23.04.2010 BUILDING MAGAZINE

E C O N O M I C Sanalysis / facts / forecast

COST MODEL ENERGY FROM WASTEThere are almost as many treatment solutions as sources of waste. Simon Rawlinson and Matthew Hicks of Davis Langdon weigh up the costs and the risks of options, including incineration

01 / INTRODUCTION

The UK waste sector issurprisingly diverse. The wastestream is inevitably varied andrequires different treatment anddisposal regimes. Within themunicipal and commercial wastestreams, there are a large numberof players. Commercialorganisations are responsible forcontracting their own wastedisposal. In the public sector,there are a host of wastecollection and waste disposalauthorities, as well as healthtrusts and education authoritieswho are responsible for their ownwaste management. This meansschemes may have toaccommodate a very variedfeedstock. Restrictive planningconcessions may also limit thesources of waste a particularscheme can treat – limitingeconomies of scale and long-termflexibility in the use of a facility.

Based on the waste hierarchy(see diagram, right), muchinvestment has been targeted atminimising the volume of wasterequiring disposal. Projectsmanaged by the Waste ResourceAction Programme (Wrap) aregood examples of the holisticapproach adopted in the UK.

However, there will continue to bea surplus, and energy from wasteas a means of treatment ispreferable to the last resort oflandfill.

Materials recovery andmechanical and biologicaltreatment processes (MBT) sitabove energy from waste in thehierarchy and can produce fuelsthat can be sold on to energyusers. Solid recovered fuel is aproduct of MBT processes and, insome cases, can be burnedwithout treatment of flue gases.

Energy from waste itself is an umbrella term describingtechnologies used to extract thechemical energy locked in wasteproducts. Energy from wastetechniques include thermalprocesses such as incineration, aswell as a range of thermal orchemical gasification techniquesthat produce gas and liquid fuels.

The portfolio of energy fromwaste techniques also includesaspects of pre-treatment requiredfor biological processes such asanaerobic digestion, as well asthe treatment of flue gases andother by-products of theconversion process. Technologiesused are proprietary and are

evolving very quickly in an effortto increase efficiency, deal with awider range of waste streams andto increase safety. Defra, forexample, has recently providedsupport to the development ofadvanced thermal techniques(ATT) such as pyrolysis.

Parties involved in energy fromwaste include WDAs who are

tasked with reducing theirlandfill related to biodegradablemunicipal waste, commercialwaste users who want to reducedisposal costs, and energy userslooking for diversified sources.There are 40 waste managementPFIs in the UK, many of whichinvolve elements of energygeneration, as well as a group of

The UK produces over 300 million tonnes ofwaste a year, 24% of which is derived fromhousehold or commercial sources. Historically,most domestic waste has been directed tolandfill, and on current disposal rates, the UK hasless than 10 years’ supply of landfill left.

Challenging EU targets for the reduction ofdisposal of domestic waste to landfill havebelatedly triggered a PFI market in wasterecycling and treatment. Commercial wasteproducers have also experienced rising costs

due to landfill tax and higher gate prices, and arealso looking for alternatives to landfill. Wastedisposal authorities face fines of £150/tonne ifthey miss their 2013 and 2020 landfill targets, apolicy which is driving waste-related investmentworth £9-11bn for the public sector alonebetween now and 2020. This is equivalent to an extra 500 million tonnes of treatmentcapacity per year.

Government policy, articulated through the“waste hierarchy” (see diagram below) is to

encourage reduction of waste at source and byrecycling. However, there are physical andeconomic limits to recycling, and few wastedisposal authorities (WDAs) expect to be in aposition to recycle more than 65% of their solidwaste stream. Unlike Europe, where incinerationis well established, energy from waste isunpopular in the UK. However, with much tighterregulation, improved technology and the growingrisk of a UK energy gap, waste’s potential as aresource is now being warmly embraced.

02 / THE UK WASTE INDUSTRY

03 / POTENTIAL BENEFITS OF ENERGY FROM WASTE SCHEMES

Energy from waste projects need to be consideredas part of the wider waste management hierarchy,but the UK produces more waste than can beeffectively recycled and bulk reduction techniquessuch as incineration are needed to reduce wastevolumes. The main benefits of processes such asincineration are:

n Waste bulk reduction. Incineration will typicallyreduce waste bulk by 60 to 70%, and some wasteproducts may also be recyclable as aggregates n Stabilisation of landfill. The bulk of the residualwaste stream – bottom ash or vitrified waste – isstable and does not emit methanen Energy production. Conversion rates of

450-600kWh per tonne are possible through asteam turbine generatorn Energy security. Waste-based energy will reduceUK dependence on imported energy sourcesn Long term cost reduction. Incineration will help tomitigate rising costs related to high gate prices andrising landfill tax.

