Funding remains major issue for key government renewables policy

The announcement today (17 February 2009) by Jane Kennedy, Environment Minister, regarding the government’s support of anaerobic digestion (AD) is a welcome one.

We at Catalyst Corporate Finance, have long been a supporter of AD as an energy recovery process, and have ourselves seen a significant rise in the interest in AD over the last eighteen months from our clients.

We have recently modelled the potential opportunity for the use of AD across the UK to treat food and farm waste. This research has highlighted a number of key operational advantages which support AD over other technologies, including:

AD plants have demonstrated that they can compete strongly (i.e. gate fees are lower than alternative disposal means) with other technologies such as gasification, which also process the food fraction of our waste.

The capex requirements to build a typical 40 ktpa plant, for example, are currently lower that other recovery processes such as pyrolysis and incineration, and also qualify for double ROCs - the renewable certificates issed by Ofgem which themselves have an intrinsic market value.

Whilst AD technology requirements vary significantly depending on local demographics (witness for example the initial problems encountered by Biffa at their Leicester plant), many of the suppliers of AD technology have successfully adapted their processes to work in the UK.

It is clear that AD operators are recognised as dependable partners by food producers and councils. This is evidenced by a number of them securing long term food waste supply contracts which underpin the financing feasibility of their projects. For example, PDM will process 42 tonnes of waste per week produced by Sainsburys stores in Scotland within its AD plants.

Whilst all these points are critical, there are two further points which Catalyst predicts will have a greater influence on the delivery of the government’s ambition.

First, there is a genuine concern about whether enough project finance will be available in the medium term to fund the rollout of so much anticipated AD capacity.

With contraction in bank funding expected to reach 15% (year on year) in 2009, only the most convincing projects will be financed, unless the government steps up its own funding commitments significantly.

The next question is, even if the funding is available, will there be enough capacity to construct these plants in the short term? The government has already made huge PFI commitments to the waste industry (increased to £750m in 2008), which will absorb construction capacity.

Technology companies such as Monsal, based in Nottingham and Enpure, based in Kidderminster, will play a key role in determining the pace of expansion.

Overall though, we believe that these constraints will serve as a positive force on the industry, and ensure that anaerobic digestion technology contributes significantly to a sustainable renewable energy infrastructure.