News Analysis: EFW - Has Australia burned an opportunity?

20 March 2018

Australia seems ideally suited to turn its trash into treasure by using it to generate electricity. But politics and regulation is holding the burgeoning energy-from-waste (EfW) industry back, as Kate Burgess reports for Inframation News

On paper, Australia seems destined to follow the lead of the UK, France and certain Southeast Asian countries in turning the mountains of urban waste that ends up in landfill into electricity.

Even though Australians are prodigious recyclers, a rapidly increasing number of city dwellers and an addiction to upgrading ‘throwaway’ consumable goods is fuelling an 8% rise in annual waste volumes.

Of the nearly 64 million tonnes of solid waste generated each year, 40% ends up being tipped into landfill sites dotted around the country, according to the latest figures available from the Department of Environment.

Aside from a handful of small-scale organic waste facilities, an enormous potential to divert larger quantities of residential, commercial and industrial waste away from pits in the ground and into generators has so far remained untapped.

To date, municipal councils have been the main driving forces for EfW schemes as they seek to recover more usable materials from rubbish thrown out by residents and businesses as a means to make local communities more liveable and sustainable.

False start

A key stumbling block has been that most councils lack the scale, skill and expertise to design and run their own projects of any scale, says Ron Wainberg, a technical director of waste industry advisers MRA Consulting.

“Some local governments are interested in building energy-from-waste plants but in my view they don’t have the expertise. They wouldn’t consider building an oil refinery, so why would they build an energy from waste plant?," he says.

Research from MRA consulting estimates that councils and waste companies such as Veolia and Suez Environment together have enough appropriately sorted waste to generate enough electricity to supply 2% of Australia’s baseload needs. In 2016, the from identified around 60 smaller schemes that can generate a combined 623MW of electricity.

The federal government’s Clean Energy Finance Corporation has also spotted the potential to turn rubbish into riches. In 2015, it predicted waste-to-energy and bioenergy could develop into an AUD 5bn (USD 3.85bn) industry, and provide 800MW of generation capacity.

While local councils have successfully pioneered schemes that break down organic waste from food and unwanted garden materials in a process known as anaerobic digestion, they have struggled to accumulate waste in the quantities needed to supply larger projects, which use combustion or gasification technologies to turn the waste into fuel for generating power.

“There are only a limited number of councils in Australia that are large enough to have enough waste to underpin a project by themselves so it takes multiple council groups to come together to have enough waste to underpin a project,” says Henry Anning, corporate and project finance director at the CEFC.

Anning believes the opportunity is as tangible as when the 2015 study was conducted. Yet three years on, not a single large-scale urban waste project has gotten off the ground.

Wasted opportunities

Anning and Wainberg agree there is room for the private sector to take the lead on projects, and work with local councils to aggregate their waste into the quantities required for larger schemes.

First, financial incentives are needed. Councils and other waste providers pay a so-called “gate fee” to project developers for the waste that would otherwise be sent to landfill.

The cost of putting waste into landfill must therefore be higher than what a project developer would charge.

Some Australian states make this easy by charging councils a levy on each tonne of waste they send to landfill. The higher the levy, the more attractive it becomes to find other ways to dispose of the waste. New South Wales charges the highest levy, followed by Victoria and Western Australia, which targets sending zero tonnes of waste to landfill by 2020.

Queensland, on the other hand, abolished its levy in 2013 shortly after the conservative Campbell Newman government came to power. There is now little incentive for councils to consider energy from waste because it would be more expensive than the default option of dumping waste into landfill sites.

While the gate fee is a project’s main source of income, developers earn a smaller amount of revenue for every megawatt of power they produce. To date they have struggled to land on the radars of big energy retailers to sign on as long-term customers. Also, the Clean Energy Regulator only classifies 50% of the power they generate as renewable energy and eligible to earn subsidies under the national Renewable Energy Target.

Local communities have also acted as roadblocks to projects going ahead, fearing they will impact air quality and have adverse health impacts. Many remember the days when households and businesses freely used incinerators to burn waste before recycling programs were widely implemented in the 1990s.

A proposed incinerator at a EfW facility in Eastern Creek on the fringes of Sydney has attracted the ire of local residents and environment groups. Its developer, Dial A Dump, has been slammed by the Environmental Protection Authority for not providing enough information on the “feedstock” or type of waste the project will use. The ongoing battle for an environmental permit has been referred to an Upper House inquiry, which was due to report back by the end of the first quarter of this year.

