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The government鈥檚 strategy for waste disposal makes much play of the need for 鈥渆nergy from waste鈥� and the role of the PFI structure in delivering it.

Although the government has sought to remain neutral in relation to the preferred waste technology, it is looking to support the market for solid recovered fuel, or SRF. This has the twin advantages of reducing the waste going to landfill and providing a renewable energy source.

SRF has up to two-thirds the energy content of coal, it can be co-fired with other fuels and is carbon neutral for the purposes of the EU鈥檚 Emission Trading Scheme. Although its popularity in the UK has been recent, the technology has already been in use for 15 years in mainland Europe.

By 2013, more than 15 million tonnes of biodegradable municipal waste will have to be diverted from landfill, rising to 19 million tonnes in 2020. It has been estimated that more than half of the waste that goes to landfill will have to be used in some other way if the government is to meet its targets. This means that SRF is well placed to take a central role.

What are the concerns?

The primary concern for PFI stakeholders is demand risk, which can only rise if production increases.

Any facility using SRF as a fuel must meet the requirements of the Waste Incineration Directive (WID), which limits the type of facilities that can burn SRF, or have appropriate justification for derogation.

Estimates suggest that the paper-making and cement industries could take up to 1 million tonnes a year, but there is a natural ceiling on their capacity. Does the power plant industry provide the solution? Significant capital investment would be required and co-firing SRF can present particular technical and operational concerns. The current view is that the power generation industry is unlikely to provide a significant or sustained level of demand, although WID-compliant co-firing facilities do exist and there are plans to build WID-compliant biomass burners, so this situation could change.

It will also be vital that the SRF producer is able to source long-term and sustainable offtake arrangements or guarantees that fit within the modelled offtake allowance. Unsold SRF may have to be landfilled, leading to penalties for failing to meet landfill diversion targets, as well as the costs of landfilling.

More than half of the waste that goes to landfill will have to be used in some other way

 

The way forward

The most viable solution for reducing market risk is likely to be the increased development of dedicated electricity-generating thermal units to handle the SRF output.

The increased efficiency and reduced carbon emissions from combined heat and power (CHP) plants compared with electricity-only energy from waste plants make them a popular option with the government. It is also possible that one thermal unit could take the outputs of several waste plants, providing economies of scale. Several councils are considering this.

Incorporating CHP or electricity-only energy from waste plants into a PFI scheme has the drawback of increasing cost and complexity. Nevertheless, it is receiving support from Defra and the waste market generally and is already envisaged as part of the Manchester project.

The government is working to improve the relevant legislative framework. The strategy documents it has published so far highlight the need to increase the treatment and disposal capacity of the SRF market. Further support was given in the 2007 Budget, where it was announced that enhanced capital allowances would be made available for CHP schemes that included

SRF-related equipment. In addition, the Renewable Obligation Order 2009 has introduced the concept of banding to the renewables obligation regime in order to provide more targeted levels of support to eligible energy from waste schemes through increased availability of valuable renewable obligation certificates.

While the effect of these steps remains to be seen, with a commitment from the government and the private sector to develop dedicated facilities to absorb SRF output, SRF will play a key role in the UK鈥檚 waste to energy PPP market.

Paul Mansouri is a senior associate in Norton Rose鈥檚 project finance group. Mark Berry is projects partner in the London banking team