Michael Berrington, associate director, energy and environment, Grant Thornton UK LLP, asks what next for waste schemes now the Waste Infrastructure Delivery Programme (WIDP) is complete…
I am continually surprised by the ability of waste projects to provide complex fresh challenges. When the WIDP programme came to an end and the final PFI credits were allocated, many of us considered that this would be the end of the hard work. The diversion targets were going to be met – in fact there were suggestions of overcapacity. It had been a long ride but now the projects could be built out and the benefits could be reaped.
At Grant Thornton, this is not a scenario that we see unfolding across the market place. This is due to a myriad of reasons – many of which relate to the inherent complexity of developing public private partnership projects, which try and deal with 25 years plus of change. However, the waste sector also has its own set of foibles. I am finding that there is a need to take a step back from the detail of the contractual and payment provisions within the project agreements and ensure that the public and the private sector act reasonably when applying them.
“The benefit of linking up energy from waste facilities to wider heat networks is recognised by DECC’s Heat Network Delivery Unit. However, in agricultural settings there is the potential to use this heat in greenhouse settings – this can bring a benefit to the local community”
The standard rules about good contract management apply here. In advance of facilities becoming operational both parties need to work together to understand the intricacies of the Payment Mechanism and the waste flow projections, which sat behind it. During the procurement process, I think everyone knew that these mechanisms were complex and that there would need to be further development. However, I am seeing that entrenched positions are already being taken on particular provisions, which I would have expected to have been “boiler plate” eg, indexation provisions and the annual reconciliations.
The adversarial approach needs to be avoided – a full review of the payment mechanism by both sides in advance of the full service commencement and the development of simple models to clarify the respective positions would avoid these issues later in the project. This approach should be followed for all potential areas of dispute, eg, application of the Change in Law provisions (eg, what is the market standard around Levy Exemption Certificates) and delivering the capital asset in line with what was expected in the Output Specification.
This is not to say the future is all about contract management, the fact that a large number of facilities are operational is testament to the programme. I believe there is now the opportunity to review the use of these assets and develop them as a community resource. As part of the procurement process, the facilities had to be designed to provide a heat as well as an electricity off take.
The benefit of linking up energy from waste facilities to wider heat networks is recognised by DECC’s Heat Network Delivery Unit. However, in agricultural settings there is the potential to use this heat in greenhouse settings – this can bring a benefit to the local community.
The potential for refinancing of schemes is now increasing. A number of the projects were closed during the depths of the credit crunch where liquidity was limited. The margins on debt on these deals is significantly higher than those that are now available in current markets – as evidenced by the recent Gloucestershire Waste Financial Close. Once there has been a period of operational performance then the time should be right to dust off the 2009 amended SOPC4 Refinancing Provisions.
Alongside all of the above, there is still a pipeline of projects to be delivered – albeit at a lower volume than in previous years. These projects can be reassured by the precedent developed within the WIDP schemes and the learning that has taken place. I am excited by the new challenges that these projects will have to face and developing innovative solutions to deal with them.