ALA

MY

“waste to energy entrepreneurs”investing in capacity to securelong-term management contracts.Grundon and Viridor, for example,developed a speculative plantnear Heathrow that has enabledthem to secure long-termcontracts with WDAs in the M4corridor. BA and Solena have also

teamed up, with a proposal for ahi-tech, plasma arc gasificationplant to produce aviation fuel.

Perhaps the most criticalstakeholder in UK energy fromwaste policy is the general public,which is antagonistic to somewaste management projects.Opposition is such that more

efficient, large schemes with thecapacity to treat the waste for aconsortium of WDAs are difficultto get through planning.

While very large schemes inexcess of 50MW will fall withinthe remit of the InfrastructurePlanning Commission, thisapplies to few schemes, so

planning will continue to becontentious and high risk.

Due to high operating costs,government incentives includinglandfill tax, Renewable ObligationCertificates (ROCs) and feed-intariffs will play a critical role inunderpinning the economics ofschemes.

MINIMISE

REUSE

RECYCLE

RECOVERENERGY

LANDFILL

Energy from waste as a means of treatment is

preferable to the last resort of landfill

BUILDING MAGAZINE 23.04.201023.04.2010 BUILDING MAGAZINE

56 / economics / cost model economics / cost model / 57

Outside the UK a range oftechnologies have been in use fora long time, but very few have atrack record with the UK’s mix ofwaste. With pressure on to havewaste treatment plant in place tomeet the 2013 landfill deadline,momentum is with incineration.However, looking forward to2020 targets and long-term PFIdeals, more advanced solutionsmay be adopted.

There are other sets of wastetreatment techniques, includingMBT and mechanical heattreatment (MHT) that often formpart of a PFI. Both include aproportion of materials recoveryfrom the general waste streamand could be used as a pre-

treatment for energy from waste.However, they differ in the waythe energy value of residualwaste is increased and in thequality of fuel produced.Production of solid recoveredfuel via MBT or MHT givesWDAs the option to sell on theirrecyclate without committing todevelop a dedicated energy fromwaste scheme.

Incineration is the mostestablished waste technology inthe UK, treating over 4,000,000tonnes per year. In energy fromwaste schemes, the heat from theprocess is used in a steamturbine to generate electricity forthe National Grid. Some projectssuch as Sheffield and Teesside

also reuse waste heat throughlarge-scale community CHPsystems. Unfortunately, due tothe unpopularity of incineration,finding locations next to heatusers is very difficult.

The most common incinerationtechnology is moving gratecombustion. A potentially moreefficient combustion technique,fluidised bed combustion, requirespre-sorting and shredding of thewaste feedstock. Relatively fewof these plants are in operation.Although well established,moving grate technology hassignificant complexitiesassociated with the optimisationof combustion, reuse of energyand the need to meet extremelystringent flue gas standards.Flue gas cleaning can addbetween 30% and 60% to thecapital cost of the equipment.

ATT processes use heat andpressure to extract gases andoils from waste materials.Gasification uses a temperatureof about 750˚C and releasesuseable hydrogen and methaneas well as carbon monoxide.

Pyrolysis takes place at a lowertemperature, 300-800˚C, underpressure and in the absence ofoxygen. The process is designedto extract a greater calorificvalue than gasification and willproduce a combination of gases,oils and waxes. The gases and

oils can potentially be used as abio-fuel, although currently theonly use is for electricitygeneration using a CHP.

Unlike incineration, bothgasification and pyrolysisrequire pre-processing of wastematerial. They also produce fluegases that require treatment.

Another emerging technology isplasma arc gasification. Thisinvolves passing waste into akiln at 4,000-7,000˚C. Gasesreleased are collected, and anywaste products are immobilisedin a vitrified mass that can besafely disposed of. Plasma arcgasification promises much, butwith few “reference” plants toconfirm performance, adoptionin Europe will be gradual.

