One renewable energy segment that seems to be benefiting from the ongoing urban development schemes such as the Smart Cities Mission, the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), the Swachh Bharat Mission, the Heritage City Development and Augmentation Yojana (HRIDAY) and the Pradhan Mantri Awas Yojana-Urban (PMAY-U) is waste to energy (WtE). One of the key objectives of these schemes is efficient waste handling and treatment, the lack of which has proved to be the biggest hurdle in the operation of existing, and the development of new, WtE projects.
For the longest time, the segment has faced a policy and regulatory paralysis. The absence of an effective tariff determination mechanism kept investors away. If a municipal corporation reached the stage of awarding a project, the discoms shied away from ensuring power offtake at the tariffs quoted by developers. Moreover, municipal corporations could not guarantee or ensure the supply of an adequate quantum of waste feed to the plants. Effective waste management is expensive, often comprising 20-50 per cent of municipal budgets.
Operating this essential municipal service requires integrated systems that are efficient, sustainable and socially supported. The absence of these systems has hampered the development of the segment.
However, over the past few years, there has been a lot of policy and regulatory advocacy to resolve these issues. In 2018, the Ministry of Power revised the Tariff Policy, 2006 under the Indian Electricity Act, 2003, making it mandatory for discoms to purchase power from WtE plants. Moreover, the remunerative tariffs set by the Central Electricity Regulatory Commission (CERC) have encouraged investor interest in the segment. A number of states have adopted the CERC’s guidelines to determine state-specific tariffs. Some states
have also adopted project-specific norms to determine tariffs, a strategy that has worked in favour of the segment. Besides, a number of states have come up with focused WtE policies. Interestingly, in 2018, the Supreme Court intervened and issued a ban on construction activity in several states, stating that they had not come up with any policy for waste management. This prompted more states to announce dedicated waste management policies.
Innovative and evolving business models
With the new power tariff policy, tariff is no longer a bidding parameter for awarding WtE projects. The policy clearly states that competitive procurement of renewable power is permitted and encouraged for all segments except waste-to-energy. WtE business models have, therefore, evolved to include various combinations of tipping fee, viability gap funding (VGF) and per-unit tariffs. Land in most cases is provided by the corporation because there have been several instances of local resistance faced by developers trying to acquire land on their own. Some states are also encouraging open access-based power offtake. Open access charges range from Re 1 per kWh to Rs 3.50 per kWh across states. Despite these charges, some urban local bodies (ULBs) have expressed keenness to procure power from these projects. They do not want to rely on discoms to purchase power as some of them are not financially sound, thus impacting the bankability of the project. Large industrial and commercial consumers are also showing interest on buying this power through the open access route. The transaction cost (open access charge) applicable to this type of power offtake has, therefore, been relaxed in several cases.
The latest example in this regard is the Delhi Metro Rail Corporation (DMRC) signing an agreement with East Delhi Waste Processing Company Limited (EDWPCL) to procure 2 MW of power from its 12 MW WtE plant in Gazipur, Uttar Pradesh. The power is being received by DMRC at its Vinod Nagar substation and is being used to meet the operational needs of its Pink Line. It is estimated that around 17.5 MUs of power will be consumed by DMRC per year through this arrangement. The Ghazipur plant is based on a public-private partnership (PPP) between the Government of Delhi, the East Delhi Municipal Corporation (EDMC) and EDWPCL. In an ideal scenario, the plant can process more than 1,500 tonnes of waste a day.
The DMRC-EDWPCL agreement comes after the Delhi Electricity Regulatory Commission (DERC) stated that WtE projects in the national capital territory would be exempt from certain open access and deviation charges for intra-state scheduling purposes.
