Waste to energy: African opportunities

This insight focuses on some of the developments which have been made in the management and treatment of municipal, commercial and industrial waste in some of the more developed and regulated jurisdictions around the world.

We have also examined where similar opportunities might exist across Africa for the development of similar infrastructure and what needs to be done by regulatory authorities and national and state governments in order to make such projects deliverable and, more relevantly, financially feasible.

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

What is WtE?

In very general terms, waste to energy facilities (or, as they are also known, energy from waste (EfW) 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 WtE 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 incineration, thermal treatment plants may instead involve gasification (producing a combustible gas) or pyrolysis (producing other products).

Non-thermal technologies include anaerobic digestion, which is ideal for treatment of vegetable matter, food waste and animal by-products, typically producing a biogas, or mechanical biological treatment (MBT), which is used primarily for dry recyclable products and solid waste.

Waste to energy 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.

The African perspective

Over the last 10 years, there has been a number of notable developments across Africa and internationally which have combined to create a favourable climate for the development of new waste management infrastructure in the region. These factors include:

• a generally more stable investment climate, which has resulted in more active involvement in project financing by regional investment and development banks (notably AfDB, DBSA, Standard Bank, Nedbank, FMO, IFC, and various others including Chinese and Japanese lenders);
• the development of more sophisticated regional energy markets and networks, allowing for greater energy trading and transmission;
• continuing power shortages in most countries across the region, ensuring that any power generation (particularly the generation of renewable energy) will be welcomed and attract favourable tariffs;
• a current shortage of effective and modern waste infrastructure, justifying investment into the sector;
• the imposition of more onerous national environmental obligations under the Paris Agreement signed in April 2016 under the United Nations Framework Convention on Climate Change;
• increasing use of public, private partnerships (PPPs) to deliver economic and social infrastructure; 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 reflected trends across the whole of the developing world and at 3.5 per cent is the highest in the world.  This 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 countries such as Cameroon and Côte d’Ivoire.

At the same time, the more positive developments of industrialisation and modernisation have given rise to:

• greater volumes of municipal, commercial and industrial waste; and
• waste of a different complexity and composition, such as different types of plastics, agro wastes and residues (such as that generated by the production of palm oil or sugar) and electrical and electronics equipment.

Current state of the market

Most waste to energy technology and the ability to extract energy from waste products are not new developments. Among the 420 plus WtE plants in Western Europe and 80 plus WtE plants in the United States, there are a number of large WtE 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 WtE projects has increased significantly over the last 20-30 years.

The development of WtE projects has varied from country to country, depending upon the local factors that have prevailed.

For example, in the UK, which has historically had access to freely available land and plentiful supplies of coal and gas reserves, there has been little reason to divert municipal waste away from landfill and towards the development of renewable energy. However, in countries such as The Netherlands (which does not have the ability to landfill waste due to the prevailing geography), there has been an overwhelming need to develop alternative solutions to the disposal of solid waste, resulting in extensive reliance upon WtE technology.

Furthermore, those countries subject to the EU Landfill Directive have been forced by Europe’s regulatory regime to develop alternative uses for municipal waste, thereby driving the demand for alternative technologies. As a result of European regulations, there is now a compelling financial justification for the development of WtE plants in most of Europe.

In other less-developed jurisdictions on the other hand (e.g. many African jurisdictions, and on the Indian subcontinent), alternative and far cheaper waste management solutions than the development of expensive WtE plants 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.

The development of waste management techniques and the extent to which a country’s ability to more efficiently manage and treat its waste reflects the country’s economic development as depicted in Figure 1.

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 WtE 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 (usually achieving availability levels of more than 70 per cent).

Key economic drivers

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

As shown below, large scale WtE projects are typically inefficient at producing electricity in comparison to their conventional thermal power plant competitors (which rely upon fossil fuels).

Comparative cost of generating power²

As a result, many WtE facilities will not be affordable or bankable based entirely on the power revenues likely to be generated from the disposal of waste alone (regardless of whether the facility produces heat also).

In Europe, we have seen a range of measures employed in order to drive forward the development of WtE projects. These measures include:

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

The majority of these incentives and subsidies are focused on energy and heat production and the reduction of greenhouse gases. Generally, these incentives treat WtE projects as simply another form of renewable heat generation, competing against hydro, solar, wind, tidal and/or other biomass power projects.

