2014 will be an important year for investment in the UK waste sector. As the PFI/PPP project pipeline reaches maturity, with most local authorities now having procured their preferred solutions, attention shifts to the next generation of waste projects and the investment opportunities that they offer.
GIB has a unique role in the market, participating on commercial terms at any level of the capital structure (providing debt, equity or mezzanine finance) and with a mandate to accelerate investment in any form of waste recycling, pre-treatment or energy recovery infrastructure. This provides us with a full view of the most exciting areas of development in the sector, both for large scale projects (£30m+ funding requirement) and the smaller scale developments working alongside our fund managers, Foresight and Greensphere.
While GIB will continue to support the remaining PFI/PPP projects in reaching financial close, we see 2014 as a key opportunity for the ‘merchant’ waste projects that are now coming forward. With long-term local authority contracts increasingly scarce, projects that can secure reliable supplies of commercial & industrial waste feedstock are now front of mind for investors in the sector. However, developing strong commercial structures with the appropriate levels of risk/reward and the necessary ‘bankable’ characteristics to attract debt finance remains a challenge. We anticipate a much stronger pipeline of projects moving into 2014 as lessons are learnt by both developers and investors from pioneering projects, such as the Evermore and the Birmingham Bio Power transactions supported by GIB in 2013.
This evolution in the feedstock supply landscape is linked with the rise of Advanced Conversion Technologies (ACT) and more specialist sub-sectors. Targeted incentives under the Renewables Obligation and the newly confirmed strike prices under Contracts for Difference are enabling gasification/pyrolysis projects to be scaled around available feedstock supplies. This allows some well-structured ACT projects to be feasible where the economies of scale required for conventional Energy from Waste facilities are not possible. GIB has seen a wide range of these ACT projects brought forward over the past year and anticipates this trend to continue, as developers seek to bring “tuck-in” solutions for the remaining residual waste around the larger scale PFI/PPP contracts.
Similarly, the Anaerobic Digestion and waste wood biomass markets have seen significant development over the past year and this is anticipated to continue into 2014. However, securing a sustainable feedstock supply in these areas may become more challenging as competition intensifies from a number of projects coming online and as the underlying waste streams are increasingly diverted from landfill.
Within this changing, and still challenging market, GIB will continue to seek opportunities for “crowding-in” new capital to the UK waste sector. Since our founding in 2012 we have had successful engagement with a large number of projects and developers within the market with investments ranging from classic PFI/PPP to merchant waste wood ACT projects.
However we face the same challenges as any other commercial investor in the sector. Despite a wide range of projects being developed with a strong underlying business case, there is often a considerable amount of further development needed before they will be able to attract project finance on commercial terms. As a steward of £3.8bn of public capital, we have a duty to invest in projects that are not only green but are supported by robust economics and a solid commercial structure. While GIB’s mandate and strategy does not allow for “soft” finance or development capital, our teams will continue to seek innovative and collaborative solutions for well-structured transactions, doing what we can to help green and profitable waste projects become a reality.
Chris Holmes, MD for Waste and Bioenergy, Green Investment Bank (GIB)