Unlike the plants for PFI contracts, the funding of merchant waste plants is not supported by long term input contracts. Typical commercial & industrial [C&I] waste contracts are 12 months duration. Technically, the feedstock contracts could have expired before a new merchant plant has been built. Banks view these arrangements through the lens of their experience of the 25 years PFI contracts and insist on long-term feedstock contracts, which waste producers and collectors are usually unable or unwilling to provide.
Accordingly, most merchant projects that get off the ground are likely have limited gearing and many will rely on private equity funding - however, even the private equity players will usually insist on a significant percentage of contracted input feedstock .
Planning consent should not be an insurmountable challenge if the site is well located, such as in an industrial area with good road access, with rail or water access a bonus.
It will usually be appropriate to utilise proven technology. Indeed, funding is likely to be virtually impossible unless a reference plant can be cited.
A turn-key ‘wrap’ contract will also help to de-risk the project and reassure funders but there are a limited number of civil engineering firms which will guarantee or ‘wrap’ the waste technology element of the plant.
Some new entrants can overlook the issue of waste composition, which is neither homogeneous or constant over time. The fact that a plant is proven to work elsewhere on a different waste stream does not mean that it will work on other waste streams .
Policy risks represent a challenge for merchant plants. The timescale for obtaining contents, constructing and commissioning a plant is likely to span a change of government. In an industry that has literally been created by UK and EU regulation and incentives, the risk of policy uncertainty and change is a real concern .
Market due diligence is essential. The development of excess capacity at a local level can seriously threaten profitability. It is essential to understand waste arisings, composition, transport costs, catchment areas and planned competitive infrastructure developments.
Having addressed the above challenges, the development of merchant plants in a high growth sector can provide attractive investment and employment opportunities.
Paul Levett, industry non-executive director