What the Green Investment Bank’s first project tells us about funding green infrastructure

_0077‘On time and on budget’ are five words any project promoter loves to be able to boast, especially for a first project. One year and five months after the Green Investment Bank (GIB) was set up, its first project has managed this feat, despite being full of potential risks which might have been enough to scare off ordinary investors: the TEG Biogas plant in Dagenham will process 50,000 tonnes per annum of biodegradable waste which would otherwise have increased methane emissions from landfill, and will sell its residual heat to Closed Loop London, a factory that recycles plastic bottles.

From a policy perspective, this sounds great: avoided landfill, a good use of waste biomass, lower CO2 emissions, more jobs (because anaerobic digestion (AD) creates valuable energy and fertiliser) and a cheaper source of heat for a nearby plastic recycler. What’s not to like? But, from a finance perspective, the deal was hard work. Understanding why this was, and why the project is a success, shows what needs to happen to build a resource resilient economy.

What are the risks?
As we’ve outlined elsewhere, most circular economy infrastructure has both a feedstock risk and a market risk. Put simply, a lack of feedstock means that the capital to build the plant doesn’t get repaid. AD plants in the UK already operate at a load factor of around 57%, whereas feasible load factors are around 80-90%. The difference is mainly due to lack of feedstock.

For green electricity, market risk isn’t much of a problem. But for heat, there are serious challenges, both relating to a lack of heat networks and proximity of potential heat users, and operations: the heat seller and user must agree on the quantity, quality and timing of heat provision, and both must be sure that the other party will be around long enough to justify changes to operations and equipment to handle the new source of heat. The market for fertiliser from AD operations is also small and fragmented at present.

How this project overcame the risks
The TEG plant is, in some ways, anomalous. It’s located in the London Sustainable Industries Park, which boasts of ‘unrivalled access to raw materials’. In this case, that means up to 2,000kt per year of biodegradable waste from London, compared to TEG’s capacity to process 50kt. Despite this apparent abundance of digestible material, the plant has had to secure medium term feedstock contracts with over 20 different providers to ensure it is able to operate. The fact that the park has been designed to host a heat network helped to derisk the sale of heat to Closed Loop London. And TEG’s siting at the park looks like a success for policy led industrial symbiosis.

On the business side, a number of normally misaligned incentives have also been aligned by the financiers supporting the project. Again, this is unusual. Foresight, the private equity group through which the GIB channels some of its money, is also an investor in Closed Loop London, meaning there’s an incentive to encourage the two businesses to agree a heat contract. The involvement of the GIB, Foresight and the London Waste and Recycling Board is itself significant: all are charged with delivering green infrastructure, meaning that they will go a little bit further than the average investor to promote the collaboration required to make the deal happen.

Making a circular economy the new normal
Many of these issues were raised at a recent seminar on financing the circular economy, jointly hosted by Green Alliance, the Scottish Council for Development and Industry and the Green Investment Bank in Edinburgh. This was part of a project supporting the Scottish government’s roadmap to a circular economy.

Its conclusions were remarkably similar to these lessons from the TEG Biogas plant: AD, like many other technically mature circular economy opportunities, makes good business sense, and none of the risks are especially challenging to overcome. But, in the absence of policy intervention to address feedstock risks, and without an organisation to push collaboration, economically and environmentally sound investments just won’t happen.

That’s why we need an industrial strategy across the UK which has a goal to capture more value from resources and explicitly sets out to help businesses invest in the infrastructure needed to do so.

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