Developing Waste-to-Value Projects: Part I – Feedstock
As a follow up to my article The United States Waste Rush, I was asked to share some thoughts on how to best approach developing a waste-to-value project taking into consideration the intense underwriting requirements of the investment community. I guess that is what I deserve when I go as far as to say that “trash is the new gold”.
For those that have endeavored to pursue financing for such projects, you know it can be a bit overwhelming. That is putting it nicely. There is an extraordinary number of influencing factors including feedstock availability, commercial contract structures, counterparty creditworthiness, and technology risk. Project development is a meticulously complicated dance fueled by a giant game of ‘chicken or egg’. Heard this one before? Investors want to see an offtake contract, but off-takers want to see investors committed.
Let’s try to unwind the web of waste-to-value project development starting with feedstock. Feedstock is the catalyst that drives all other components of the waste-to-value project development lifecycle. It sets the stage for which type of technology should be used for processing. It serves to define which offtake products and customers can and should be pursued. This helps to define which EPC contractors are best suited to execute the project. You get the idea.
In order to effectively evaluate the most economically viable and financeable project, it is critical that a full feedstock strategy and sourcing analysis be completed. I repeat, this is critical. Far too many waste-to-value projects do not reach financial close or do not achieve successful operations due to a lack of nuanced understanding of the feedstock. Unlike fossil fuel, waste-related feedstocks (agricultural, organics, MSW, etc.) tend to be variable in nature (size, moisture content, energy density, etc.), require pre-treatment and handling, and inflict increased volatility on process technology. The following considerations should be thoroughly addressed:
- Volume & Coverage Ratio: Investors routinely look at the volume of feedstock required for operation and assess the coverage ratio, or the amount of equivalent or similar feedstock potentially available in a reasonable radius from the site location (often <50 miles) that could be contracted in the event there is a supplier disruption. If the facility is relying on feedstock supply from remote suppliers with inadequate backup sources, it will be very difficult for investors to underwrite. There are companies that specialize in these types of assessments such as Forest2Market.
- Contract Tenure: Simply put, the longer the term of the contract the better. Investors are looking for initial contracts in place that will, at a minimum, confidently allow for the payback of their investment (assuming things go as planned). Typically, a minimum term that investors want to see is 5 years, with 10 years being the preferred length. Contract length must take into consideration the offtake contract length.
- Tip Fees & Economics: For many waste-to-value projects to achieve financial close, tip fees must represent a material portion of the project economics. Although not always the case, the less the project economics are exposed to government subsidies (RFS, LCFS, etc.), the better. Ideally, if fixed contracted revenue streams such as tip fees, electricity (PPA) or contracted bi-products can cover operating expenses and debt obligations, your project will be attractive to the broad investment community.
- Creditworthiness: The creditworthiness of a feedstock provider is perhaps the biggest driver for an investor to deem the waste stream bankable. Investors want as much certainty as possible that the feedstock provider is going to be around for the long-term and the feedstock contract is unlikely to be exposed to material disruption or termination. Typically, “mom and pop” suppliers don’t get it done.
- Variability & Best Available Technology (BAT): The consistency of the feedstock is a primary driving force behind technology selection and ensuring steady-state operations are achievable. With significant variability (moisture content, size, volume, material class, etc.) it becomes extremely difficult to run an operation with high uptime. There are certain technologies that can handle variability in waste streams better than others, thus understanding the feedstock is a key criterion in selecting and sizing the right technology packages. Taking various feedstock samples (of the actual feedstock you would be processing) and sending it to a laboratory for testing is highly recommended. This will help to ensure design criteria is best suited to the feedstock and any outlier results are properly understood.
- Energy Density: Energy density most often determines how much product you can make. For example, you need a lot more dairy waste by volume than municipal solid waste to produce an equivalent amount of natural gas. Thus, if you can leverage waste streams that offer high energy densities, you can often reduce the Capex and Opex and increase margins by producing greater yields with less waste.
As you are compiling this information, consider developing a feedstock matrix. This will help to organize your feedstock supply opportunities and begin to evaluate the most financeable options. Here is an example:
Once the feedstock evaluation is complete, you can begin the technology selection and validation process. This is not to say you can’t be canvassing the technology market and becoming intimate with the leading player’s capabilities, but far too many developers advance technology selection and preliminary engineering prior to an in-depth understanding of the feedstock.
We will cover that in Part II. Stay tuned.