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The perception of waste and how the world treats waste is changing. Previously the main market driver for the waste and renewable energy market was based on economic factors. Other market drivers now exist, which has created a demand for new waste management companies. As an example, the waste sector in the UK is estimated to be worth more than £7 million (US $14 million) a year and it is estimated that the UK needs to invest £11 billion (Defra) ($22 billion) by 2020 on 1500 new facilities to recycle, reprocess, treat and dispose of waste. The UK government is supporting this through the use of PFI credit schemes. A whole new world market has therefore evolved for environmentally-orientated, technology-based start-up companies that convert waste into renewable energy. This article looks at the background to this dynamic and the challenges faced by these companies in their quest for success.

The change in dynamics

The past 20 years has seen a change in how we look at our environment. There has been a greater understanding of the economic, social and environmental risks of not managing waste. This realization has developed at different rates internationally; Western Europe has taken a lead, whereas the USA has been slower to embrace the issue, as demonstrated by its stance on the Kyoto Protocol. China and the Far East are, in this sense, only just starting to talk about it and face a unique set of conflicting environmental and economic challenges.

Non-renewable sources of energy such as coal must be replaced by renewable energy Click here to

Non-renewable sources of energy such as coal must be replaced by renewable energy Click here to enlarge image

The waste and renewable energy sector has been shaped by a change in the perception of the environment. Powerful and influential forces have emerged in the market, which has created the demand for new start-up companies.

Environmental factors

The Stern report, published in 2006, created an authoritative and eye-opening scientific report on the challenges of climate change. The report highlighted the need to decarbonize the power sector by 60% and reduce CO2 emissions by 80% of current levels to ensure increases in global temperature do not exceed two degrees Celsius.

Regulations and legislation

Scientific evidence, public awareness and increased levels of participation in environmental campaigning have led to governments worldwide implementing regulations and legislation. Examples include:

EU Landfill Diversion Directive

recycling targets

climate change regulations.

Economics

Economic drivers to developing the waste and renewable energy sector have included:

waste disposal and landfill gate fees/landfill tax

penalties/avoidance schemes (eg landfill allowance schemes and fines, carbon trading)

energy prices

investment subsidies (e.g. ROCs, LECs, PFI Credits).

Renewable market

The demand for nuclear power generation, wind farms, solar power and so on is now unstoppable and has created a whole new market, though each has its own challenges.

Figure 1. Global fossil fuel consumption Click here to enlarge image

Figure 1. Global fossil fuel consumption Click here to enlarge image

Many well known entrepreneurs are committing to alternative energy. Richard Branson of Virgin fame committed his personal profits from various business interests – estimated at $3 billion over 10 years – to developing energy sources that don’t contribute to global warming. Bill Gates invested $100 million into Pacific Ethanol, a US alternative energy company. Vinod Khosla, co-founder of Sun Microsystems, and Bob Metcalfe, inventor of the Ethernet, are investing hundreds of millions of dollars in alternative energy. Venture capitalists sank some $200 million into alternative-energy companies last year – double the $100 million invested in that sector in 2004, according to estimates by PWC and Thomson Venture Economics. As entrepreneurs seek to exploit this, there is a growing realization and simple logic that waste is a genuine alternative that can be utilized in a wide range of technologies to generate renewable energy. When considering the demand and opportunity in today’s marketplace these points are prevalent:

the problem of what we do with our waste is not going to go away

the demand for renewable energy is not going to go away

the pressure caused by diminishing fossil fuel supplies is increasing

the public feeling is that governments across the world are responsible

the need for new technologies that can deliver carbon reduction and waste reduction outcomes are increasingly bankable, which opens up the market for all

investment funds are increasingly available from traditional sources as well as from the PE sector.

How do start-up companies ensure they succeed in a waste market which is full of opportunity and demand?

