With the European Landfill Directive, and the UK’s enabling act, the Waste Emissions Trading Act 2003, placing a duty on all waste disposal authorities (WDAs) to reduce the amount of biodegradable municipal waste (BMW) disposed to landfill, and the EU Waste Framework Directive likely to impose increasingly challenging targets, the Government and WDAs are having to make fundamental decisions in relation to the way they manage waste.
By 2013, in excess of 15 million tonnes of BMW will have to be diverted from landfill, rising to 19 million tonnes in 2020. The EU has set itself a target to achieve 20% of its energy from renewable sources by 2020 and the UK has committed to deliver its share of 15%. In the UK, we currently recover energy from only 11 per cent of municipal waste; by comparison, the European average is 17.3 per cent and Denmark recovers energy from 54 per cent of its municipal waste.
The UK Government has set out its key objectives and strategies for meeting landfill diversion targets, securing greater investment in waste infrastructure; increasing recycling resources and developing recovery of energy from residual waste using various technologies in the Waste Strategy for England 2007 (WS2007), published in May 2007. WS2007, along with the Government’s Energy White Paper and the forthcoming Heat and Energy Strategy consultation, highlight the increasing promotion of “energy from waste” as a cornerstone of the Government’s waste strategy and the PFI/PPP structure (despite a somewhat inconsistent track record in the waste sector) as the Government’s favoured delivery model for implementing its strategy.
Although the Government has sought to remain neutral in relation to the preferred waste technology, it is looking to give support to the market for solid recovered fuel (SRF). SRF (sometimes termed RDF (or refuse derived fuel)) is a heat-dried product processed to a high and uniform specification and is one of the principal products, along with biogas and compost, of mechanical biological treatment (MBT) plants.
As a waste-derived fuel it has the advantage of re-cycling waste otherwise likely to be sent to landfill and of being a renewable source of energy. It has a high energy content (up to two-thirds that of coal); can be co-fired with other fuels; is carbon neutral for the purposes of the EU’s Emission Trading Scheme (and moves are currently being made to ensure tighter quality specifications). Although its popularity has grown relatively recently in the UK, MBT plants and the production of SRF are not new technologies having been used for fifteen years in mainland Europe, particularly in Germany.
With a general resistance, for both political and environmental reasons, to increasing the capacity of waste incineration, SRF is in theory therefore well placed to take a central role in the drive to create energy from waste. Without an increase of waste incineration capacity, some estimates suggest that more than 50% of the tonnage of waste which needs to be diverted from landfill to meet targets is likely to require mechanical biological treatment, in turn creating an opportunity for a significant increase in SRF production.
However, if SRF is to play a successful part in the Government’s waste strategy, PFI/PPP stakeholders (particularly WDAs and lenders) will need to be satisfied that any risks associated with it are appropriately addressed.
The primary concern for PFI/PPP stakeholders is ensuring sufficient demand for the SRF produced. Demand risk is an issue now and can only intensify if SRF production continues to increase. Why is this?
In the UK, SRF is currently classified by the Environment Agency as a waste (and remains classified as a waste until it is burned as fuel and the energy recovered) so any facility using it as a fuel must meet the requirements of the Waste Incineration Directive (WID) or have appropriate justification for derogation. This significantly limits the type of facilities which can burn SRF.
Of the potential outlets for SRF identified by Defra, the cement and paper making industries have the greatest capacity at present. Unlike the power plant industry, the cement industry has a specific derogation under the WID enabling cement kiln operators to co-fire waste-derived fuels in their kilns. However, despite its higher quality, SRF has to compete against other waste-derived fuels (e.g. scrap tyres and waste oils) and there are question marks surrounding the extent to which the cement industry will be able to soak up any increase in SRF production. By current estimates the industry could take between 350-500,000 tonnes of SRF per annum. The paper-making industry could potentially take more (up to 600,000 tonnes per annum) for co-incineration with paper sludge but present offtake levels are low.
Does the power plant industry provide the solution? By some estimates, if a 2000MW coal-fired power plant substituted a tenth of its fuel requirements with SRF, a significant percentage of all potential SRF output would be absorbed. However, significant capital investment would be required to upgrade existing power plant facilities to handle waste in accordance with WID standards. Additionally, co-firing SRF presents particular technical and operational concerns. It remains to be seen whether new, purpose-built power plants designed to co-fire SRF from the outset might offer a way forward. Current consensus would appear to be that the current power generation industry is unlikely to provide a significant or sustained level of demand.
As SRF is still treated as a waste (because of EU waste law definitions and case law) an SRF producer has to pay an offtaker to take its product (with the price being determined by a number of factors e.g. tonnage, length of the contract, quality of SRF). This means that the SRF offtake price is a key driver to a project’s success. In the context of a PPP project, it is vital that the SRF producer is able to source long-term and sustained offtakers for its SRF output at prices which fit within the modelled offtake allowance. Without suitable offtake arrangements in place a WDA may find itself without a viable waste management solution (and the project potentially in default) as unsold-SRF may have to be land-filled, leading to penalties and/or defaults for failing to meet land-fill diversion targets, as wells as the costs of landilling.
Although, there are ways to mitigate price risk (e.g. a risk sharing mechanism to address increases in SRF offtake costs) such solutions can work only if there is a robust market to accept SRF production, otherwise SRF’s role will be naturally limited.
Absent any fundamental changes to the EU waste and in particular WID to permit wider burning of SRF (and at present any such changes look unlikely), to address demand concerns, the most viable solution for reducing market risk is likely to be the increased development by MBT operators/developers of dedicated electricity generating thermal units to handle the SRF output produced by their MBT plants. The increased efficiency and reduced CO² emissions from combined heat and power (CHP) plants as opposed to electricity-only EfW plants make them a particularly popular option with the Government. There is also the option for one thermal unit to take the outputs of several MBT plants, providing scope for economies of scale. We understand that this latter option is under review by a group of public authority bodies.
The approach of incorporating CHP or other electricity-only producing EfW plants into PFI/PPP structures may have its drawbacks, such as increased costs and complexity, but it is receiving support from Defra and the waste market more generally and is already envisaged on projects in Manchester.
As mentioned above, the Government is working to improve the relevant legislative framework: WIDP’s November 2006 Action Plan and the WS2007 have highlighted the need to promote on-going market development initiatives to increase treatment and disposal capacity in the SRF market. Further support was also given in the 2007 Budget, where it was announced that Enhanced Capital Allowances would be made available for good quality CHP schemes, so as to include SRF-related equipment. In addition, following the recent completion of the Government’s Renewable Energy Strategy Consultation, there are proposed reforms to introduce banding to the Renewables Obligation regime in order to provide more targeted levels of support to eligible energy from waste schemes.
Whilst it remains to be seen to what extent these steps will have in creating a much wider market for the use of SRF, if there is a firm commitment from both government and private sector alike to develop dedicated facilities to absorb SRF output, SRF has the opportunity to take a key role in the UK’s waste PPP market.
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