Other revenue streams

This lack of focus on the waste supply side of the equation has, however, proved to be problematic in financing long-term WtE projects in a number of jurisdictions.

Most significant WtE projects have therefore relied heavily on the revenue arising from its waste disposal activities, typically charged on the basis of a “gate fee” or “tipping fee” per tonne of waste.

In the context of WtE projects developed in Western Europe, it is not uncommon for the vast majority (often over 70 per cent) of all revenues to be derived through the waste gate fee, payable by the relevant municipal authority responsible for the disposal of waste.

Given the volatility of energy prices and the fickleness of most government subsidies, most lenders to WtE 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 (indexed);
• guaranteed minimum waste volumes (usually structured on a “put or pay” or “deliver or pay” basis);
• maximum waste volumes with a regular forecasting mechanism; and
• some form of 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 WtE projects with long term reliance on waste gate fees, particularly where the local economy will not allow for such gate fees to be absorbed or afforded.

Waste volume risk

The key problem arises from the tension between two key policy objectives of any government: reducing the overall volume of waste produced and maximising renewable energy production. For the successful development and financing of WtE projects, it is important that waste flows are maximised (not minimised) in order to fuel these facilities.

The problem was brought into sharp focus by the UK Government’s 2011 Waste Policy Review which stated that “we are aiming to get the most energy out of the residual waste, rather than to get the most waste into energy recovery”. Herein lies the difficulty in project-financing WtE projects.

For this reason, in some of the more developed jurisdictions, the focus has been on anaerobic digestion, gasification and the generation of heat (rather than electricity) from waste. These developments (which have focused on maximising the efficiency of energy extraction from the waste feedstock, rather than on delivering effective waste disposal infrastructure) have exacerbated the problems of financing WtE projects and slowed the development of WtE projects in Western Europe. This is largely due to regulatory regimes which favour energy extraction over waste disposal.

Therefore, in developing WtE projects (regardless of whether these are financed through equity or debt), much of the focus is on the waste supply side of the project, given that waste typically cannot be transported over long distances (as compared to coal, oil or gas) without incurring significant and prohibitive costs.

Developers therefore need to look at a number of key factors on the waste supply side, before deciding in which jurisdiction to focus their attention. These factors are outlined below.

Identifying opportunities

As is the case for any energy development, WtE 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 mindful of the fact 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 U-turns, leading to regulatory changes such as changes to incentive mechanisms. 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 WtE 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 WtE 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 sophisticated 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 such waste;
• the ownership by municipal authorities of the waste stream (this is typical where the relevant municipal authorities have a statutory duty to collect and dispose of waste within the relevant region);
• 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 WtE projects (which risks may be managed through a power purchase agreement, waste concession or government support agreements); 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 WtE projects, and various international regulations which prevent or regulate the transnational shipment of solid waste products, securing sufficient waste feedstock for WtE projects has traditionally been a problematic area for these types of projects.

In particular, it is not as simple to secure long-term supplies of the feedstock as 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 on the waste side of any WtE project in order 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 WtE project, it will also be necessary to ensure that the other key commercial 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 WtE 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.

It is only with these core ingredients that WtE projects may be financed and delivered in the current market.

Recent WtE developments

Whilst WtE projects are common throughout other more sophisticated markets (where the regulatory regimes and macroeconomic factors are conducive to projects of this nature), the development of WtE projects in Africa is more recent.

Examples of some recent WtE developments in the region include:

• the Johannesburg Landfill Gas to Energy Project, involving the development of five landfill gas to energy plants, producing up to 13MW of energy;
• 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;
• the biogas plant at Kumasi Abattoir, Ghana, involving the production of biogas from the treatment and disposal of animal, crop and sewage waste;
• 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;
• the Pilot Biogas Initiative, Ferlo, Senegal, involving a development of 40 bio-digesters in Ferlo, with animal waste being used as the feedstock;
• 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; and
• the $120 million Koshe Waste to Energy Project, Addis Ababa, Ethiopia, involving the treatment of 350,000 tonnes of waste annually to produce 50MW of energy through a controlled combustion process.

Whilst not all of these developments are significant in size, compared to many of the European and US WtE 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.