A start-up company can possess excellent ideas, have an extremely capable and competent team and have a genuinely receptive market to the product or service on offer, but there are a number of hard lessons that any start-up company will have to learn if it is to succeed. This applies to all developed world markets. There are no shortcuts and nothing will ever happen quickly enough. To make the grade there are three significant challenging phases which any waste to renewable energy start-up will have to pass through. There will always be the odd exception which defies these rules, but it would be a brave or, rather, a foolish entrepreneur who expects to shortcut the system. All three phases are dependent on the implementation of the right management team. The process will be full of knock-backs, frustrations and obstacles. Any start- up management team will need commitment and durability to be successful. Many would describe the journey as 10% inspiration and 90% perspiration.

Challenge one: concept development

An idea, even if it is unique, will not get off the drawing board unless the company’s founders are prepared to invest in

developing a robust and detailed business plan. As one company developing a renewable power generation capability for

new homes found, once they really understood the market, it just wasn’t economic as a stand-alone business – it was a great idea, but not deliverable.

The business plan will need to include not only a review of the market and where the company fits in as a business, but also sufficient technical and financial detail. It will need to demonstrate, at least at the theoretical level, that the idea can be turned in to a reality. Within the waste to renewable energy sector, there has been a natural scepticism about new technology from both the private and public sector. Banks, local authorities and even waste management contractors and development companies have shown reluctance to back new technology-based companies. For the banks this is because of risk, whether based around technology reliability, the security of the incoming waste stream, the certainty of power off-take contracts and the economics associated with all three. Local authorities and other key customers worry about the ability of technologies to deliver, not just against their statutory targets on recycling, diversion and renewable energy, but also to deliver the political objectives of the authority as a group or individually. The term NIMTO – not in my term of office – has become an increasingly important ditty as waste-related projects will often span an election period, which puts an additional stress on the decision-making process and increases risk. For waste management companies, and increasingly the new entrant infrastructure companies, the issue has tended to revolve around the technologies’ ability to be scaled-up from pilot plant to full-scale facility. Can the plant then last the course and be able to handle a changing, unpredictable waste stream over what may well be 20 years in order to get the economics right? Gasification is one example of where going from small-scale trials to full-blown capability has thrown up a whole new set of challenges. These sorts of challenges can and are being overcome, but they tend to extend the development phase and increase costs. Under normal circumstances, one would progress from phase one to phase two at this point, but within the waste to renewable energy sector, it is more important to jump straight to phase three as this sets the agenda for phase two. As one

mechanical biological treatment (MBT) company discovered, it’s a catch 22 and there is a danger of a slow painful death

when a business is kept alive but without appropriate funding to get to challenge three.

Challenge three: funding

Any start-up company knows that to succeed it needs significant funds to enable it to build a facility, whether on the back of a long-term local authority contract, or to build a merchant facility. This won’t be a few hundred thousand pounds but several millions, as a relatively small waste to renewable energy plant (75,000 tonnes per annum) could cost £15 million (US $28.5 million) even with 80:20 debt. Equity will still require £3 million (US $5.9 million) excluding development costs, meaning that £5 million (US $9.9 million) is required just to get started. This means the business will either need to go to the market or find a private equity/venture capital-backed company to inject the equity funds to enable it to develop, not only one plant, but the platform for the development of a string of facilities. As noted above, the question uppermost in potential investors’ minds is not only how much, but what is the risk and the return. Equity and project funding is available, of that there is no doubt. The sector is topical on a global scale, and it has a longevity to it which makes investments always more attractive. Financial institutions across most global markets are gearing themselves up for the environmental revolution. Within the waste to renewable energy sector, history has shown a hesitancy to invest in projects not supported by four things:

a site with planning permission

adequate independent technology due diligence

a reference plant, preferably at scale

security of waste input and power off-take contracts.

It is this understanding of what is necessary to succeed that forms the basis of what needs to be done in phase two – asset base creation.

