EnergySource | Issue 20 19 Jul 2018 African energy from waste projects: A plethora of opportunities

Over the last five years, Ashurst has been involved in the development of energy from waste (EfW) projects across a number of regions.

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This article focuses on some of the growing opportunities that exist across Africa for the development of such infrastructure and what needs to be done by the public sector in order to make such projects deliverable and, more relevantly, financially feasible.

Furthermore, we have identified those factors that investors in the sector should use to identify the most deliverable projects on which to focus their attention.

Finally, we have included a short summary of the various types of EfW projects being undertaken across Africa to deal with the growing problem of (and opportunities associated with) waste management. 

What is waste to energy?

In very general terms, EfW facilities (or, as they are also known, "waste to energy" or "WtE" facilities) create energy in the form of electricity and/or heat from the treatment of waste products. This is usually done by "thermally treating" (or incinerating) the waste.

Most EfW processes produce electricity or heat directly through combustion. Alternatively, they might produce a combustible fuel such as methane or methanol from the treatment of a waste product.

In addition to "mainstream" moving grate or fluidised bed thermal treatment plants, thermal treatment plants may instead involve:

In addition to "mainstream" moving grate or fluidised bed thermal treatment plants, thermal treatment plants may instead involve:

  • gasification (producing a combustible gas or syngas); or
  • pyrolysis (producing other products using high temperature decomposition).  

Non-thermal technologies include:

  • anaerobic digestion, which is ideal for treatment of vegetable matter, food waste and animal by-products, typically producing a biogas; and 
  • mechanical biological treatment, which is used primarily for dry recyclable products and solid waste, often to separate recyclable products and produce a "refuse derived fuel" with the residue.

EfW plants have been used to treat and dispose of a number of waste products, but primarily are used on:

  • municipal solid waste;
  • commercial and industrial waste;
  • food waste;
  • industrial by-products (such as bagasse produced during sugar production);
  • animal by-products and animal waste (e.g. chicken droppings); and
  • sewage.

Current state of the EfW market globally

Most EfW technology is not new. Among the 420 plus EfW plants in Western Europe and 80 plus EfW plants in the United States, there are a number of large EfW facilities which have now been in operation for three to four decades. In fact, the use of solid municipal waste to produce biogas and electricity dates back to the early 20th century. 

However, due to dwindling fossil fuel resources, the increasing focus on energy security, a greater awareness of the social and environmental hazards of poor waste management and an overwhelming global focus on reducing greenhouse gases, the development of EfW projects has increased significantly over the last 20 to 30 years. 

In many developing economies (e.g. many African jurisdictions, and on the Indian sub-continent), alternative and far cheaper waste management solutions have been used, as a result of greater levels of scavenging and recycling, the low cost of labour, the ready availability of landfill sites and the lack of available capital. 

However, concerns over energy security and a greater recognition of the environmental and social concerns associated with existing waste management systems have opened up greater opportunities for developers, banks and equipment manufacturers in the EfW space, particularly in the emerging markets.

In addition, as compared to renewable electricity generated from wind turbines or solar CSP or PV panels, power generated from waste represents baseload capacity and is therefore a far more reliable and stable source of electricity (often achieving availability levels of around 90 per cent).

Challenges of waste management in Africa

Changes to demographic and social factors affecting many African countries are challenging the adequacy and sustainability of current waste management practices across the continent. In particular, African cities are facing:

  • growing populations;
  • rising incomes;
  • increasing volumes of waste arising as a result of population growth, industrialisation and modernisation;
  • limited space, particularly in expanding urban areas, over which to build or expand landfills;
  • increasing risk of disease and other health risks associated with unregulated and illegal dumping practices;
  • pressure on continued use of landfills in light of changes in views towards waste management and the environment more generally; and
  • the fiscal challenge of meeting infrastructure demands across all sectors.

On the other hand, Africa has also seen the following developments over the past decade which position it well to become a growing frontier for EfW projects:

  • a generally more stable investment climate, which has resulted in more active involvement in project financing by regional investment and development banks;
  • the development of more sophisticated regional energy markets and networks, allowing for greater energy trading and transmission (e.g. the Southern African Power Pool);
  • continuing power shortages in most countries across the region, ensuring that any power generation (particularly the generation of baseload renewable energy) will be welcomed and attract favourable tariffs;
  • a current shortage of effective and modern waste infrastructure, justifying investment into the sector;
  • such investments are aligned with national priorities and strategies promoting infrastructure development, inclusive growth, sensitivity to the environment and sustained job creation;
  • the imposition of more onerous national emission reduction obligations under the Paris Agreement signed in April 2016 under the United Nations Framework Convention on Climate Change;
  • the more favourable regulatory environment in African countries towards thermal treatment of waste (compared, for example, to the EU which has focused on waste reduction);
  • increasing use of public private partnerships (PPPs) to deliver economic and social infrastructure and greater familiarity with these structures; and
  • a greater focus on Africa by internationally recognised and experienced developers keen to develop new markets.

