Why Supply? The EfW Conundrum

There are many factors to consider when considering the viability of developing a heat network but there can be little debate that having reliable sources of heat – and the cost of that heat – are two of the fundamental requirements.

Energy from Waste (EfW) facilities have long been a key part of the waste hierarchy – providing both a vital waste management function and a reliable source of renewable electricity. But what if they could also provide a reliable source of heat as well?

The majority of EfW facilities in the UK are classed as ‘heat ready’, however just under a quarter of all operational facilities actually export heat. In this article, we explore the role that EfW facilities could play in the heat transition as well as the aspects that may need to be resolved.

All asset operators and developers want to keep their costs down – and heat networks are no different.

To make a project economically viable and encourage customers to connect, developers need to ensure that the ‘levelised cost of heat’ (LCOH) (i.e. the total cost to a consumer per kWh of heat supplied by a heat network) is as close as possible to what customers are used to paying – i.e. the equivalent “all inclusive” cost of heat from a gas boiler.

The cost of obtaining “heat” (or rather heated water or steam, which acts as the thermal energy carrier) from a reliable source plays a key role in determining the viability of a heat network and is a key building block in calculating a network’s LCOH.

Heat can be obtained from many sources, but surplus heat from industrial processes, including waste treatment at EfW facilities can be one of the best value sources of low-carbon heat as the heat is a byproduct of an essential process and can be decoupled from some of the volatility of energy prices.

So how does it work? As outlined by the Environmental Services Association (ESA) in their guide to heat offtake from EfW facilities, there are multiple potential sources of heat within an EfW facility. However, the most common approach is a “Direct Heat Offtake” in which some of the steam which is generated from the waste incineration (and usually used to drive a turbine to produce electricity) is diverted from electricity production and instead put through a heat exchanger, which transfers the heat from the steam to the water in the heat network.

What makes heat from EfW facilities an attractive option? There are a number of reasons:

• due to their role in the safe disposal of residual waste, EfW facilities need to operate on a consistent basis with high availability, meaning that the source of heat is reliable and constant;
• the heat is a by-product of the process which would be produced in any event (i.e. it is not being produced specifically for the heat network). This means that certain costs can be (and are already being) shared across those disposing of waste at the EfW facility as part of its overheads (leaving only heat specific costs (e.g. the costs of any heat upgrading and the delivery of the heat into the heat network (plus a return on any investment needed to achieve this) to be covered in the heat offtake contract price); and
• where the heat offtake is for “high grade” heat, it may require no additional temperature boost (e.g. from a heat pump) to elevate its temperature prior to distribution to the heat network’s customers.

Sounds great, so what’s the catch? Well, firstly, whilst heat is a by-product of the waste treatment process, EfW facilities typically need to divert steam from electricity production in order to generate the heat. To do this, steam is diverted from electricity prodution, resulting in a drop in electricity output.

Therefore, for every kWh of heat energy generated by an EfW facility which is diverted from electricity production, there is lost electricity revenue. This opportunity cost is referred to as the ‘Z-factor’ (i.e. the number of units of heat that can be recovered for each unit of electricity generation lost) and will inevitably influence the price at which an EfW operator will sell its heat. This will particularly be an issue where the EfW facility has existing project finance in place which is secured on modelled revenue streams.  In this case the EfW operator will need to demonstrate to its funder that any replacement revenue from the heat supply is a stable revenue stream from a creditworthy counterparty and is at least as beneficial to the business case as the lost electricity revenue.

From a heat network developer perspective, there are also other points that will need to be considered, including:

• many EfW facilities were constructed more than 25 years ago and so may require significant asset replacement works to continue operating and to ensure heat can be delivered from the facility to the heat network;
• whilst some EfW facilities have been built and are operated on a merchant basis, there are also many constructed under PFI/PPP arrangements meaning that they are in essence local authority assets operated under a concession arrangement, which can make negotiations of long-term heat commitments more complex;
• EfW facilities will have planned outages roughly every 12-18 months which can last from a couple days to several weeks (and older facilities may have more frequent outages depending on the level of investment in their ongoing operation and maintenance). If an EfW facility is to be relied upon to provide large volumes of consistent, high-grade heat, this can mean the heat network developer needs significant back-up facilities in place to plug the gap during these period (and for any unplanned outages that may occur); and
• the potential benefits of connecting to a heat network which may be afforded to EfW facilities under the UK Emissions Trading Scheme (“UK ETS”). Whilst the government has now confirmed that the expansion of  UK ETS to include EfWs will not take place in 2028 as originally planned, the current lack of certainty means that any upside (such as free allowances or partial exemption for heat network connected EfWs) cannot yet be factored into business cases which are being developed.

Whilst there are a number of important commercial and technical points to consider, successful delivery of zonal-scale heat networks will require heat network developers to have access to a range of reliable, low-cost sources of heat and EfW facilities can no doubt play a key role in the heating transition. Enabling these facilities to deliver on their heat potential will require heat network developers to understand the waste sector more widely and for both parties to work together with a long-term vision to build a viable business model which works for them both.

Currently, 12 of the UK’s 64 operational EfW facilities are already connected to district heat networks (and several more have recently received funding from the Green Heat Network Fund to commercialise new heat networks). With zoning fast approaching and the Government’s target of 7% of heat demand being met by heat networks in England by 2035, there has never been a more opportune moment for EfW operators and heat network developers alike to explore this opportunity.

As part of our Clean Heat Hub series, we are supporting clients across the lifecycle of heat network projects and our Waste and Circular Economy practice has years of experience advising those operating in the waste sector, meaning we are well placed to support both offtakers and suppliers of heat from EfW facilities.

If you are considering a heat offtake arrangement, we can support with contractual negotiation and regulatory advice. Please get in touch with Nick Churchward or Greg Fearn if you would like more information.