When the UK government released its long-awaited energy white paper in December, it was clear what it expected from certain parts of the energy market. Offshore wind? 40GW by 2030, please. Hydrogen? Tentative steps for an immature technology making its way into the system, but a target of 4GW by 2024 was outlined nonetheless.
“Most projects are brought forward by a fairly small pool of capable and competent waste companies”
And what of the plans for bioenergy, the fuels that generated 28 percent of the country’s clean electricity in 2019? The most concrete promise was the publication of “a new Biomass Strategy in 2022”, with biomass described in the paper as “any material of biological origin, including wastes”. Uncertainty and delays have become a theme in this sub-sector of the UK’s clean energy story. Although the country has built up an energy-from-waste capacity that is among the highest in the world, growth has stalled in the past couple of years.
This is not due to a lack of interest. One of 2020’s largest infrastructure deals was KKR’s £4.2 billion ($5.8 billion; €4.8 billion) acquisition of Viridor, owner of 12 incinerators, from Pennon Group. First Sentier Investors also made a splash in October, paying SSE £995 million for a 50 percent stake in two EfW plants. Meanwhile, Macquarie, through the Green Investment Group, last year continued its joint venture with EfW operator Covanta.
So, with some of the infrastructure market’s largest players investing significant sums, why are others talking about continued commissioning delays, write-downs and legal disputes with contractors? Ed Northam, head of the Green Investment Group in Europe, denies there is an inherent problem with the sector. However, he believes the projects’ complexity makes them different from wind or solar sites, and that this is affecting deliverability.
“There’s a collection of technologies that need to be put together,” he says. “Just reflecting that means the opportunity for projects to throw up challenges, especially through the build period, is heightened. You’re going to need to be more hands-on and bring a degree of focus and expertise to that.”
Concerns around the use of new technologies have been among the main issues. Measures by the UK government following the global financial crisis to encourage the installation of EfW facilities, including a landfill tax, meant more projects coming to the fore. Although plenty have received backing, Matthew Norman, global head of infrastructure at Crédit Agricole CIB, which has been a significant lender in the sector, remains cautious about new technology.
“There was such a rush for those projects to close that perhaps deals weren’t done in such a diligent manner”
“Historically unproven technology in the waste sector has run into challenges across the market,” he says. “There was a strong government push to increase recycling and people thought new technology was the solution. We have steered away from unproven technology and decided to support more traditional recovery and recycling solutions.”
A lack of familiarity with certain technologies is also pointed to by Matthew Gillions, a senior construction consultant at insurance broker and risk advisor Marsh. “Contractors wouldn’t necessarily be familiar with all the technology being used on a project,” he says. “What that’s led to is a failure of the facilities to perform in accordance with what they would expect.”
Gillions points specifically to advanced conversion technology, a form of gasification in EfW projects. An ACT project has been at the heart of a dispute involving Bioenergy Infrastructure Group, the largest asset in the M&G-owned Infracapital’s first greenfield fund and which pension fund documents in November revealed had been written down.
The Energy Works Hull site, a 24MW combined heat and power ACT project, was originally meant to be operational in 2018. However, BIG terminated engineering and construction company M+W Group’s contract in 2019 after significant delays and a dispute with a subcontractor meant the plant was still under construction. The delays impacted revenues and “triggered issues with the lenders”, according to the pension.
BIG and Infracapital declined to comment for this story. However, Infracapital told us in November that “in common with many others in this sector, we have seen issues with some sites”, while insisting that the majority of BIG’s sites were performing well.
“We have been working hard to identify and address these, strengthening the management team and taking an active approach to overseeing construction and contractors,” Infracapital said at the time. “These efforts have started to bear fruit. We are confident in the group’s financial position and in its long-term value.”
If Infracapital’s efforts to address delays have started to bear fruit, they might be one of the lucky ones in this respect, according to Gillions. “We have seen projects which have been longer in the extension period of the construction phase than they were in the original construction period,” he says. “For example, a large £300 million EfW project would take about three years to build. We’ve seen some that have been in extension for more than three years because they can’t get the process to do what they should have done. The two main drivers for that are the technology that was deployed and the lack of familiarity of that technology by the engineering, procurement and construction contractors.”
Limited EPC expertise
Alongside questions about technologies, EPC contractors and their ability to deliver EfW projects have become the heart of the matter. A wealth of contractors has entered and exited the market in recent years, with Interserve the most high-profile to quit – although, fittingly, its plans were delayed until last year as it struggled to complete projects on time. One former employee says the firm “didn’t have the technical in-house expertise” to build such projects and “just saw it as an opportunity to make a quick buck”.
An Interserve spokesman emailed us the following statement: “Under the leaderships of the then chief executive Adrian Ringrose, Interserve, which is now in administration, made a strategic decision to enter the EfW sector a decade ago. Interserve experienced complications with the delivery of projects following the insolvency of a key contractor which supplied technology for the plants’ combustion areas.”
