Waste represents an increasingly important source of energy. Using waste as fuel can have important environmental benefits not only by reducing reliance on landfill but by reducing carbon dioxide emissions.
It does this in two ways: by reducing the amount of methane emitted into the atmosphere from landfill, and by replacing fossil fuel which would otherwise be used to generate energy.
Energy can be derived from waste in a number of ways:
The most obvious is the burning of landfill gas but increasingly large quantities of waste are directly incinerated to generate heat, which can then be used directly to heat factories, hospitals and other large buildings. Alternatively, the heat can be used to generate electricity by using the steam created by combustion to drive a steam turbine.
Gasification is another option in which biomass is heated in an oxygen deficient atmosphere to produce a low-energy gas which can then be used as a fuel in a turbine or combustion engine to produce electricity.
Mechanical-biological treatment (better known to you and me as composting) can be used to generate not only compost but also solid recyclable fuel which can then be used to generate electricity or in industry, for example, produce cement.
All sorts of waste can be used for waste-to-energy (WTE) projects, typically a combination of household, and commercial and industrial waste.
Strict environmental standards now apply throughout Europe to the emissions from WTE plants, which therefore require the installation of extensive state-of-the-art gas cleaning systems. However, getting permission to build incinerators can still run up against local objections.
This has led to operators seeking to by-pass the local planning decision process by treating projects as electricity plants under the Planning Act 2008 and taking the decision to the Infrastructure Planning Commission (which it is rumoured is soon to be abolished by the coalition government).
This isn’t an option in Scotland where, depending on the size of the project, applications are made to the local planning authority or the Scottish Government.
Despite the current pressures to reduce public-sector spending in almost every sphere, WTE remains an absolute priority because local authorities face stiff penalties for failure to meet EU targets for reducing landfill use by 50% by 2013.
Local authorities can fund WTE projects under PFI or by using their own borrowing powers.
Private-sector participants in PFI projects, however, continue to face a number of contractual and commercial challenges in bringing such projects to a successful conclusion.
Some of these challenges, such as difficulties in obtaining planning permission and deciding how to share revenues among stakeholders, are ones which are common to a number of renewable or cleantech projects:
The Department for Environment, Food and Rural Affairs in London and the Waste Implementation Development Programme (WIDP) issued a standard form project agreement (the “WIDP contract”) for projects in England and Wales in June 2009.
Any material changes to the standard form require WIDP approval.
The process for receiving approval is not straightforward and, although the 2009 document was issued for industry consultation prior to release, it omitted to address some key concerns.
Partly as a result of this, it is understood that a new form of WIDP standard form contract will be issued in the near future.
The WIDP contract does not apply in Scotland but is considered to be a useful template and will inevitably have an influence.
It is being used as the basis for the project agreement in a number of Scottish waste projects currently in procurement.
Obtaining planning permission remains the single biggest challenge in relation to waste PFI projects and is arguably the key factor behind the well-publicised delays in waste projects reaching financial close. The WIDP contract provides only limited compensation for failure to achieve planning permission.
The question of what will happen in the event that planning is delayed but not refused (and the associated costs consequences) continue to be debated in many deals.
One of the key issues in PFI projects is how the local authority will benefit from the revenues generated by the developer from the offtake arrangements under which the fuel or power resulting from the project are sold. This third-party income can be one of the key elements underpinning the economic viability of the project and its distribution is hotly negotiated.
The WIDP contract specifies that while protester action should not result in the termination of the contract, nor should it give rise to full compensation to the private-sector participants.
The market has started to come to terms with this position (unless there are project specific reasons to argue otherwise) despite the fact that such matters are difficult to insure against. It is not envisaged that WIDP will change its position on this matter.
The market has continued to try to strike a balance between the sponsors’ commercial need to have flexibility in dealing with their supply chain (particularly in relation to off-takers) and the public sector’s wish to retain control over the identity and suitability of sub-contractors who often form a critical part of the chosen solution. This is an area where the new WIDP contract is meant to be bringing further clarity.
In conclusion, there remain a number of areas where business continues to wrestle with issues inherent in waste PFI projects.
The publication of the new WIDP contract is eagerly awaited but early reports suggest that a number of challenging issues remain to be resolved.
Penelope Warne is head of energy at international law firm CMS Cameron McKenna.
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