Should I invest in Waste to Energy?


Waste to Energy plants are expensive. This is a ‘big bet’ decision where, once committed, you have to live with the consequences for a long time.  Such a decision requires careful thinking through your options and choices and matching these with what could happen in the future.

What could the future hold?

Much effort goes into creating a more circular economy to prevent, reuse or recycle as much waste as possible. However some waste needs to be disposed of through landfill or incineration. In 2015 the European Union disposed of 125MT of municipal waste through these methods – equivalent to a quarter of a tonne per person (Source data).

In the past 20 years EU landfill volumes have decreased 60%, while incineration volumes have increased by 90%. One option with incineration is to capture the associated heat or convert the heat to electricity in a Waste to Energy (WtE) facility. WtE competes with landfill, not recycling.

However using WtE to avoid landfill and use waste productively is not necessarily viewed as a solution in a circular economy. The more fundamental aim is to eliminate waste. This makes WtE decisions complex, despite reports that replacing landfill with high efficiency WtE could save large quantities of CO2. Key uncertainties are driven by government regulation and how the circular economy progresses:

  • Waste Supply: What is the size of the market? What countries are growing and why?
  • Capacity: What plants are already working and what stage of life? When might mothballed plants come back on-stream? What contracts are in place & what waste is “up for grabs”? Economies of scale are important but transporting waste too far becomes uneconomic and creates more emissions.
  • Regulation: How will regulation direct waste streams? How much reuse/recycling is occurring? Will nationalist politics reverse tighter controls? What subsidies/carbon credits can be used/generated?
  • Securing outputs: What contracts for WtE plants are available for electricity / district heating? What about comparable projects (e.g. Hinkley, Swansea Tidal Barrage)? Upgrade of bottom ashes?
  • Costs: How much will the plant cost? Impact of local geography (both build and delivery costs)?

While recent government actions, like the EC recommendation to reduce subsidy for WtE, might pose a barrier for uptake it is in fact predicted to grow. China alone is expected to increase WtE capacity by 100MT p.a. over the next 10 years.  For reference, the largest plant in Europe is AEB in Amsterdam at 1.4MT p.a. This cost more than €700M to build a high efficiency plant.

As an investor, you need to make choices about what to do and when to do it, but with so much uncertainty it is difficult. There are many different worlds we could end up in with WtE. To help simplify we can define different broad narrative scenarios. These scenarios aim to reflect the uncertainties that will matter most – size of the waste market and government support for WtE.

What Waste to Energy choices should investors consider?

Not all WtE plants are the same so it is not just a go/no-go decision. As an investor, you have different alternatives you can take based on key decisions.

  • Where should we build a new plant?
  • What capacity?
  • What type of plant? (e.g. Bespoke high efficiency or off the shelf, pre-treatment vs. no pre-treatment)
  • Should we import waste from overseas?
  • Do we produce electricity or heat as our primary output and where do we send it (more crucial if we chose heat as the output)?

Depending on how you think the market will evolve you would act differently. If you believe scenario 4 is likely; an expensive, high efficiency plant will generate the most electricity to sell and you can serve a bigger area (approximately a 1% increase in efficiency is equivalent to 1500km of transportation of waste by truck). Alternatively doing nothing and waiting should not be a passive decision but an active one based on a view of the future. Waiting until all is clear will mean any first mover advantage is lost. As always, there is a trade-off between potential returns and risk.

People have made bad decisions in WtE before by having strategies misaligned with national market trends. You won’t stay in one scenario forever as the market will vary. In 2008 certain European nations became over-saturated with plants and as waste volumes dropped many were forced to mothball. These are expensive mistakes to make.

Examples of good & bad outcomes for different WtE investment decisions are shown below:

How will this be play out over time?

When making a decision, it will not be clear what scenario you face once you invest and whether this will remain. But there are ways to create value along the way and change the odds:

  • Active efforts: Pursue lobbying to promote WtE as a valuable part of the low carbon future, push the subsidies for outputs to comparable levels for renewables or get gate fees up. Maintain flexibility and optionality as long as possible, e.g. through pre-emptive early permit approval, so you can react quickly. Secure long term commitments from waste suppliers or on electricity prices, to give more security in an uncertain market. Prepare to move up the supply chain, handling the recycling/reuse efforts to hedge against WtE fluctuations.
  • Passive efforts: Identify key signposts and monitor trends to better predict what scenario is looking the most likely then prepare to act quickly when required.

WtE faces headwinds but is also set to grow so it is difficult to “place bets”. There will be a lot of investment in WtE but decisions will be inherently uncertain. There is no silver bullet, but a structured process helps you find creative ways to add value and make great decisions.

Thank you to Hendrik van de Vijver for assistance in writing this reflection. Hendrik is an expert on WtE in the Netherlands and optimising the use of WtE outputs.

For more information, contact Chris Jones.