Norton Rose Fulbright LLP
06/23/2022 | News release | Archived content
Energy from waste projects: why so problematic?
Content
Introduction
In recent years, the number of energy from waste (EfW) projects has grown in the UK due to increasing regulatory and public support for new technologies that reduce landfill and greenhouse gas emissions. However, so too has the number of disputes in connection with EfW projects. EfW projects remain challenging and high risk and there are a number of complexities which continue to affect their deliverability and success. In this article, we explore some of the issues that commonly occur on EfW projects and discuss how such risks can be managed throughout the project life-cycle.
What is EfW?
EfW plants, as the name suggests, generate energy (typically heat and electricity) using waste as the fuel source. This can be done in a variety of ways, although it is typically achieved by combustion / incineration. Put simply, combustion plants work by burning the waste and converting it into heat, flue gas and fly ash. The heat can then be captured and used to generate electricity. The flue gas and fly ash, which contain toxins and greenhouse gases, are filtered and cleaned before being released into the atmosphere.
This article focuses primarily on the risks associated with combustion plants, being the most popular technology in the UK.
Managing the risks
Although there is no universal model for EfW projects, the key risks remain broadly the same. These risks generally fall under the following categories:
- Contracting and relationship management
- Design and construction
- Completion, commissioning and operational performance
- External factors
Contracting and relationship management
Given their complexity, most EfW projects are generally only economically viable on a larger scale. As such, the projects often involve numerous contracting parties each with their own, often competing interests, and, in most cases, one party will be the single point of responsibility for the performance of the plant under an EPC arrangement. Multiple subcontracts will typically be required for the major elements, such as the turbines, boilers and the plant's process control systems. As with any complex project, good project management, change control, interfacing, division of responsibilities, and coordination is required to manage the various subcontractor packages to avoid the losing control of the programme before the EfW technologies become operational. To manage and avoid conflicts, negotiating and drafting carefully considered contracts is critical. Said contracts should include clear risk allocation provisions, a clear framework of obligations and reporting obligations, particularly where there are joint venture arrangements. Upwards and downwards reporting will be key as each party will likely hold different views on the level of information provision that is appropriate. Ironing out these differences before any conflicts arise will help keep the issues in dispute to a minimum.
In addition, it is important that each contract includes an effective dispute resolution mechanism and that these provisions are consistent across the suite of project agreements. From the outset, parties should consider how they want to resolve disputes and whether a particular forum should be favoured or avoided. EfW projects constructed in the UK pursuant to a PFI process are excluded from the Housing Grants, Construction and Regeneration Act 1996, and therefore excluded from the automatic right to adjudication. Further, as EfW projects typically have an operational life of 20-30 years and require ongoing cooperation, parties should consider alternative ways of diffusing differences, for example, using early case evaluations and dispute avoidance panels.
In the unfortunate event that the project is terminated, the parties will look to the contracts to establish liability and issues of compensation on termination. It is therefore critical that the contracts provide a clearly defined process for termination and assessment of compensation that grants flexibility to account for different scenarios.
Design and construction
Many disputes, particularly in connection with combustion plants, arise from inadequate procurement and design processes which mix and match major components. Particular attention is therefore required when contracting to identify and provide for design interface risks and to provide clear risk allocation between the parties so that, should a dispute arise in connection with the design and construction of the plant, it is clear who bears responsibility.
Further, EfW plants are often built on historic landfill sites which generally come with the risk of gas leaks and other environmental issues. These can present significant risks to the project during the construction phase, causing delays and additional expenditure to rectify any issues with the ground conditions. It is therefore important to not only conduct comprehensive environmental risk assessments prior to site selection, but also to ensure that ground risk is dealt with in detail in the underlying project documents.
Completion, commissioning and operational performance
EfW projects also involve the use of complex technology which has had a mixed record of success in the UK and elsewhere. Issues often arise around commissioning and acceptance testing -it can take as much as 12-18 months for a EfW plant to operate smoothly and at full capacity, with some projects being axed before achieving operational status or shortly thereafter.
Feedstock also presents a unique and key risk to the operational performance EfW projects. Should fuel supply fall short, the efficiency of the plant will fall down too which can lead to losses and reduced revenue. Further, as fuel is often taken from municipality waste and commercial sites, it can have a varied and unexpected chemical composition and/or calorific value. Non-compliant fuel also presents technical and operational risks to the project, and can lead to damage to equipment and increased costs. Regular and consistent fuel testing is therefore key; provision for which should be set out in detail in the underlying project documents along with liquidated damages provisions to compensate the party receiving non-compliant fuel.
External factors
In the UK it is widely accepted that the first round of building of new EfW projects has now been completed and that only a handful of major new EfW plants are required (largely in the South East). Recent developments affecting the waste sector include the publication by the UK government in March 2022 of its consultation on the UK Emissions Trading Scheme (UK ETS) which called for evidence on whether it should extend the scheme to EfW projects. Emissions from waste incineration with no energy recovery and energy from waste are at present not covered in the remit of the scheme. The proposal to include waste incinerators in the UK ETS is consistent with the government's desire to reduce CO2 emissions from the waste management sector and presents opportunities for operators of waste incinerators and EfW plants to invest in and implement CCS technology; whether this be through retro-fitting CCS technology to existing EfW facilities or incorporating CCS technology into new EfW plants that are currently being developed.
There is also an increasing drive by government to unlock the potential of EfW plants to deliver low carbon heating for UK homes and businesses. This could represent a potential area for future growth for the EfW sector. At present, less than a quarter of the operational EfW projects in the UK also export the heat they generate, which is in stark contrast to EfW plants in Europe where the vast majority export both heat and electricity - dramatically improving their efficiency. All EfW facilities are district heating enabled. Making the most of the heat produced by these plants could therefore be critical to delivering cost-effective heat decarbonisation in urban areas across the UK in line with the government's Net-Zero Strategy.