In addition, the last few years have witnessed a greater emphasis on the development of infrastructure dedicated to alleviate environmental as well as health and safety concerns.

Urban growth in Africa has led to the development of poor waste management practices, particularly in slum areas, including the widespread dumping of waste in water courses and uncontrolled dump sites.  As a result of those practices and trends, sanitation levels have remained low and, in the worst affected areas, this has resulted in outbreaks of disease including plague, cholera and typhoid fever in various African countries.

Key economic drivers

Economic drivers of EfW developments

While the social and environmental drivers for a project may seem compelling, the same cannot always be said for the economic rationale for those projects.

The reality is that many EfW facilities are not currently affordable or bankable, as they are based entirely on the revenues from the sale of the power generated (regardless of whether the facility also produces heat). This is largely due to the cost of electricity produced in this manner being higher than the cost of producing electricity using other technologies.

Globally, a range of measures have been employed to facilitate the development of EfW projects. These measures include:

  • feed-in tariffs;
  • green certificates (in a variety of forms);
  • renewable heat incentives;
  • enhanced capital allowances and other tax incentives; and
  • the imposition of landfill taxes.

Other revenue streams

A lack of focus on the waste supply side of the equation has proved to be problematic in financing long-term EfW projects in developing countries. te fee" or "tipping fee" per tonne of waste. These fees will also be payable by the relevant municipal authority responsible for the disposal of waste.

Most large-scale, successful EfW projects have relied heavily on the revenue arising from their waste disposal activities, typically charged on the basis of a "gate fee" or "tipping fee" per tonne of waste. These fees will also be payable by the relevant municipal authority responsible for the disposal of waste."

Gate fees or tipping fees usual account for between 40 per cent and 70 per cent of the revenue for a project. The other revenue streams derive from:

  • sales of electricity and/or heat;
  • public sector subsidies (e.g. green certificates, feed-in tariffs, contracts for difference, etc.); and
  • sales of recyclable products (e.g. ferrous and non-ferrous metals, glass, paper, etc.).

This structure may be resisted in cities in Africa which historically have not paid for waste disposal and where it would be politically difficult to pass on gate fees to the local residents.

Given the volatility of energy prices and the unpredictability of most government subsidies, most lenders to EfW projects will welcome the stable long-term revenue stream which derives from waste gate fees, particularly when such payment arrangements benefit from:

  • strong counterparty credit ratings;
  • fixed gate fee rates per tonne of waste;
  • guaranteed minimum waste volumes (usually structured on a "put or pay" or "deliver or pay" basis);
  • change or law protection; and
  • protection in respect of changes to waste composition.

In an African context, however, waste disposal is often carried out at no cost to the local population and at little cost to the relevant municipal authority, particularly where waste can be landfilled or dumped and there is no overriding policy or macroeconomic driver to avoid landfill.

This makes it very difficult in many cases to structure EfW projects with long term reliance on waste gate fees, particularly where the local economy and political situation will not allow for such gate fees to be passed to the end-users.

Furthermore, although the investment outlook is improving, there continues to be a lack of public and private sector counterparties for projects that have strong credit ratings. 

The legal frameworks across several African countries are also still developing and do not have the same standard of transparency and rule of law as in developed countries. This necessarily means less certainty to funders and other parties involved with respect to any conflicts.

Identifying African opportunities

As is the case for any energy development, EfW projects are best developed where favourable or (at the very least) acceptable investment regimes prevail. 

Investors and banks will inevitably look for a legal framework which facilitates the resolution of disputes and the enforcement of any awards or decisions which arise. The legal processes of the country should always be transparent and the rule of law and respect for the sanctity of contractual commitments should prevail.

Investors also need to be aware that even jurisdictions with very stable investment regimes and legal systems can throw up some surprises. As government policymakers juggle climate change and other environmental concerns with security of energy supply issues, and seek to meet various self-imposed and external targets, there are likely to be some policy reversals, leading to regulatory changes. It is therefore important for investors to always consider not only the existing regulatory regime, but also to keep a close eye on policy developments. 

In the context of EfW projects, there are a number of additional characteristics which any investor will inevitably look for, to ensure that the legal and commercial framework for these projects is attractive for both foreign investors and commercial and multilateral lenders. 

