Two years ago, I was among many people who predicted that we would have built up to 20 food waste anaerobicdigestion (AD) plants in the UK by now, and that the huge potential for bio-energy would be unlocked. While planning for such facilities and securing power purchase agreements have not proven to be market barriers, perhaps, surprisingly, securing waste has.
The vision and potential for a national network of facilities to process food waste and generate electricity is a real one. But if we are to do this successfully, we need to finance such facilities with a replicable non-recourse (project finance) model.
If we rely on asset-secured recourse debt finance for funding, the market will develop at a much slower rate and be linked to the balance sheet strength and ability to borrow of some large players. Yes, there are a few banks thatwill consider project finance deals of less than £15m, and the typical debt requirement of an AD facility is £4m-£8m. But those banks are lending and most have been relatively unaffected by the credit crunch.
One such bank, Triodos, has seen numerous food waste in-vessel composting and AD plant proposals in the past 18 months. While there are many strong propositions with good management, proven technology and suppliers, as well as strong power purchase agreements, the key element required for a project finance arrangement are the waste supply contracts. These are essential, underpinning the future revenues of the project and so providing security for the investment.
To provide debt finance on the scale required, these contracts typically must be for 10 years and include some deliver or pay penalties. However, there are very few local authorities that have had the foresight to offer such contracts. As a result, despite many potential projects in the UK and numerous offers of grant support, very few developments are progressing.
In fact, I suspect that a large proportion of developments that have secured grant finance have been unable tosecure debt finance. It would be easy to blame the credit crunch for this, but the reality is that the banks that would typically lend to projects of this nature and scale continue to lend. The market failure that is holding back the potential for food waste infrastructure in the UK is the lack of bankable contracts.
So when public spending cuts are being considered, perhaps we should review the public sector support to this sector. Fewer grants and more bankable contracts could be a better balance. Longer term deliver or pay contracts should be seen as a long-term investment, and they can actually be used to build value for the public sector. For example, contracts can be awarded on a build and operate basis, with ownership transferring to the public sector at the end of the term.
We have a huge opportunity to create a network of facilities that generate sustainable energy from our food waste, but this could happen much faster. Perhaps the advent of the coalition Government will provide the opportunity to review why and what interventions would help this opportunity to become a reality?
Dr Bevis Watts is head of business banking at Triodos Bank and a member of the Chartered Institution of Waste Management