Waste-to-energy (WtE), also known as energy-from-waste (EfW), is probably the world's least discussed form of sustainable power generation – attracting much less attention than wind, solar, hydro, geothermal or even tidal energy.
Yet the quiet success of WtE projects in Europe has not escaped the notice of ambitious investors who believe the technology could also work for Africa.
As Europe's WtE market approaches saturation, Africa is an obvious next step; energy demand in the continent is predicted to rise by 127% by 2040, according to BP's Energy Outlook – 2019, with electricity demand almost tripling and the share of renewables in Africa's fuel mix growing from 1% today, to 16% over the same period.
There are significant challenges in developing WtE projects in countries with little or no organised waste collection, compounded by a scarcity of finance and, in some countries, political instability.
As with any market, there are risk-reward balances to be struck in African jurisdictions.
A handful of WtE developers have already tested their footing by constructing and operating waste-fed power projects in countries including Ethiopia, South Africa, Nigeria and Kenya.
Those which have delivered projects have picked up a few scars along the way, but the end-to-end experience of delivering some of the first WtE plants in Africa, however choppy, provides useful lessons that the wider industry can learn from.
Rising energy consumption
There are some key demographic factors that favour the development of WtE in Africa.
Rapid urbanisation has created megacities (with populations of more than 10 million) across the continent.
Cairo in Egypt, Kinshasa in the Democratic Republic of the Congo and Lagos in Nigeria are already megacities, while Luanda in Angola, Dar es Salaam in Tanzania and Johannesburg in South Africa will attain megacity status by 2030, according the United Nations.
Highly concentrated conurbations need both regular power and sustainable forms of waste disposal – the two main market drivers for WtE – to mature into attractive, efficient modern cities.
While initially, energy is needed to power homes, offices, factories, public services and infrastructure, as urban populations become established and wealth increases, even more power is required for applications such as high-speed internet connectivity, air conditioning and food processing.
There are some important political drivers that support WtE.
The UN's Sustainable Development Goal 7 focuses on delivering universal access to affordable, clean energy, a policy that favours renewables in general, including WtE in appropriate contexts, and one which has been widely embraced in Africa.
These include a commitment to tackle greenhouse gas (GHG) emissions from municipal solid waste (MSW), and the country has lived up to this promise by evaluating the viability of WtE technology and fostering a handful of what are currently early stage WtE projects.
Government attitudes to landfill are also changing significantly across Africa.
Cities like Addis Ababa in Ethiopia – the second most populous African nation after Nigeria and one of the continent's fastest-growing economies – have expanded so much and so rapidly, that they have encircled enormous waste dumps which were originally outside city boundaries.
This has forced people to live and work next to, or even on, dangerous landfill sites, leading to health and environmental problems for Africa's city dwellers and compelling governments to consider more sustainable options for waste management.
As African economies mature and establish their own modern service sectors, industry chiefs and politicians are keen to ensure that these are not held back by unreliable energy supply.
Even relatively developed African economies like (largely coal-fuelled) South Africa still suffer from rolling blackouts when energy supply fails – a problem which South Africa's Reserve Bank estimated could dock domestic economic growth by 1.1% in 2019.
If uninterrupted supplies of feedstock can be guaranteed, WtE does not have the intermittency issues that hinder solar, wind and even hydro energy, and is therefore technically more reliable than other forms of renewable energy.
A bonus feature of WtE projects is their capacity to generate revenue beyond selling the electricity they produce.
When the waste is sorted, metals can be separated from the refuse using magnets to be recycled and sold.
The treatment of waste usually results in residual products which, depending on the type of feedstock, can be made into construction materials, agricultural feed or fertiliser.
The relatively high moisture content of waste in African countries, due to the high proportion of organic matter and what are often very humid climactic conditions, compared to that produced in developed economies, presents opportunities to harvest power from excess steam, which can be sold to other offtakers, including local businesses.
WtE operators can also collect the water extracted from the waste during the drying process, for human or industrial consumption.
The potential to derive additional revenue from waste treatment is something that lenders and investors will look at very carefully when evaluating the bankability of a project.
Since MSW lacks the glamour of wind, solar or hydro as a source of energy, WtE developers need to tackle a certain amount of stigma around the sector.