Key ingredients of any EfW project will therefore include:

  • a regulatory system which is supportive of the thermal treatment of waste (surprisingly, such regulatory systems may be more prevalent in developing markets than in more established markets, e.g. Ireland and the UK);
  • an organised waste collection and regulatory regime which facilitates the centralised collection of municipal and commercial waste and discourages illegal, unregulated or ad hoc disposal (e.g. fly-tipping) of waste;
  • the ownership by municipal authorities of the waste stream (typically where the municipal authorities have a statutory duty to collect and dispose of waste);
  • creditworthy long-term suppliers of waste (which may comprise municipal authorities/local government or, alternatively, financially stable and technically proficient corporate entities);
  • a significant need (on a regional or national level) for new energy generation and readily available offtakers for any new energy produced (e.g. district heating networks, existing industrial users of heat and power or an established electricity grid system);
  • creditworthy long-term power and/or heat offtakers (which may be public utilities or corporate offtakers with sufficient balance sheet strength);
  • a transparent licensing and planning regime which is capable of enabling all key consents and permits to be obtained in a way which is both efficient and incapable of subsequent challenge;
  • appropriate government authorities prepared to shoulder the political risks associated with EfW projects; and
  • low or negligible levels of organised or political resistance to the development of thermal waste treatment facilities. 

Due to the inherent nature of the waste feedstock for EfW projects, and various international regulations which prevent or regulate the transnational shipment of solid waste products, securing sufficient feedstock for EfW projects has traditionally been a problematic area for these projects. 

In particular, securing long-term supplies of waste feedstock is more problematic than would typically be the case for coal, gas, oil or other biomass-fuelled independent power projects. For this reason, a significant amount of up-front legal, regulatory and commercial due diligence often needs to be carried out up-front to determine the viability and bankability of any such deal.

Once the viability of the project is established, in order to ensure the success of any EfW project, it will also be necessary to ensure that the usual ingredients exist for a successful and bankable project, including:

  • strong sponsor support;
  • demonstrable knowledge and track record by the sponsors of project-financing infrastructure developments;
  • a strong and experienced advisory team (with both waste and energy experience);
  • an EPC contractor with an established track record of developing EfW projects utilising proven technology (e.g. preferably moving grate or fluidised bed);
  • recognised and reliable equipment suppliers for the chosen technology;
  • an appropriate security package from the EPC contractor which reflects the nature and extent of EPC risks involved in the project; and
  • an acceptable strategy for the disposal of all ash residue and other by-products. 

Snapshot of current developments in the EfW market in Africa 

Below we have listed some recent projects and initiatives in the EfW sector in Africa, illustrating the very real opportunities which currently exist. 

Ethiopia: The US$120 million Reppie waste to energy project in Addis Ababa, Ethiopia, transforming the country's largest landfill into a waste to energy site which can dispose of 1,400 tonnes of waste per day through a controlled combustion process and generate enough power to supply households with 30 per cent of their electricity needs.  This is still in the process of being built.
Ghana: Armech Africa Limited is to construct a US$300 million waste to energy power plant in Tema, Ghana to generate 60MW of clean energy.  The project will be pre-financed by the Armech Group via Industrial and Commercial Bank of China but is yet to start construction. 
Kenya: The sustainable Energy Fund for Africa has approved a grant of US$995,000 to support the planning stages of the construction of a 10 MW grid-connected municipal waste to energy plant in Nairobi, Kenya.
Uganda: The Kampala Solid Waste Treatment and Disposal PPP Project which is intended to manage at least 1,000 tonnes daily of Municipal Solid Waste, and is still being planned.
Kenya: The Nairobi City County Government has published an Expression of Interest notice to establish a waste to energy facility in Dandora, which we understand has received submissions but is yet to be awarded to a developer.
Zambia: The Government of Zambia has expressed interest in establishing an EfW facility and has been looking for a private partner to take forward this project.
South Africa: The Johannesburg Landfill Gas to Energy Project, involving the development of five landfill gas to energy plants, producing up to 19 MW of energy.
Nigeria: The Municipal Solid Waste Composting Project, Ikorodu, Nigeria, being developed by EarthCare Nigeria Limited, processing 1,500 tonnes of solid waste per day to produce a composted material.
Ghana: The biogas plant at Kumasi Abattoir, Ghana, involving the production of biogas from the treatment and disposal of animal, crop and sewage waste.
Nigeria: The Ketu Ikosi Biogas Project, Lagos, Nigeria, being developed by Midori Environmental Solutions in conjunction with the Lagos Waste Management Authority, treating food waste as the feedstock.
Senegal: The Pilot Biogas Initiative, Ferlo, Senegal, involving a development of 40 bio-digesters in Ferlo, with animal waste being used as the feedstock.
Kenya: The Gorge Farm AD Power Plant, Naivasha, Kenya, commissioned by Tropical Power in collaboration with biogas plant manufacturer, Snow Leopard Projects GmbH, processing 500,000 tonnes of organic waste per year.

While not all of these developments are significant in size, compared to many of the European and US EfW projects, nonetheless they illustrate a growing understanding across the region of the benefits to be gained from diverting waste away from landfill and using waste feedstock as a resource to produce renewable energy.

There are therefore very real opportunities for power developers and utilities across Africa to develop this form of renewable energy technology.

Co-author: Alice Rosenthal-Erickson, Trainee Solicitor.

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The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying it to specific issues or transactions.

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