Challenge two: asset base creation

To achieve the success of phase two, ensure adequate funds are dispensable and be prepared for it to take longer than expected. As a rule of thumb, any start-up should expect phase one to have lasted six to 12 months. Phase two will potentially take an average of three years or more. Planning permission alone will take on average two years. The time frame for some sites and technologies could be considerably longer, particularly where energy recovery is concerned, as there will never be a planning application made where someone doesn’t say ‘it is just an incinerator by a different name’. Whether it is true or not is largely unimportant – perception is the key. It is not the intention of this article to discuss the vagaries of the planning process or waste to energy plants; suffice it to say it won’t be easy!

Figure 2. Municipal waste management in the European Union Click here to enlarge image

Figure 2. Municipal waste management in the European Union Click here to enlarge image

Added to the site identification and planning process, the need to secure a waste stream and off-take contracts makes the whole scenario even more complicated, expensive and time consuming. To succeed, the owners of the business will need to invest in capable and credible management resource. They need this not just to deliver the business plan, but also to convince the investors that they have the strength in depth to deliver. Yet more expense, but a pre-requisite, is to have a managing director, finance director and operations/technical director in place early. To reach phase three and deliver a successful project, the shareholders will need significant funds – anything up to £5 million (US $9.9 million) could be needed. To expect to do it for a £1 million (US $2 million) is naïve and likely to lead to the loss of every penny invested.

Shareholder expectations

Throughout all of these phases, managing the expectations of the shareholders is critically important. Right from the start the shareholder needs to understand the process, the time it will take and the potential financial outlay involved. Ironically, it is often the banks and financial institutions that understand this and recognize how long it will take. The problem is the enthusiasm of the product developers. Too many start-up companies fail because the money runs out and no further investors can be found, despite the company having a great idea. Conceptual robustness, thorough business plans and genuine market opportunities are not enough on their own to get significant financial support. Clearly this is not always the case, as a number of companies have managed to find an angel investor or they have deep enough pockets within the existing shareholder/management team.

A funder’s view

Risk and reward is a very good starting point when we look at the things financial institutions consider. The question though could be one of balance; how much risk against how much reward? Here the market has seen a shift in approach over the past three years as the whole environmental agenda receives high levels of attention not just in the UK and Europe, but also – finally some might say – in the US. There are a lot of technology based start-up companies out there all with cracking good ideas. Ultimately for the people holding the purse strings, the question is as much about timing and relative risk. A number of companies within the sector got in to the market early and have managed, through their own deep pockets and from finding friendly merchant banks, to secure adequate funding to get through phase two. These are not the norm and there are many casualties en route which you rarely hear about.

The EU Landfill Diversion Directive means the importance of expanding waste-to- energy markets will continue to

The EU Landfill Diversion Directive means the importance of expanding waste-to- energy markets will continue to increase Click here to enlarge image

In the current economic climate, with the impact of the credit crunch in the headlines on a daily basis, has this made a difference to a start-up’s chances of success? Arguably yes and no! On the one hand, money has become more expensive and financial institutions are looking to spread their risks. On the other, the sector is still seen as a long-term, secure market, making investment decisions easier – an interesting conundrum which will be viewed differently depending on who you speak to! However, most companies in this sector have found this only a minor obstacle to overcome when setting up a start-up company.

Conclusions

In summary, the key lessons for all start-up companies to learn, regardless of where they are based, are as follows:

A robust and detailed business plan with appropriate third-party due diligence in relation to the engineering designs and project economics is a fundamental start point.

The company must have a resolute and capable management team and effective advisers to fill the skills and knowledge gaps. Funding these will not be cheap and though compensation through share allocation has a value,

it doesn’t pay the mortgage.

Developing this plan will, as with every other stage of the development of a start-up business, take longer than anticipated.

Phase two of the business plan implementation, which requires a combination of site acquisition, obtaining planning permissions, securing waste streams and power off-take contracts as well as even developing a pilot/reference plant, will require genuine investment by the shareholders.

The process will take longer than you ever expect. A recent example showed that from finding a site to signing contracts with the banks and EPC contractors and without a secure waste stream, for a mechanical biological treatment plant has taken three and a half years.

There is a lot of competition out there for funds and, as the market expands and the opportunities become more concrete, banks and financial institutions will hold the whip hand, which makes the lessons above even more critical.

