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Third party investors remain hungry

As the waste treatment market makes the transition from the era of conventional PFI/PPP projects, underpinned by council contracts to smaller merchant projects, plant developers are considering how to access third party finance.

Of a smaller scale, backed by merchant waste contracts and often incorporating advanced conversion technologies such as gasification, these projects present a wholly different risk profile to what has been financed in the past. But with proper structuring and risk mitigation, the market is ready to provide capital.

Before approaching third party investors, project sponsors should ensure that their scheme has completed the requisite level of development.

All major contracts should have a document setting out the terms of the commercial transaction agreed in principle with credible counterparties. Sponsors should ensure they have a plan to cover costs, including development and advisory costs, up to financial close. Such plans should include legally binding agreements with certain investors to cover these costs to that point.  

Financeable projects start with a site that has strategic advantages such as transport access, proximity to feedstock source and so on. The sponsors will have secured the rights to the land through an exclusive purchase agreement or lease option. The site should have full planning consent with an implementation plan to satisfy any conditions.

An environmental permit will have been obtained and no issues from the Environmental Impact Assessment should be outstanding. Power projects will have a grid connection offer from the local distribution network operator, and any other offtake arrangements such as heat infrastructure or private wire will be fully permitted.

A robust technical solution is key to obtaining third party finance. The technology should have a proven operational track record at a similar scale to what is being contemplated. But innovative applications of technology, such as the use of Nexterra gasifiers on the GIB-funded Birmingham Biopower project, can still attract finance if the technology is sufficiently proven and the rest of the project is structured in a manner to mitigate technical risks.

The feedstock contracting strategy of a successful project will adequately mitigate price and volume risks. Contracts with strong counterparties will guarantee feedstock of a specification appropriate for the technology and financing package.

Project economics should stand up to lower gate fees/higher prices to provide comfort to third party financiers, and ensure the project is competitive in the

Attractive Project site

Construction arrangements should be with contractors with a strong track record. Successful projects typically include, in the construction contracts, a detailed specification developed with qualified engineers which demonstrates the plant’s minimum performance requirements, along with regulatory or other limitations such as planning or fuel specification.

The construction contracts should align incentives with the contractor and sponsors to ensure the project is delivered on time and performs as required. A security package will be in place to provide financial guarantees. The proposed build timetable to commissioning should allow headroom for any regulatory deadlines or the last date by which it must be done.

Contracts for the operation and maintenance of the project should similarly be with experienced counterparties, and provide guaranteed levels of performance on which third party financiers can build a funding case.

The term of all arrangements during the operating phase should be longer than the tenure of any debt, and provide security from the counterparties to guarantee their liabilities or obligations to the project.

Finally, sponsors will have to have a convincing financing case with realistic assumptions on which investors can make informed decisions. Strong equity returns and debt coverage ratios, underpinned by contractual arrangements, will attract third party capital into well-structured projects.

The GIB remains committed to delivering investment into projects that are both green and profitable for the UK’s waste sector. It remains at the forefront of financing innovative, merchant projects both directly and through our fund managers. Its recent investments in Birmingham Biopower, Evermore Renewable Energy and Widnes biomass CHP alongside private investors demonstrate there is an appetite for well-structured projects.

Chris Holmes is the managing director for waste and bio-energy at the Green Investment Bank (GIB)

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