More can be expected; by 2014, EU member states will face regulations for bringing about an end to landfills, accompanied by a cap on how much waste can be burned. If effective, the rules should further incentivize countries to seek more effective ways of waste avoidance and recycling. Many jurisdictions have also implemented a tax on landfills that essentially makes recycling and waste treatment a more competitive alternative.
But while this should mean a further rise in the number of projects in the sector, many developers are now struggling to secure long-term financing in the wake of the global financial crisis. The challenge is that most waste-related facilities have asset lives of more than 15 years but banks are generally unable to support debt tenors to match. This either presents project refinancing risk that impacts on the attractiveness of the deals or pushes the short-term costs up to such an extent as to erode early-year gains. Either outcome has effectively dampened growth for what otherwise would be economically and commercially sound propositions.
Putting aside regulation and financial challenges, however, many recycling and waste management developers face four key challenges that need to be overcome: planning, technology, feedstock availability and off-take agreements.
While the world’s population seems more focused on environmental alternatives to landfill than ever before, few seem willing to live next to a waste treatment or recycling facility. As a result, many local governments have become rather restrictive in providing planning permission for these facilities even when proposed for suitable locations. So while there may be a compelling need (both economically and environmentally) for new waste-treatment infrastructure, the sector is challenged to secure appropriate locations close to their source that will suit their needs.
As the pace of technological change and innovation continues to pick up speed, we are starting to see a number of new technologies emerge in the sector. And while some energy from waste (EfW) technologies tend to be well understood, proven and reliable; new technologies may start to challenge the economics of the older, more traditional solutions. So while many of the emerging technologies still have some way to go before their mode of operation, efficiency and effectiveness is proven, there is concern on the part of EfW investors and funders that their eventual introduction may well divert feedstock (i.e. waste) away from their investments.
Securing a long-term feedstock supply contract from a credit worthy counterparty is often the golden key to delivering waste infrastructure solutions. As consumers and businesses become ever more adept at recycling, there is every indication that the levels of available feedstock will reduce. At the same time, we have seen a steady growth in the number of facilities now in operation around the world. As a result, there are concerns in some geographies that sustaining the level of feedstock required to operate these facilities will become increasingly difficult. But in many markets, where landfill is still the main option, this has not even started to become a limiting factor. And in these markets the panacea to new investment is the utilization of the long-term availability of this feedstock that can, in some way, match the asset life.
The final challenge relates to the ‘output’ of these facilities, either in the form of recyclables (such as paper, plastic, glass and metals), electricity or heat. To sustain profitable operations, investors take a serious look at how they can sustain long-term value from processing this fuel (i.e. the waste) via the sale of electricity, heat and other byproducts. Closed loop solutions and strategic joint ventures can significantly enhance the returns for all parties.
Of course, these are not mutually exclusive challenges. Large, economically efficient EfWs provide good economies of scale, thus promoting low treatment costs but they take more feeding (with high levels of feedstock), are more difficult to get planning approval for, and generally drive the need for longer-term financings. On the other hand, smaller local facilities provide the option for low planning risk solutions, perhaps a requirement for shorter-term debt requirements (as the assets themselves have shorter lives) but become more challenging in providing a low-cost solution.
These challenges are not insurmountable. Pulling together a consortium of parties can drive rich rewards to the victors. And while it is no means an easy sector in which to operate, it remains that the growing world can no longer treat waste as a consequence of one’s existence.
The main growth driver for this sector will continue to be the speed at which individual countries’ appetites for dealing with the green agenda becomes a reality. In many cases, we will see an increase in education programs (which will likely increase the demand for these facilities and the related feedstock) and subtle changes in the way that municipalities collect waste and pay for treatment.
But as the world’s resources become rarer, the economic need to drive more value from waste will become more acute. These fundamental drivers will therefore ensure that the present demand for the development of waste infrastructure facilities will continue for the foreseeable future despite the challenges highlighted above.
By Gordon Shearer, KPMG in the UK