Anaerobic digestion is abiological process for theorganic portion of municipalsolid waste. Advantages includescalability and low runningcosts. Implementation issuesinclude waste preprocessing,and disposal of the non-organicwaste and the residual“digestate”. Defra is promotingdevelopment of anaerobicdigestion capability in the UKand more than 10 large-scaleschemes are in development. Thelong-term vision is that bio-fuelsfrom anaerobic digestion andATT will be used as part of thenatural gas or liquid fuel supply.

04 / ENERGY FROM WASTE TECHNOLOGIES

Energy from waste projects are typically procuredon a build-own-operate basis, with operational andcommercial risks being taken by a wasteconsortium. The economics of energy from wasteschemes are subject to many sources of risk anduncertainty, so although a scheme will usually beset up with a guaranteed feedstock source, overallviability will be subject to a wide range of pricing,deliverability and performance risks. Combined withthe requirement to secure very large values ofprivate finance, this level of risk exposure tends tofavour the use of well established technologies andsolution providers.

The main variables affecting energy from wasteviability are as follows:

End user requirements Project sponsors such asWDAs have been in competition for scarce wastemanagement expertise and private finance. Inpractice, larger WDAs are in a stronger position todetermine preferred solutions than smallerauthorities who have in some cases struggled toattract operator interest. Other areas where end-user requirements might affect the projectdesign include the consistency of the wastefeedstock they can provide. Projects serving aconsortium of WDAs will need to be designed todeal with a less consistent waste stream, with aconsequent impact on efficiency.Income The main sources of income are the gateprice for the waste stream and the sale price of

energy and by-products such as aggregates. Thewaste gate price, currently about £60 to£90/tonne, has increased substantially with thesupport of landfill tax and typically contributes70% of income. Certainty with regards to thecontinuation of the landfill tax accelerator is animportant consideration for operators and investors.

Depending on the technologies adopted, theremay be additional income streams related toexported heat energy as well as income fromincentives such as ROCs. Costs Energy from waste schemes needsubstantial investment in pre-treatment and gridconnection infrastructure, as well as land and maingenerator plant. Operating costs are also substantial,

VALUE

Mitigation of long-term costs to the WDA Energy from waste projectseliminate risks of exposure to penalties from the Landfill Allowance TradingScheme relating to landfill disposal in excess of allowances.

Risk transfer through procurement Turnkey procurement via PFI or atreatment contract enables clients to secure large-scale investment and tooutsource project delivery and operational risks.

Minimisation of social impacts including vehicle movements, where this canbe achieved using existing infrastructure such as rail.

Economies of scale Energy from waste schemes are most cost effectivewith a throughput in excess of 350,000 tonnes a year. For larger projects itis claimed that doubling the throughput of a scheme only results in a costincrease of 50%. Other benefits of scale include reduced land-take andhigher operational efficiencies.

Recovery of value from the waste stream including heat energy andrecyclates such as aggregate or solid waste fuel.

Quality of the business case, including good quality information, use of well-established technologies and extensive scenario modelling.

Accurate estimation of the quality and volume of the waste stream, so thatplant operates effectively.

Diversification of waste management processes to include waste reductionand recovery. Materials recovery and composting are cheaper and moreenvironmentally desirable than combustion. Larger projects that enable arange of techniques to be cost effectively included in the treatment mixshould deliver optimum outcomes.

Diversification of sources of waste – dealing with commercial and municipalwaste streams together improves economies of scale and certainty of waste supply.

Continuing incentivisation of waste reduction and recovery strategies.

RISK

Certainty of availability End users need assurance that the proposed plantwill deliver the expected waste throughput and waste bulk reduction withinstrict emissions levels and timescales.

Certainty of delivery Where the project delivers useable output such as asyngas or solid recovered fuel, assurance of product quality is critical.

Project delivery Risks include integration and co-ordination of complex anddistinct technologies for pre-treatment, combustion, flue gas treatment andthe grid connection. Site constraints to the plan or building height may limitthe proprietary technologies that can be used in a particular location.

Planning risks Planning challenges include health concerns, trafficmovement and the visual impact of a development that can include a 90mhigh stack. Planning consents may involve restrictions on operations such aslimits on where waste can be sourced from. Other risks include delays in theplanning process for overhead power line connections.

Project delivery Guarantees that transfer risk related to the availability andquality of feedstock and the availability and performance of the technologywill also improve viability – so long as the warranties are enforceable.

