure has allowed the company to use existing equity in the business to fund pre-financial close projects with supporting infrastructure investment which can be drawn down to facilitate aggressive roll-out plans.More Waste Management World Articles Waste Management World Issue Archives