Legal Insights

Waste to Energy projects: opportunities and challenges

By Andrew Pitney, Patrick Ibbotson

• 20 July 2020 • 12 min read

There is a clear need to reduce dependence on landfill and find better waste solutions.

At the same time, our waste processing and recycling markets are not functioning as they should, with large volumes of potentially recyclable material being unusable and destined for landfill. A parallel need exists to reduce our reliance on fossil fuels for energy generation and utilise innovative technologies that facilitate renewable energy sources.

Waste to Energy (WtE) initiatives (also described as Energy from Waste) seek to address these needs by redeploying waste from landfill for use in energy generation.

It is estimated that WtE processes contribute to only around 1% of Australia’s electricity output, below the OECD average of 2.4%, with just 4% of Victoria’s waste currently utilised to produce energy. As a result, a significant opportunity exists to increase Australia’s WtE output and, as such, interest in WtE facilities is growing.

Australian governments (Commonwealth, States, Territories and Municipal) are developing policies and guidelines to facilitate WtE initiatives. As governments at all levels seek to stimulate economic activity following the COVID-19 pandemic, there is a clear opportunity for government to promote these projects and assist to overcome the challenges and risks described in this article.

In its report released in November 2019, the Victorian Government’s inquiry into recycling and waste management recommended increased promotion, regulation and investment in WtE projects. Similarly, in its report released in May 2020, Infrastructure Victoria made detailed recommendations to the Victorian Government to provide clarity to the WtE sector and to establish regulatory settings to achieve desired WtE outcomes. At a national level, Infrastructure Partnerships Australia, in its report dated June 2020, made a series of recommendations for government action to promote a nationally consistent WtE market in Australia.

What is Waste to Energy?

WtE describes the process of utilising waste to generate energy, in the form of electricity, heat or fuels. WtE projects involve a range of stakeholders, from local councils who manage municipal waste, through to businesses in the waste and energy sectors, energy users and generators of waste.

Broadly, WtE facilities fall into two main categories: thermal treatment (indirect, direct and the creation and burning of manufactured cakes or pellets as fuel sources) and biological processing of organic waste. These processes use a range of technologies including combustion, gasification, anaerobic digestion and fermentation. The exact type of technology utilised in any project is dependent on the characteristics of the feedstock waste material. Similarly, the outputs and residues from WtE processes also vary, depending on the nature of the feedstock and the technology used.

WtE is typically considered ’renewable energy’ when organic waste (biomass) is used as the feedstock. However, the use of plastic feedstock in some WtE facilities also requires the use of fossil fuels, diminishing the environmental credentials of such initiatives.

A simple WtE process is depicted below

A simple WtE process is depicted

Opportunities arising from WtE initiatives

WtE initiatives present several potential opportunities for project proponents and the wider community. These include an increased opportunity to extract value from waste, opportunities to reduce greenhouse emissions and reduced reliance on both fossil fuels for energy and landfills that are reaching capacity..

Beyond these direct benefits, WtE initiatives present a significant opportunity for investment and associated job creation, along with opportunities to redeploy waste that is problematic in landfill (e.g. agricultural waste). The potential for businesses to reduce energy costs in the face of rising gas and electricity prices through WtE initiatives is another notable advantage.

A number of these potential opportunities and benefits have already materialised in a handful of existing and economically viable WtE plants in Australia, with viability set to continue to improve as technology matures and costs decline.

Examples of leading WtE projects in Australia are;

  • the $700m Kwinana project in Western Australia, which processes approximately 400,000 tonnes of municipal, commercial and industrial waste per annum to produce approximately 36MW of baseload power for export to the grid; and
  • Yarra Valley Water’s plant, the first WtE facility in Victoria, which opened in 2017. The plant has converted 60,000 tonnes of spoiled food waste into renewable energy capable of powering 1,500 homes. The project has also allowed YVW to save over $1 million in energy costs and has helped alleviate landfill problems.

Issues to be addressed

While the opportunities are compelling, there are certain issues to be addressed when considering the implementation of an WtE plant.

The capital investment required for a project raises issues as to the financial structures and associated arrangements. Often the debt financier will look to the local government principal to effectively underwrite the repayment of principal and interest through guaranteed minimum payments and controls on termination, including where there is a termination due to failure of the technology.

It is important that an appropriate balance is struck so that the demand for WtE feedstock does not incentivise the creation of more waste. For example, a business may relax its waste reduction or recycling efforts if its waste is feeding WtE production to create energy at lower cost.

Additionally, depending on the feedstock and technology, WtE processes may create air pollution, contaminated water or other residues. To address this risk, strict emission standards, controls and monitoring is required, which may reduce the feasibility of the WtE plant. However, this is likely to be less of an issue for smaller-scale facilities using a benign and homogenous feedstock.

Some WtE processes can produce residues which can be applied to beneficial uses, such as fertiliser, with the nature of the feedstock determining the extent to which residue can be used. If residue is put to such a beneficial use, additional specification, certification and monitoring requirements will apply.

Transportation of unprocessed organic waste feedstock may pose a biosecurity risk, due to the potential spread of pests and plant disease. Where this is identified as a risk, mitigation and monitoring requirements will likely apply.

There is also a risk that the WtE plant itself may also adversely affect amenity, through odour, noise, local transport congestion, dust and vermin, depending on the feedstock and treatment method used. However, several WtE plants situated in heavily populated areas overseas operate with minimal impact on amenity, particularly in Asia and Europe.

Significant difficulties will arise if the waste feedstock is not predictable or contains contaminants that need to be removed before being utilised. This impacts on the consistency of energy production (and therefore offtake revenues) as well as the costs of operation and management of emissions. While technology continues to evolve to help address these issues, this can be a major factor in determining whether the project will be viable.