Co-ordination of programme delivery Projects that involve a number oftechnologically distinct but closely related components need effectiveprogramme management.

Technology risk associated with complex processes Each new featureincorporated to reduce emissions or increase energy recovery contributes tothis risk.

Supply and demand risk Reference projects with an extended track recordof operation with a UK waste stream are important business case evidencefor both end-user clients and funders.

Viability risk related to the long-term value of incentives such as landfill taxand ROCs.

Supply risk associated with the volume, quality and consistency of the wastestream.

Demand risk related to markets for recyclates such as solid recovered fuelas well as waste heat, and the prices that can be obtained for theseproducts.

Political risk for end users of commitment to energy from waste if incentiveto recycle is reduced.

06 / ADDITIONAL COST AND VALUE DRIVERS

particularly those related to safe operation.According to Wrap, total costs of disposal viaenergy from waste range from £65 to £136/tonne.

In terms of operating costs, the main areas of riskinvolve throughput, energy prices, the operatingand maintenance regime and the costs of disposalof waste products. Replacement cost of plant alsohas to be factored into the model. The implication

of lower than expected throughput is increasedunit costs. Lower waste conversion rates willincrease cost related to landfill tax liabilities.

Additional cost and value drivers Most value drivers associated with energy fromwaste are related to scale of operation, which isdifficult to optimise due to planning constraint.

Many of the risks relate to the effective operation of plant, which makes innovation particularlydifficult to deliver – especially in smaller schemesthat have a limited range of treatment processes.There are a number of high-profile projects wheretimescales and quality standards have not beenmet, and where testing and commissioning hastaken significantly longer than anticipated.

In summary, the risk exposure on energy to waste projects is relativelyhigh – particularly for emerging technologies. Turnkey contracts are animportant mechanism to enable these complex interrelated risks to bepackaged in such a way as the main objective of optimising the use ofwaste as a resource is met. This concentration of risk will inevitably resultin a risk premium which can be mitigated to an extent by giving suppliersfreedom over the application of technologies.

05 / COST AND VALUE DRIVERS

BUILDING MAGAZINE 23.04.201023.04.2010 BUILDING MAGAZINE

economics / cost model / 59

Temporary works 1,650,000 64.71 2.00

Allowance for temporary works, item @ £1,650,000

Building shell 34,811,600 1,365.16 46.42

Piling, pilecaps and ground beams, generally 11,000m2 @ £460

Extra for base to air-cooled condenser 2,150m2 @ £150

Extra for stack base, item @ £330,000

Floor slabs, typically 500 thick insitu concrete, below ground drainage 11,000m2 @

£185

Feedstock and bottom ash storage bunkers complete, retaining walls, internal walls,

floor slabs, etc. (rate based on footprint area) 1,485m2 @ £3,650

Insitu concrete frame and upper floor construction to tipping hall, including full

height shear wall structures (rate based on footprint area) 2,835m2 @ £1,280

Insitu concrete frame and upper floor construction to boiler, turbine and flue gas

treatment hall, including full height shear wall structures (rate based on footprint

area) 4,500m2 @ £270

Structural steelwork to building including long span curved trusses to roofs and

framing to process plant, stairs and access platforms (rate based on gross internal

floor area) 25,500m2 @ £400

Cladding and roofing. Flat-panel cladding panels, feature glazing, aluminium louvres,

raised seam roofing on structural deck and secondary steelwork curved to profile,

roof lights, rainwater disposal, architectural cladding to stack (rate based on gross

internal floor area) 25,500m2 @ £220

Allowance for blockwork partitions and cladding lining, item @ £645,000

Allowance for doors and windows, item @ £345,000

Finishing and fit-out works 1,830,000 71.76 2.44

Allowance for surface finishes, item @ £1,300,000

Allowance for partitions, finishes and fittings to offices, workshops, staff facilities

and laboratories, item @ £530,000

Building services installation 11,793,000 462.47 15.72

Plumbing and sanitary installation, complete, item @ £130,000

Mechanical services installation. Heating and ventilation including closed cycle

ventilation system with negative pressurisation and odour abatement to tipping hall

and waste hoppers. Heating and air conditioning systems to offices and workshops.

