The past two years have been a rollercoaster for many developers of energy-from-waste (EfW) projects, with a series of ‘deal critical’ deadlines associated with the Renewable Heat Incentive (RHI), the closure of the Renewables Obligation (RO) to new entrants and the transition to the Contracts for Difference (CfD) support regime for EfW infrastructure.
With hundreds of millions of pounds at stake, investors in UK EfW infrastructure will always need an appropriate buffer for the construction phase of projects: to mitigate the ‘all-or-nothing’ risk of missing a deadline and losing eligibility for a critical support regime such as the RO, RHI or CfD. In most cases, this requires a minimum of six months between the projected completion date for construction and the relevant deadline.
The market has therefore seen a stuttering series of ‘drop-dead’ dates (critical dates where, if you miss financial close, the project is essentially ‘dead’) for projects during the past two years as developers seek to meet the various deadlines for key subsidy regimes.
The complexity of this situation has been increased by the introduction of RO grace periods in autumn 2014; the first round of the CfD allocation at the end of 2014; delay to the anticipated second round of CfDs; and continued uncertainty over RHI tariffs and budgets.
It is clear that developers have done all they can to drive their projects towards financial close to meet these deadlines. But, in many cases, it has not been possible to get there in time and projects now face a wait for their next opportunity to bid for a CfD or for other legislation to become clear.
However, this is not the end of the road for EfW projects, and there are five key actions which may help to improve your chances of successfully financing these projects in future.
1 Take a cold, hard look at your project: sit down with your colleagues and advisers to look objectively at why the project could not reach financial close in time to meet the deadline or was unsuccessful in the CfD auction.
This is the ideal opportunity to be honest about the limitations of the project – it may be one fatal flaw in the project design or an accumulation of costs/ risks across the entire structure. The important thing is to make sure that you listen to feedback with an open mind and learn from your experiences.
2 Take the time to restructure properly: in the final stages of closing a project, all parties are in fire-fighting mode – dealing with issues as they crop up while trying to minimise the amount of movement in project fundamentals. For projects which have faced multiple, successive deadlines, this may have led to an accumulation of ‘sticking plaster’ solutions to fundamental issues.
Now is a good opportunity to look past these temporary fixes and do some real surgery on your deal: thinking about how you would approach the project if you were starting from scratch. For example, you may consider re-tendering your engineering, procurement and construction or operations and maintenance provider, restructuring your fuel strategy or even look for a new set of investors. Ultimately, this is the opportunity to forget the phrase “there just isn’t enough time”.
3 Minimise your cash burn: be smart in incurring further development costs while you wait for the green light you need. It is critical to minimise the amount of historic cost weighing your project down when it reactivates because this may be the difference between attracting investors to your project rather than another’s.
4 Keep an eye on market developments: while there is a clear need for additional waste infrastructure at a national scale, make sure to keep a close eye on the development of projects in your local catchment area. The regional availability and gate fees of waste is a constantly evolving landscape and you need to make sure that your project still makes sense in light of competitors which have managed to reach financial close ahead of you.
5 Be smart about engaging with investors: it is critical that you engage with likely investors at the right time to make sure your project is well structured, for example, to help set your cost of capital and establish your minimum CfD bid price.
However, be aware that few investors will be willing to spend significant time and resource before the project is allocated a CfD or the relevant legislative door is opened. So be strategic about how you engage with potential investors: have a clear and complete project structure to propose and take on board their feedback.
Chris Holmes is managing director of waste and bioenergy at the UK Green Investment Bank