Potential challenges to viability

AS WELL AS ADDRESSING THE POTENTIAL RISKS DESCRIBED ABOVE, THERE MAY BE BROADER OBSTACLES TO BE OVERCOME, SUCH AS

WtE plants must be cost competitive (as well as achieving environmental objectives).

For example, the gate fee must be competitive relative to the landfill gate fees and the price of energy produced by the WtE facility must be competitivein the energy market. The project will need to compare favourably to the 'business as usual' situation

If external private financing is required for an WtE facility, the cost of credit must be competitive and the project must be ‘bankable’. Because WtE plant and equipment is highly specialised (with potentially low-value as security) and the WtE market is relatively new in Australia, these projects may attract a higher risk profile (and funding cost).

It may be necessary to support the viability and bankability of projects by finding additional revenue streams, for example selling heat energy and creating commercially marketable residue, such as fertilisers. The market for these recovered materials is emerging and consumer confidence needs to be enhanced, including by requiring quality assurance specifications.

The project proponent may need to offer a guaranteed minimum supply of waste feedstock or a guaranteed minimum payment to help underpin the viability and funding of the project. Local Councils, who will often control the waste streams, may not be permitted to give such a guarantee. Where there is project finance, the arrangements for termination in the event of non-performance or technology failure will be contentious. The financier will often require the principal to make break payments on termination.

In addition to debt and equity funding, WtE projects may be financed by waste operators, the project proponent or government sources (e.g. CEFC or ARENA). While the sale of carbon credits can help underpin the viability of the project, depending on the environmental impact of the WtE project, it may not be eligible to participate in the Australian government’s Emission Reduction Fund.

Several aspects of any proposed WtE facility will require regulatory approvals, typically including;

• planning approvals

• works and operational approvals from the environmental authority

• approval to connect the facility to the electricity grid (where relevant).

There is a significant risk if the regulator is unclear as to the required standards for feedstock, disposal of residues or emissions. There is a real risk that a change in any of these standards will affect the ability to operate the facility or the cost of operating the facility.

Depending on the type of feedstock and technology used (and associated environmental impacts and amenity issues), it may be difficult for the project proponent to find a commercially viable site.

These regulatory approvals are likely to be facilitated (and objections avoided or minimised) where the preponement carries out thorough investigations and there is open consultation with the community regarding the proposed facility.

The composition of waste feedstock may vary over time, which may be affected by changing consumption patterns or government policy to divert certain materials from landfill. For that reason, WtE facilities need to be designed to allow for some flexibility in feedstock volume and composition. This is particularly relevant to the emissions from the plant, the risk of process failure and to the realisation of energy and other offtake revenues.

A pipeline of potential WtE is necessary to encourage contractors, waste generators, plant operators, waste contractors, technology providers and financiers to dedicate resources to this emerging sector, and to encourage an active and competitive market for WtE projects.

Typical contracting structure

Before undertaking an WtE project, proponents should understand and assess the issues outlined in this article and appropriately address all responsibilities and risks through an integrated suite of project contracts.

Diagram depicting the typical contracting arrangements for an WtE project implemented via a special purpose vehicle.

Notable features of the contracting structure are

  • An WtE project requires secure contracts for supply and delivery of feedstock, particularly where the project relies on feedstock from an external source. Long-term supply contracts (preferably 15-20 years) may be difficult to achieve as existing market practice and preference is for contracts of significantly shorter duration, typically around two years for commercial waste contractors.
  • For procurement of design, construction and commissioning of the WtE plant, the proponent will need to engage consultants and a contractor (whether construct-only, design & construct, EPC or BOOT contracting structure) under clear and robust contractual terms that provide protection for the proponent.
  • If the proponent will not operate or maintain the plant, the proponent will need to engage a services contractor to provide operations and/or maintenance services throughout a defined contract period.
  • A waste disposal contractor will be required for any residue that is not re-used on site or sold to external customers.
  • If the project feasibility is dependent on revenue from the project output – such as energy sales into the grid or selling residues, commitments for secure long-term offtake contracts and grid connection contracts will be required at the outset.
  • Grid connection contracts need to be negotiated and documented with regulated electricity networks, under a regulated electricity network access regime. The technical and timing requirements of theis regime, as well as the risk allocations under these contracts, need to be well understood and factored into the projects planning and resourcing of the project.
  • Offtake contracts (power purchase agreements or “PPAs”) have historically been difficult to negotiate if a consistent, continuous supply of power can not be assured. However the potential counterparties and types of PPA now available provide a deeper and more varied market for PPAs, beyond a commercial or industrial customer co-located with the WtE plant or an energy retailer. Depending on the type of waste source and its availability, the potential offtakers may include corporate customers, industrial customers, financial institutions and telecommunications companies, whose consumption loads may be located anywhere in Australia. The types of PPA have evolved significantly to encompass physical energy offtake contracts, synthetic energy offtake contracts and financial derivatives. To the extent the output varies with fuel availability, these PPAs can be firm, for specific time periods, matched to a segment of a customer’s load profile, or firmed up in combination with energy storage (e.g battery or pumped hydro).
  • Where external financing is required, robust debt and equity arrangements will need to be agreed at the project outset, with associated security mechanisms.

Maddocks has extensive experience in all legal disciplines required to implement an WtE project including business case preparation, project structuring, risk analysis, property, planning & environment, regulatory requirements, construction, PPAs, electricity grid connection contracts, other commercial contracts, project finance and dispute resolution.

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