When most people think of WtE, they think of mass incineration, which has historically been a contentious proposition because of concerns about its impact on air quality.
In fact, WtE covers any process that produces energy from waste, including collecting methane from peat, anaerobic digestion and gasification, as well as incineration.
Plants based on any of these processes can be operated sustainably using the right kinds of technology.
Historically, there has been very little in the way of systematic collection of waste in Africa – which is a problem for WtE technologies that rely on regular supply of consistent quality feedstock.
Even where organised waste collection exists, consumers need to be trained to sort and dispose of waste in ways that support WtE fuel collection.
Because the moisture content of MSW in developing economies tends to be a lot higher than in developed economies, drying the waste before it can be used to produce power adds to the cost of the WtE process.
Another challenge is that the calorific level of waste in Africa is much lower on average than it is in developed countries, where MSW has a higher plastic content, meaning that African waste burns less efficiently than technologies designed for developed markets.
Large WtE projects are capex-intensive.
High interest rates in some African jurisdictions are unhelpful to borrowers looking to fund high capex, low opex projects, although there is, in some circumstances, help in the form of local currency loans with entities such as GuarantCo.
The scale of investment required to get WtE projects off the ground is sometimes prohibitive, to emerging economies in Africa and automatically shrinks the pool of potential lenders who have the capacity and risk appetite to finance them.
There is also a shortage of bankable projects for interested investors to consider as models, and a lack of experience in low-carbon financing.
Typically, WtE projects are constructed on an engineering, procurement and construction (EPC) basis, where contractors foot the full upfront cost of procuring and building the WtE facility.
At present, it appears that there are not enough sufficiently capitalised contractors in Africa, who can offer sufficient assurance to lenders that their balance sheets are robust enough to deliver entire projects.
Few EPC contractors have demonstrable track records of delivering WtE or similar projects, and using international contractors is likely to be politically unpalatable in African jurisdictions, unless they partner with a local firm.
The lack of forex availability in many African countries is another problem, given that most WtE developers are international and are likely to want to pay for services, and be paid, in US dollars.
Some African governments are working to improve forex supply, through policies intended to boost exports, but more needs to be done to resolve currency concerns in most of Africa's jurisdictions.
African governments have traditionally erected fewer hurdles to energy projects in terms of permits and licences compared to those in developed countries, but scrutiny is becoming sharper and regulation is tightening in Africa.
While this is to be welcomed in the interests of raising standards, often a lack of communication between different government departments in some African countries can cause the necessary approvals to get stuck in the system.
Developing a successful WtE project
As in any region where this relatively novel form of renewable energy is still gaining traction, there are certain key components which a WtE project needs to be successful in Africa.
These include having buyers lined up to take the power produced; proven, context-appropriate technology; committed partners at private and state level; a stable regulatory backdrop; and mechanisms for resolving disputes.
It is essential for any WtE development to have prospective or secure bankable power purchase agreements (PPAs) in place, before approaching lenders to finance the project.
This requires forensic research into what creditworthy offtakers, including utilities and independent power producer (IPPs), exist in the target market.
Before signing any agreements, developers should ascertain that the offtaker understands the project and is unlikely to walk away if the scheme is delayed.
It is also helpful to have offtakers for any by-products likely to come out of the project, although these can be arranged at a later date, once the power offtake agreements have been signed.
While offtakes with IPPs and government utilities are desirable from a security of investment perspective, it should be remembered that many WtE projects are likely to be off-grid and reliant on PPAs with local energy users, rather than utilities, which reinforces the need for careful due diligence.
Having the right technology that can accommodate the feedstock generated from local MSW is vital.
It is likely that a developer will buy in a technology solution from a third party. How this is paid for varies, from one-off upfront payments, to instalments or royalties based on power sales, or a combination of these.
However developers choose to pay for their technology, it is a costly and risk-heavy aspect of any project, which needs to be handled with particular care.
Some technologies, such as gasification which is a relatively new form of WtE and is more sensitive to the quality of feedstock than incineration or combustion, are considered riskier than others.
The technology also needs to be one that sufficiently detoxifies emissions to satisfy government and/or lenders’ criteria.