Dedicated extract systems. Hot and cold water installations. 25,500m2 @ £150

Electrical installations, substation, including associated building works, item @

£440,000

Electrical installations, HV installation, lighting and emergency lighting, small power

and power supply to building services installations 25,500m2 @ £36

Protection installations, lightning protection and earthing and bonding, complete,

item @ £480,000

Protection installations, fire detection, alarm and supression systems 25,500m3 @

£80

Lift and conveyor installations, very heavy duty goods and passenger lifts serving

seven levels, item @ £2,750,000

Special installations, crane and hoist installation, including crane rails, item @

£300,000

Special installations, building mangement and energy management systems, item @

£910,000

Ancillary building works 2,640,500 103.55 3.52

HGV access ramp complete, including substructure, structure, road surface and

safety barriers, item @ £2,150,000

Allowance for gatehouses and weighbridges, item @ £375,000

Allowance for fuel and chemical storage – foundations, interceptors, etc., item @

£115,500

External works 5,540,000 217.25 7.39

Site preparation, generally, item @ £310,000

Roads and hardstandings, including traffic control systems, item @ £1,110,000

Security fencing and gates, item @ £230,000

Drainage installations, complete, item @ £840,000

External services, incoming HV supply, site water infrastructure, item @

£3,050,000

Preliminaries and contingencies 16,734,900 656.27 22.31

Contractor's management, site establishment and site supervision. Allow 17% @

£9,836,700

Contractors EPC design fees for building only. Allow 6% @ £3,500,000

Design reserve. Allow 5% @ £3,398,200

Total construction cost – building only 75,000,000 2,941.17 100.00

Turnkey technology contracts 230,000,000 9,019.61

Indicative cost of 600,000 tpa incineration and energy from waste installation, with

planned net electricity output of 65MWe, item @ £220,000,000

Indicative cost of National Grid connection, item @ £10,000,000

Total construction cost – building only 30,000,000 14,902 11,960.78

A / COST BREAKDOWN

£ £/m2 GIFA % £ £/m2 GIFA %

Delivery of energy from waste projects is anextended process, typically taking seven to 10years. In the current market, there are many WDAsseeking to secure relatively scarce technologicaland project delivery resources, and as a result, thepackaging of the project will be critical in attractinginterest from bidders and from PFI financiers.

Some major issues in procurement deal withattracting the most appropriate bidders in the firstplace, obtaining finance and devising the most costeffective project delivery mechanism in order tointegrate the major elements of technology.

Supplier selection in the public sector presentlyinvolves a costly and complex competitive dialogueprocess. The advantage to both the promoter andthe provider is that the competitive dialogueprocess enables a range of technologically

08 / COST MODEL

The cost model provides outline costs of thebuilding facilities associated with a 600,000tonne a year combustion plant based on a three-line moving grate technology. The analysis also provides indicative costs of thecombustion system and the grid connection.

Details of the scope of external works areincluded as these are a critical element of theoperation of the facility.

Site preparation costs, client-side professionalfees and VAT are excluded.

AcknowledgementsWe would like to thank Jon Dedman, Steve Waltho and Peter Browneof Davis Langdon’s energy team for their contribution to this article.

different solutions to be considered as part of thebidding process. Unfortunately this increases thecosts of all parties. Recently, smaller authoritieshave had difficulties in attracting compliant bids.

Private finance is more costly in the waste sectorthan some other PFI streams because of the rangeof risks involved. The costs of large “back-end”projects, such as incinerators, are such that sincethe loan syndication market collapsed in 2007,funding has been more difficult to arrange through“clubs” of lending institutions. The Manchesterwaste PFI, worth over £1bn, received far higherpublic sector funding through the EuropeanInvestment Bank and the Treasury infrastructurefinance unit, than had originally been anticipated.

Another key issue concerns the management ofconstruction delivery risk within the special

purpose vehicle. SPV projects are typicallydelivered to the service operator via anengineering, procurement and construction (EPC)contract. The operator’s risk can be minimised bywrapping all aspects of the capital works – pre-treatment, main plant and grid connectioninfrastructure – into a single EPC deal. However,these arrangements add significantly to costsrelated to fees, management resource and riskpremium. An “unwrapped” approach, where theSPV takes a more direct role in managing risk, mayincrease returns and reduce overall cost to thepublic sector, but could be more difficult to finance.

The final, critical aspect of procurement of wastetreatment projects is testing and commissioning,which in the UK requires extended evidence ofeffective operation before full certification.

07 / PROCUREMENT

The Lakeside energy from waste plant at Colnbrook, Berkshire, is one of the few to have been approved by planners