If you can succeed in overcoming these challenges (in a market where the demand is as clear as it can be) in the waste to renewable energy sector, then the opportunity to exploit this gap in the market and create a successful business is unbelievably exciting. Andrew Garcia is the Director of Environment & Energy at Navigant Consulting (Europe) e-mail: andrew.garcia@navigantconsulting.com

Case study

Biomass Worldwide Limited

On the back of years of research, the construction of a pilot plant in the US and the sale of a licence to a company outside of Europe, the technology developer set about launching the product in the UK and internationally through putting together a management team and developing a business plan. Discussions were held with appropriate authorities and organizations around the globe and the interest expressed was high. So far so good, but it rapidly became clear that the level of funding available from the shareholders would not be adequate to enable the business to achieve its full potential in the UK (seen as its initial prime target market). It then fell upon the

management team to raise further funds from private investors or financial institutions, but the business hit the standard

catch 22 of ‘no assets no funding, versus no funding, so no assets’.

Despite the fact that the technology worked and could be demonstrated to work on a commercial scale, because of the lack of funds it couldn’t get to the next level of its own development – a site, planning and a potential waste stream. It couldn’t even get a well-funded engineering company/infrastructure firm to take it on as there was no strength behind the balance sheet for performance guarantees. This resulted in stalemate. The business is continuing to operate, but its aspirations have moved towards the US, the management team has moved on and it is down to the shareholders to work pro bono, but the lessons are not proving any different. Hindsight is a wonderful thing and had the management team realized earlier on that this level of funding was going to be necessary then maybe they would have done something different. The key lesson was as much one of nativity as one of market understanding. Getting the right shareholders and management with relevant experience and funds in place early is therefore fundamental.

Case study

Graphite Resources Ltd

Having had a significant degree of success in their family business and early careers the two main shareholders – brothers – decided that it was time to use their entrepreneurial skills in the waste treatment market in the north-east of England. Following an appropriate degree of research they decided to invest in autoclaving as their preferred mechanical biological treatment technology. Armed with a solid business plan, bags of enthusiasm and a healthy dose of determination they set about delivering their plan. The successes of the start-up were a combination of financial backing to invest in the plan, their willingness to take a risk, and inheriting very quickly the key survival lessons to stay afloat in the waste management world. The brothers had a strong local contact base so they were able to secure a site, invest in submitting a professional planning permission as well as a series of professional advisers and internal resources so that when they went on the hunt for funds their capability to deliver was clear. Now over three years after the two entrepreneurs started off on this journey they have all the ingredients for success in place – a rigorous and ambitious plan, a site [they are also finalizing more sites], planning permission, an EPC contractor who can provide the requisite guarantees, a solid technology supplier, an adequate degree of certainty as to what they will do with the MBT plant output, the base management team and, most importantly, the funds to make it happen. They have learnt the lessons fast, are battered and bruised but have achieved their overall goal. Though it may seem premature to celebrate success when a plant has not yet been built or commissioned, within the waste to renewable energy sector right now, getting to the point where a plant can be delivered is by far the highest hurdle.

Case study

Biossence Ltd

Biossence Ltd was established in 2006 to develop and deliver flagship waste-to-energy projects producing renewable power. Its plans are to develop and operate large-scale integrated waste treatment and energy recovery facilities. The

Anglo-German firm Biossence Solutions, which describes itself as ‘a pioneering company developing safer, greener and more sustainable solutions to our growing waste problem’, started its journey by identifying a number of potential sites and

finalized its search with a site on the Wirral, UK. Over two years it has undertaken significant public consultations, had to revise its planning application having moved location within the overall development, changed its potential equipment suppliers and seen some challenging times with shareholders. Nevertheless, Biossence has a site and planning permission, and now moves on to the next stage of the development – finding the equity funding to build a £95 million plant. The company has invested significant amounts of its own money to get this far, but there is still a long way to go. Reality says with luck and skill it might make financial close by the end of the year, so it will be over three years between start-up and putting the first spade in the ground.