Because most WtE projects will be unique to the contexts they operate in, they cannot be operated remotely and developers need to have skilled technicians on the ground at all times to resolve any glitches.
It is currently impossible to develop any kind of effective WtE project anywhere without secure, organised feedstock supply.
For African jurisdictions, the good news is that they have “leapfrog opportunities” to implement waste collection and sorting systems from scratch that are tailored to WtE.
In parts of some of the larger African cities, the cost of collecting and sorting waste is now being levied on inhabitants and there is a clear improvement in MSW processing compared to 10-15 years ago.
Clearly, relatively few African citizens or governments can currently afford to foot the cost of sophisticated waste disposal, however, so developers may need to subsidise this part of the supply chain, at least to begin with.
It helps to have investors who understand both the WtE market and the geographical context of the project.
In this respect, it is preferable to have a small pool of committed lenders whose interests are easier to align with project approaches and goals.
Sometimes, the size of projects and the associated capex will require a large consortium of lenders – a situation which can be challenging when it comes to keeping all parties satisfied.
In such cases, clear communication and leadership by the developer is indispensable.
State financial backing usually reassures other lenders, and over the past few years there has been a discernible shift by African governments away from EPC plus finance models towards funding projects with domestic sovereign debt.
However, if governments are unable or unwilling to partly fund the project, development finance is available from other sources, such as the growing green bond market and specialist funds focused on renewables.
When considering investing in a big project, it is wise to choose a jurisdiction with a reasonably stable, or at least predictable, regulatory context that is supportive of foreign investment.
WtE developers should look for clear policy frameworks, backed by evidence of policies in practice.
Establishing regular, transparent dialogue with government should ensure developers are kept up to date with relevant policies and have opportunities to raise any concerns.
Governments should be able to give a developer a clear vision of what they want from a project and what they are prepared to offer in terms of offtakes, credit enhancement, subsidies (if applicable) and political will to see deals through.
If a developer ends up with a utility offtaker that becomes insolvent or financially strained, it is helpful to know that government will step in to secure the project.
It is worth remembering that political will can come and go, however, and that subsidy regimes may evolve or be phased out.
It should also be noted that the overall trend among African governments seems to be towards rationalising the pipeline of renewables projects, focusing on fewer, lower-risk developments rather than simply encouraging a multiplicity of projects in the hope that some will succeed.
This means that developers need to ensure their project is in as bankable a position as possible before applying for government approvals.
Putting appropriate environmental and social governance (ESG) processes in place is becoming increasingly critical to developing successful energy projects, anywhere in the world, but particularly in Africa.
WtE developers therefore need to invest time and resources communicating the story of a project internally within the host country.
When operated correctly, WtE projects can be one-stop social and economic transformation units, getting rid of waste safely and producing power for the country, while also providing jobs and educational opportunities.
Ultimately, African WtE projects need to be operated by the host countries for themselves, so it is important to train local workforces and ensure that anyone who stands to be affected by the project reaps a net benefit from it.
Both developers and investors in large WtE projects need to be patient and prepared for things to progress gradually, if that is what it takes to get them right.
This is because short cuts do not tend to last the length of a standard PPA and can result in assets becoming stranded.
Project plans also need to be flexible, iterative and sufficiently resourced to adapt to changes in circumstances.
The future of WtE in Africa
There is clear recognition that the scale of investment required to meet energy demand in Africa cannot all be paid for by national budgets.
This has led to the emergence of creative new developers and investors working to secure sustainable forms of funding from multiple sources, which buy into the need for African energy demand to be met by a mix of renewable sources, including WtE.
While there continue to be challenges in terms of financing, political will, technology and organised waste collection, anecdotal evidence suggests that there is an increasing appetite for WtE in the larger African cities.
Progress is likely to be slow, at least for the next few years, and the risks remain considerable, but the potential benefits of WtE to all stakeholders could ultimately outweigh the frustrations.
Cecily Davis is a partner, engineering, procurement and construction specialist and Head of the Africa Group at law firm, Fieldfisher. For more information on our waste to energy, construction or African expertise, please visit the relevant pages on the Fieldfisher website.