Interestingly, a large number of corporations have come to believe that the polluter has to pay for the waste produced. Some of them have already started charging user fees. In many cases, the corporations’ ability to charge and collect those funds is limited, so they are inviting the private sector to undertake this. For instance, the Municipal Corporation of Gurugram has outsourced this service to Ecogreen Energy. Residents are required to segregate and dump wet and dry waste in separate bags, which are then collected from their doorsteps. Depending on their plot size, residents are charged between Rs 50 and Rs 100 for the waste collection service. The city generates around 700 tonnes of daily waste, which is taken to the Bandhwari WtE plant. The 32-acre plant is capable of handling 600 tonnes of garbage per day, but it is currently receiving around 1,500 tonnes per day from Gurugram and Faridabad.
Some corporations are also planning to go for engineering, procurement and construction, and operations and maintenance-based business models as they feel they would be in a position to mobilise funding and undertake technology selection themselves. There have been various attempts in this direction, but there has been no clear case of success so far in India.
Different competencies and risk appetite levels drive the selection of the business model by the corporation and the private developer. But overall, the government has been successful in instilling a competitive spirit among cities and states, with rankings and grades on cleanliness, waste management and waste utilisation. It has also been successful in attracting significant private sector interest in this space. In fact, a successful PPP model appears to be emerging in the waste management space, which will work in favour of WtE projects.
Financing trends in the segment have also been encouraging. A number of municipal corporations have issued green bonds at attractive interest rates of 8-10 per cent in the past two years to raise funds from the market. These funds are being utilised to either provide for the VGF component or support WtE projects in some other way. Municipal corporations of cities like Ahmedabad, Bhopal and Indore are among the few that are financially strong and have been appreciated by investors.
Given that the appetite of commercial banks to lend to WtE projects is limited due to their already significant exposure to the power sector (which is facing the issue of stressed assets and non-performing assets), non-banking financial companies (NBFCs) have come into larger play. Recently, the Power Finance Corporation provided Rs 3 billion to a WtE project. The Indian Renewable Energy Development Agency and REC Limited are other NBFCs that are mulling financing or refinancing existing WtE projects. Multilateral development banks like the International Finance Corporation have also been actively looking at this segment.
In addition, the government has set up specialised funds for credit enhancement of municipal corporations. This will be crucial for providing bankability assurance to project developers. WtE projects face twin challenges – regarding the sourcing of waste and regarding the tipping income paid by ULBs. In some cases, corporations are devising a “secure tariff” mechanism, wherein they guarantee a minimum tariff to project developers. In this case, they pay the developer the difference between the state electricity regulatory commission (SERC) determined tariff and the corporation guaranteed tariff. To address these challenges and enable corporations to implement the secure tariff mechanism, it is important to keep the financial health of the corporations in check.
Of late, international investors have shown significant interest in entering this space. In a recent transaction, private equity (PE) firm KKR and Co. has acquired a 60 per cent stake in environmental solutions provider Ramky Enviro Engineers Limited (REEL) for $530 million. This is the largest buyout by a PE firm in India’s environmental services sector. The acquisition has been undertaken through a combination of primary and secondary investments from KKR’s Asian Fund III and has valued Ramky at around $1 billion. Hyderabad-based REEL’s environment management service offerings include the collection, transportation and processing of hazardous, municipal, biomedical and e-waste, as well as recycling of paper, plastics and chemicals. REEL operates the country’s largest WtE plant in Delhi, with a power generating capacity of 24 MW, converting 1,500 tonnes of waste every day. Its other WtE plants are located in Hyderabad, Nashik, Koyambedu and Rewa. The company handles 3.5 million tonnes of municipal waste and 1 million tonnes of industrial waste per annum.
There are also a number of FDI deals and investments in the pipeline. China-based Ecogreen Energy Private Limited is investing in three projects in this segment. UK-based GJ Nature Care & Energy has also announced an investment of almost Rs 15 billion for setting up WtE plants in select cities in southern India. One of the projects won by the company is a 10 MW WtE project in Kochi. Meanwhile, a French company intends to set up an 8 MW WtE project in India involving Rs 2 billion of investments. The German government is supporting a WtE project in Nashik through GIZ. A US-based technology firm, which claims to have developed a new technology wherein it will be able to process waste to produce valuable outputs besides power, is also planning to invest in India. The growing number of international firms lining up to invest in this space is indicative of the fact that the time is just right to enter this segment.
