October 16, 2017

Energy from waste investment in the UK

3 min

Subscribe to our blog

Energy from waste (EfW) is a relatively small but rapidly evolving sector in North West European power markets. EfW investment is being driven by technology improvements, cost reductions and stringent EU guidelines on landfill waste.

The UK is Europe’s second largest market for EfW with 12 mtpa of waste consumed in 2016. Other dominant markets include Germany (24 mtpa), Netherlands (8 mtpa) and Scandinavia (12 mtpa combined).

The UK EfW sector is focused on power production (6 TWh in 2016), complemented with additional revenue streams e.g. from steam and metals recovery. CHP and steam outputs play a much bigger role on the Continent e.g. via district heating plants.  In the UK, only 8 of a total of 40 EfW plants export heat.

UK EfW projects have historically focused on conventional incineration technologies (e.g. grate based systems).  But the government has now limited renewable CfD access to emerging EfW technologies.

The lure of government CfDs has supported renewed interest in Advanced Conversion Technologies (ACT) which involve waste gasification and Anaerobic Digestion (AD) to generate biogas.  64MW of small scale ACT projects were successful in the second UK CfD round announced last month.

In today’s article we look at investment value drivers and challenges for UK EfW assets.

EfW investment considerations

There have historically been a range of smaller EfW project developers in the UK.  But asset ownership is starting to consolidate as EfW technology matures, capacity volumes increase and a proven track record of financing is established.

There is also a substantial EfW project development pipeline in the UK, which is increasingly focusing on larger scale conventional grate technologies.

EfW assets however have a unique set of exposures that mean they sit on the fringe of the conventional infrastructure investment space.  Key asset value drivers and associated challenges are summarised in Table 1.

Table 1: 5 key drivers of EfW asset value

Value drivers Key valuation challenges
Power price exposure Power revenue can account for upwards of half of total revenue. This creates a strong implicit exposure to UK gas prices (which dominate marginal power price setting). Projecting UK power prices for 20+ years. UK supply stack evolution & extent of gas price recovery in 2020s are key drivers of EfW asset value upside.
Waste input revenue Revenue from long term contracts for waste disposal underpins asset revenues (e.g. 60-70 £/t). Waste prices have been increasing, with some assets retaining uncontracted exposures. Waste supply versus EfW capacity volume growth (in the context of other sources of UK capacity) are key drivers of waste price evolution.
Capacity payments CfD availability limited. But capacity payments provide an alternative revenue stream which is relatively stable (e.g. 20-30 £/kW/year). Evolution of UK capacity mix important. Focus on competition across peakers, CCGTs & batteries driving marginal capacity pricing.
Embedded benefits & other revenue Triad benefit to fall to 3-10 £/kW by 2020. But significant BSuoS benefit remains (e.g. 12-15 £/kW), given high EfW load factors. CHP benefits also possible. Understanding value revenue upside from avoided rising system balancing costs (BSUoS).  Capturing any CHP revenue dynamics.
Growth strategy Aggregation opportunities across 40 existing assets in the UK.  Significant development pipeline of EfW projects. Also expansion potential into NW Europe. Quantifying economies of scale from aggregating assets and defining a realistic EfW growth volume potential.

Source: Timera Energy


Conventional thermal power assets are primarily exposed to the correlated spread between fuel and power prices.  EfW however has an outright power price exposure.  While this can be relatively easily hedged in the forward market over a 18-24 month horizon, it still means equity bears significant market risk exposure.  But with that risk comes the potential for substantial value upside from gas price driven UK power price recovery in the 2020s.

The challenges associated with market risk are helped by EfW asset revenues typically being underpinned by long term waste contracts (at increasingly healthy prices). Waste revenues combined with capacity payments and embedded benefit streams are helping to support project financing.

The other important challenge investors face is defining a scalable business model.  There can be significant efficiencies and overhead reductions from developing a portfolio of EfW assets.  These include a central commercial function to market power, capacity and embedded benefits, as well as well as sharing operational capabilities across plants.  It is these factors that are likely to drive an ongoing consolidation across EfW assets, similar to that currently underway in the UK peaker sector.

Energy from waste investment in the UK