One acquirer of an Interserve project is Greencoat Capital’s bioenergy division, which bought the 40MW Templeborough biomass plant in 2019. Although a different technology, it had “issues common to some other projects built at the time”, according to James Samworth, partner at Greencoat. “But it was a delay and not a performance issue.” “I don’t think anyone’s cracked the technology, to be honest,” the former Interserve employee adds.
“Our clients want a degree of predictability in their returns and are prepared to pay a certain price for that predictability”
Interserve’s bet on EfW projects did not deliver a quick buck, though Northam indicates the company’s problems reflected wider issues the sector has created. “The industry has been brought up around an EPC model, and just the depth and the number of parties that are able to provide a fully wrapped EPC development package for waste-to-energy has reduced,” he says.
“It’s not a particularly deep pool. Invariably, where you don’t have depth and liquidity around a particular delivery model, it does put a bit of pressure on. Where there’s less depth you have to be very thoughtful as to how you respond to that.”
Chris Jonas, director at EfW consultancy Tolvik and a former managing director at Viridor, says these projects are not “a shed with bits of kit inside”. “Most projects are brought forward by a fairly small pool of capable and competent waste companies,” he says. “There is an awful lot of companies who have planning permission or consent to bring a project forwards but, in my opinion, not many of those have got the ability to bring all the parties through to a successful financial close.”
Tolvik’s latest annual report on the sector, published last May, noted an overall 21 million tonnes of waste capacity in the UK, including projects in the development phase. However, it added that only 38 percent of projects granted planning permission were being developed by those already active in the UK EfW sector, and projects backed by such actors were the most successful in reaching a financial close.
The report stated that Tolvik had started to factor “significant commissioning delays on a number of projects”, with ACT sites highlighted as particularly challenging.
According to Gillions, the other factor bringing these construction and technology issues to the fore is the time frame and the expiry of the renewables obligation subsidy for EfW plants. With the subsidy system having ended a couple of years ago and requiring projects to be commissioned in 2020-21, problems are starting to mount.
“There was such a rush for those projects to close,” says Gillions. “Perhaps deals weren’t done in such a diligent manner as before, because they knew they had to get there before the date. When you’re building, everything’s going fine. It’s when it gets to the testing and commissioning period that these things start to manifest. What you see in the market now is a function of what happened a few years ago in terms of the race to get there. The subsidies encouraged developers and contractors to enter a market with a particular type of technology they were less familiar with.”
Although Gillions says Marsh has yet to see a project fail to secure insurance, the standard of projects is not what the firm found two years ago and insurance costs for these facilities have risen by 20-30 percent since 2018.
Build back better
So where does the industry go from here? Will the fundamental issues with technology restrict its growth or does the power lie with the small pool our sources have told us are doing it right?
The sector has room for redemption, with the GIG and Covanta collaborating on projects with Biffa, the waste company formerly owned by Global Infrastructure Partners, a deal described by GIP founder Adebayo Ogunlesi to us in 2017 as a “disaster”, but which is working with sector leaders once again.
“As you work through the value streams in the waste sector, you can work out where it’s best to operate,” Norman believes. “There are certainly opportunities in this market but there are also risks. As long as the plant is well located, uses proven technologies and is operated by established experts in the business, then this exhibits strong infrastructure characteristics.”
Both the economic and macro-level ingredients for success still exist. Viridor, for example, had recorded a 19.1 percent increase to an EBITDA of £178.9 million before the KKR acquisition. Meanwhile, the need for environmental infrastructure is only increasing, as is the LP appetite to meet it.
So how does one avoid getting burned? Gillions responds: “The fundamental issues are: has the EPC contractor delivered this type of project successfully before? Is the process technology proven? Is the key equipment from reputable suppliers? Is there a robust fire protection system?”
The last point may sound obvious, but the nature of the projects means it has been an issue at several sites. Norman echoes Gillions’ advice around counterparties and adds that platform-building is the best way to capture the sector’s strong fundamentals.
Samworth is a little more circumspect on how to capture these. “What’s done is done,” he muses on construction. “The way we’ve approached it is to try to acquire plants that are performing well at prices that reflect their projected performance. Our clients want a degree of predictability in their returns and are prepared to pay a certain price for that.”
Some investors, it seems, are no longer prepared to fan the flames.
Aviva’s biomass blues
Biomass projects face different issues to other EfW sites owing to feedstock availability and transportation.
However, construction difficulties have also reared its head at Aviva Investors’ Barry Biomass project in Wales.
Accounts for the project company owned by Aviva’s Infrastructure Income Fund, filed in September 2020, noted various “claims for material amounts being disputed with third-party subcontractors”. Should such claims be accepted, “the company may not be able to fund the payment of these liabilities, which results in a material uncertainty which may cast significant doubt about the company’s ability to continue as a going concern”.
The accounts do not specify the issue with the contractor, though correspondence from the Vale of Glamorgan, the local authority where the project is based, as reported by The Times, points to a specific issue. According to Ian Robinson, principal planner at the authority, the development has been built as “a mirror image” to the plans, and is “the wrong way round”.
Aviva declined to comment but a limited partner, the Hammersmith and Fulham Pension Fund, noted in November that this was causing an issue with the pension’s auditors. The Barry project looks set to continue to be another burning issue.