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Change of attitude to UK investment

Confidence and optimism appear to have returned to the project funding market for the UK’s waste industry.

Based on recent analysis and observations by Catalyst, this seems wholly justified.

Investment commitments made on energy-from-waste (EfW) and biomass power projects in the first quarter of 2015 reached almost £1.2bn, their highest level since Q4 2013 which had included Sita’s (now Suez Environnement) £500m Merseyside Recycling and Waste Authority plant.

This funding included equity and debt investment, and was committed on 11 projects designed to generate more than 400MW of output.

As the graph shows, Q1 marks a step change after a relatively flat 2014. The industry should see this positively, especially given the range of projects funded, whether judged on scale, feedstock or technology. But it is worth stepping back and considering if this level of investment is sustainable or is not representative of the current situation.    

Factors to consider

In March we saw the £175m Tilbury Green Power project reach financial close, to be funded by a consortium of the Green Investment Bank (GIB) and the Electricity Supply Board of Ireland, with each committing £35m, and senior debt provided by EKF, Investec and Rabobank.

Stobart Group signed a waste wood supply agreement, which involves 270,000 tonnes per annum (tpa) over 15 years, and marked its fourth major biomass supply contract in four months. Whether Stobart will seek further project opportunities remains to be seen, especially as the group has stated that it has now achieved its target of contracting the supply of two million tpa before2018.

Clearly, contracting with a party like Stobart is now a bankable approach to feedstock supply, and Catalyst noted seeing this type of supply agreement across a range of feedstocks including refuse-derived fuel (RDF) from commercial and industrial (C&I) waste as well as food and other waste streams.

The Levenseat project in Lanarkshire, for example, involved a mixture of municipal and C&I long-term supply. The 90,000 tonnes of RDF to be supplied to the 10MW Hoddesdon plant in Hertfordshire is contracted through Biffa and Powerday.

Timing is also crucial to projects at the moment, given the transition from the Renewable Obligation regime to Contracts for Difference (CfD). The former will close to new generators on 31 March 2017, and many of the Renewable Obligation Certificate (ROC) projects in the pipeline are being accelerated to ensure they meet the cut-off deadline.   

Typically, funders seek six to nine months of ‘buffer’ between the planned project commissioning date and the ROC termination date which, of course, may include a year’s grace period. We have, however, seen the first round of CfDs awarded, and 157MW of electricity is to be generated from waste by five EfW facilities in the first allocation round, all of which will need to be financed.

It is also notable that the GIB has been involved in four of the projects since the start of January 2015, committing £365m. This involvement has clearly helped to unlock projects and give confidence to other funders to enter the UK waste market, especially with regards to both advanced thermal technology and funding structures. Catalyst anticipates that the GIB will continue to invest at a similar pace, although not every month will be as busy as this March, which is its year end.

One of the most notable changes has been the progressive attitude of the bank lending community to the transition away from PFI contracts. They are taking a more flexible approach to the sector, recognising that the landscape has changed and the merchant model, albeit underpinned by supply contracts from corporates, can now be banked.

This bodes well for projects of scale that want to get project finance into their capital structure.

Mark Wilson is head of waste and renewables at Catalyst Corporate Finance

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