Better regulation to recognise the environmental and social costs of landfill, as well as how they can act as a baseload energy supplier are needed to improve the economics of bigger projects and attract investors, Anning says.

Investors and lenders have struggled to gain comfort with the complex web of contracts that underpin waste to energy schemes, and the fact that larger grate combustion and gasification technologies are as yet unproven in an Australian context.

“The trouble with waste is that somebody always owns it,” MRA’s Wainberg says. “What a lot of the entrepreneurs don’t appreciate is that waste is managed under a fairly complex interconnecting network of contracts and people who own those contracts and make their living out of it want to defend their patch.”

He adds that various waste contracts expire at different times, and co-ordinating them so they provide a reliable stream of waste to feed an incinerator can be challenging.

“It can become chicken and egg because councils want to secure their waste from projects that are likely to proceed but projects won’t go ahead unless the contracts are signed,” the CEFC’s Anning says.

Signs of progress

Councils in Western Australia have joined forces to alleviate this issue. Rivers Regional Council and Eastern Metropolitan Regional Councils are municipal clusters that have collectively agreed to supply waste to project developers.

Phoenix Energy has partnered with Rivers Regional Council (RRC) to develop the Kwinana Waste to Energy project in conjunction with Macquarie Capital as financial sponsor. Meanwhile, local developer New Energy is proposing a facility at East Rockingham, south of Perth together with the ERMC grouping.

Despite both projects being in development for several years, neither has yet managed to secure the project financing and equity investment they are seeking.

The schemes have been dogged at various times by a various technical, contractual and financial issues. A group of international lenders including ING and SMBC lost interest in the Phoenix project after the developer sacked engineering and procurement contractor POSCO in late 2015.

Phoenix has since dumped EY as financial adviser and taken on Macquarie in an advisory and sponsor capacity. Banking sources familiar with the project said funding talks involving MUFG and SMBC took place around six months ago but have not progressed into the signing of a project loan facility.

New Energy’s AUD 400m Rockingham project is also seeking lenders and equity sponsors, after enduring a major facelift when it ditched its original American contractor Kiewit in 2013. It later switched to a grate combustion technology provided by Hitachi Zosen and partnered with Abu Dhabi-based Tribe Infrastructure Group. The trio then entered their project in a tender run in 2017 by the ERMC, which specifically called for a combustion-based EfW solution. They were anointed preferred bidder in September 2017, have agreed to process 330,000 tonnes of council waste annually, and are understood to be in early stage discussions with lenders and potential equity sponsors.

Phoenix is plowing ahead with its AUD 400m Kwinana project regardless, having signed 20-year waste supply agreements with RRC along with seven other local council to the tune of 400,000 tonnes of waste per annum. It has secured planning and environmental permits, and expects to have finished building the facility after 2020.

The ability of either Perth project or Sydney’s Eastern Creek to lock in financing will be critical to the viability of large scale energy from waste in Australia. The CEFC is looking to provide debt or equity to such projects, although Anning declines to say whether the agency has decided to back any.

“We’re looking to support proven technologies overseas that have been using a similar feedstock and at a similar scale and deploying those to market.

“We haven’t seen much project finance in the waste sector generally. Most of the projects are done on the balance sheets of large waste companies. We need one of the large-scale projects to reach financial close. That always builds investor confidence,” Anning adds.

Picking a winner

The CEFC is also looking to give a leg-up to the smaller end of the market where anaerobic digestors dominate, and in 2016 appointed UK infrastructure fund manager Foresight Group to manage an AUD 100m bioenergy fund.

Foresight director Gary Sofarelli says the fund is currently building a portfolio of about five to ten commercial and industrial projects each around AUD 10m-15m in size. It is speaking to various agribusinesses, handlers of urban landfill waste and those converting forestry materials into wood pellets to produce biofuels. The completed portfolio will be backed with non-recourse project finance.

He points out that anaerobic digestor projects are less political and more straightforward to build, but adds it is time consuming to mesh several different smaller schemes into a single investment.

"[Closing the first waste-to-energy project] will set a benchmark and once operational it will prove that the technology can work whilst still providing a healthy return to investors and delivering an environmentally and socially more responsible outcome,"Sofarelli says.

Large project or small, institutional investors are well on their way to finding a foothold in Australia’s burgeoning EfW scene. Watch this space.