Since the amendment to the tariff policy and the release of the CERC’s tariff regulations, several states have revised their tariff norms for WtE projects.
In a recent order, the Karnataka Electricity Regulatory Commission (KERC) has extended the validity of the generic tariff it had set for municipal solid waste (MSW) projects in the state. A tariff of Rs 7.08 per kWh was set by the commission back in 2016, which was applicable to all of the state’s MSW-based power projects commissioned between September 19, 2016 and March 31, 2018. The order has come in response to Karnataka Power Corporation Limited’s request to retain the existing tariff, stating that it had already taken up a 5 MW WtE project in Bidadi. KPCL stated that any reduction in the existing tariff would adversely affect the project. Therefore, to encourage new WtE projects in Karnataka, the commission decided to retain the existing tariff for a period of one year beginning April 1, 2019.
In a similar case, the Andhra Pradesh Electricity Regulatory Commission previously approved a tariff of Rs 7.50 per kWh for 5 MW each of WtE projects belonging to Anantapur MSW Private Limited and Envikare Green Energy Private Limited.
Meanwhile, in Tamil Nadu, the SERC has set the generic tariff for the procurement of power from MSW projects in the state at Rs 6.28 per kWh without accelerated depreciation and at Rs 5.90 per kWh with accelerated depreciation, effective April 1, 2019.
Overall, there is significant tariff diversity across projects due to the prevalence of different business models, and the kinds of tipping and quantum VGF offered by various corporations, and also because most states now follow project-specific tariff-setting.
While composting, gasification and incineration continue to be the dominantly used techniques in the WtE space, a number of new methods and technologies have evolved over time. The industry is also working towards the development of useful byproducts such as biochar, bioethanol, compressed biogas, bioCNG and steam. A number of companies are tying up with oil marketing companies to produce bioethanol. Some companies have started selling steam, which has a use case for industrial applications rather than for conversion to power. An improved form of plasma technology is also coming up, which can reportedly work with lower auxiliary consumption and produce better output.
Broadly, 50 per cent of the WtE potential is confined to nine states. About a year ago, only half of them were making progress but in the past few months, other states have also started witnessing significant developments. There is a clear trend of an emerging ecosystem to drive growth in the segment. The Swachh Survekshan Abhiyan has helped create healthy competition among the municipal corporations. The regulatory framework for must-run and must-purchase, tariff visibility for 25 years and project-specific tariffs have instilled further confidence in the segment.
As a result, a number of new players are entering this space while existing players are drawing up strategies to expand their operations. In a recent development, NTPC and EDMC have come together to form a 74:26 joint venture (JV) to harness municipal waste for conversion to green energy. The JV aims to develop and operate a state-of-the-art integrated waste management and energy generation facility. The WtE facility will utilise MSW from EDMC and various other zones. EDMC is yet to determine the location of the project. However, growth in the segment is not proving to be as fast as envisaged. Almost 75 per cent of the WtE potential remains untapped. Of the 25 per cent that has been tapped across various projects, some have become defunct. Around 130 MW of capacity has been commissioned and 340 MW of projects are still under development. In other words, 30,000 tonnes per day (TPD) of waste is currently being processed, but this could go up to 400,000 TPD.
In order to realise this potential, it is important to determine viable tariffs. This calls for comprehensive pre-feasibility studies for a more realistic assessment. Risk-sharing among corporations and private parties also needs to be improved. With better access to finance, and NBFCs and multilateral development banks coming into play, contract management requires thorough checks.
Overall, according to PwC’s estimates, the WtE segment presents an $18 million investment opportunity by 2030, implying a CAGR of 14 per cent over the next 12-13 years. Of this investment, the bulk would be needed for project opex. Notably, WtE is the only renewable energy segment that requires the majority of the investment to be made on the opex side. But it is also the only segment that offers a post-tax return on equity of about 16 per cent.
By Dolly Khattar