While the trends are varied across individual countries, significant progress continues to be made globally in the deployment of renewable energy and energy efficiency measures. We thought it timely to provide an insight into certain lesser-known clean energy sectors. One such area is the Energy from Waste (EfW) sector.
We find the Energy from Waste sector fascinating. It involves the incineration of waste to create electricity, steam or heat. It is very well developed in certain northern European countries, showing it is a proven and viable source of renewable energy. In Germany, some 32% of all waste is processed in Energy from Waste facilities, while Denmark is a world leader at 51%. In America, industry estimates put EfW share at a relatively low 7% of waste disposal. What are the attractions of Energy from Waste?
– It is a source of baseload renewable energy with availability factors consistently in-excess of 90% pa (higher than coal at c. 80%!).
– EfW incineration dramatically reduces landfill and can work very effectively in conjunction with waste recycling programs (for example paper, plastics and metals).
–For every 10 tonnes of landfill waste diverted to EfW, 9 tonnes of carbon dioxide emissions are avoided.
– The annuity style revenue associated with waste disposal and electricity generation is well suited to public-private partnerships.
– The rapid urbanisation of China and India and lack of landfill capacity means there is a huge need and opportunity for the development of EfW projects.
Covanta Holdings (NYSE listed) is a world leader in the EfW sector. With a sole focus on EfW, Covanta is significantly smaller than its key global rivals, the more diverse Waste Management in North America and Veolia Environment in Europe, but has the added bonus of electricity and steam generation. The Covanta model is premised on being paid to take waste and also being paid to generate renewable, baseload electricity. Covanta operates 43 facilities across North America, two in China and one in Italy. Covanta has a current market capitalisation of $US2.3 billion and is 11% owned by interests associated with Sam Zell, a US property billionaire.
Covanta operates facilities that generate over 10 million MWh (megawatt hours) annually, the equivalent to 1,300 MW of generation capacity with an average availability of over 90%. Covanta estimates it holds a 65% share of the American Energy from Waste sector. Add to EfW their other renewable energy facilities and Covanta represents 8% of all US non-hydro renewable energy production.
Covanta is a specialist operator with an excellent track record in safety and environmental issues. One key area of development has been the enhanced recovery of ferrous and non-ferrous metals. Through its incineration process, Covanta converts 10 tonnes of waste into 1 tonne of ash and 0.5 tonne of scrap metal, plus 5-7.5 MWh of power. In 2013 Covanta expects to recycle over 480,000 tonnes of metal from its waste stream, 15% more than 2011 on stable waste intake volumes. This has generated incremental revenue of some $US80 million in 2012 despite currently depressed scrap metal prices, and is a key area of profitable organic growth.
Over the last decade Covanta has progressively expanded its Energy from Waste capacity to its current position as the North American industry leader. A landmark transaction being when Covanta acquired Veolia’s North American EfW business for $US450 million in February 2010. This added six new facilities with a combined capacity of 8,660 tonnes per day. Covanta has also undertaken a number of greenfield and brownfield capacity expansions – a few of these are outlined below.
Hawaii – Hawaii is perfect for EfW. While the capital cost of such a facility is very high, the lack of available landfill capacity and the exceptionally high fuel cost of electricity alternatives (namely imported diesel) makes this a very logical project when viewed from an energy security/self-sufficiency perspective. In December 2009 Covanta agreed to expand its existing Energy from Waste facility in Honolulu, raising its waste intake capacity by almost 50% from 2,160 to 3,060 tonnes per day. This will take gross electricity capacity from 57 MW to 90 MW at a construction cost of US$302m. Covanta has built and will now operate this facility supported by an extended contract term of 20 years. Funding and ownership is retained by the County of Honolulu. This facility was commissioned on time and on budget in September 2012.
Canada – In 2009 Covanta won the contract to design, construct and operate a C$270 million, 140,000 tonnes pa (385 tonnes per day) greenfield site in Ontario, Canada supported by regional government financing. Construction commenced in late 2011 with commissioning due at the end of 2014.
China – Covanta operates two small EfW facilities in China in conjunction with its local equity partners. The difficulties for foreign firms to invest and operate successfully in mainland China and to deal with myriad government authorities involved is evident primarily in the lack of detail Covanta provides on these facilities’ performance. China was not even mentioned in the third quarter results last week. Intriguing given EfW has been a key target for investment in China’s 12 th Five Year Plan. We contrast Covanta’s low key approach to the rapid expansion of the smaller but more dynamic (and risk tolerant) profile of HK-listed China Everbright International.
US – A key feature of EfW in the US is that this involves a waste supply and/or energy off-take agreement with the local or municipal governments in America, often with a guaranteed tip service fee agreement to provide a relatively high level of revenue certainty. This allows Covanta to tap the tax exempt US corporate bond market, with maturities of up to 30 years to match the long term contract durations. This availability of financing is a key to developing long term societal infrastructure; an availability that the Clean Energy Finance Corporation seeks to replicate in the Australian context.
UK – In 2010 the UK government set a target to dramatically reduce UK landfill usage, driven by a doubling of landfill taxes to £80 per tonne by 2014. However, despite Covanta setting up a dedicated new office in England three years ago and investing many millions in endless feasibility studies, Covanta has been unable to secure local government permitting for two major new EfW proposals at Merseyside and Middlewich.
Ireland – Covanta has also been unable to secure appropriate funding for its planned €350m, 600,000 tonne pa Dublin, Ireland EfW project. A lack of consistency between local and national government objectives will sound familiar to any Australian energy market participant.
In conclusion, Covanta operates a very specialised business in an asset intensive sector reliant on successful execution of very long dated public-private partnership projects. With long term waste intake and electricity supply contracts, plus successful access to the long term debt and equity markets, Covanta has delivered strong gains to investors over the long term. It has also built up a significant portfolio of renewable energy assets whose operation allows North America to avoid almost 20 million tonnes pa of carbon dioxide emissions.
Tim Buckley is managing director and portfolio manager at Arkx Investment Management
Note: While Arkx is an investor in Covanta Holdings and China Everbright International, this article is provided to detail clean energy industry developments that have relevance in the Australian context and should not in any way be taken as investment advice. Arkx is a Sydney based investment management company that invests in the leading, listed international clean energy companies.