Still PLUGGED IN

Michael Fickes

THE WASTE-TO-ENERGY (WTE) industry has returned to the nation's renewable energy radar screen, thanks to recent tax credit legislation. Among various corporate tax measures, the American Jobs Creation Act of 2004 authorizes the Internal Revenue Service to provide tax credits for the production of renewable energy from geothermal, solar, wind and biomass sources of energy. For the first time, legislators included WTE (as well as landfill gas-to-energy) in the biomass category of renewable energy sources.

However, it isn't the financial value of the renewable energy tax credit — 0.9 cents per kilowatt hour (kWh) produced — that is generating excitement in the WTE industry. The symbolic value of being included on the list of renewable energy sources is boosting WTE professionals' spirits. “We've been fighting to be recognized as a renewable energy source,” says John Miller, CEO of Montvale, N.J.-based American Ref-Fuel Co. “This production tax-credit legislation puts us in that category. “

In fact, the tax credit will probably not help to fund new WTE plants this year. While producers using renewable energy sources may use the credits for the next five years, plants must begin production by December 2005 to qualify for the credits. Industry experts say that it takes at least 11 months to bring a facility online, and no new WTE facilities have been started since the mid-1990s. “For now, the symbolic value of the tax credit is more than the financial value,” Miller adds. “It makes us think that going forward, there may be additional incentives for renewables.”

The credits may help to fund a handful of current WTE expansions — the first significant construction projects undertaken by the industry in a decade. “The market has begun to build again,” says Maria Zannes, vice president of the Washington-based Integrated Waste Services Association (IWSA), which represents WTE producers. “Facilities in Florida, Hawaii, Minnesota and Pennsylvania now are being expanded. So new construction has begun with expansions at existing facilities.”

Before tax credits will spur significant growth, Congress will have to extend the credits and signal a willingness to make credits a part of WTE financing for the foreseeable future.

While the tax credit legislation has focused new attention on the industry, the issue driving WTE companies today is the impending, dramatic change in the original industry business model. Twenty years ago, guaranteed contracts with municipalities and energy producers provided capital to build and operate WTE plants. Today, those contracts are coming to an end, which means that WTE plants will have to develop a model that will enable them to prosper within today's deregulated energy market.

Model Beginnings

The WTE industry arose in the late-1980s. Through the mid-1990s, WTE companies built 103 WTE plants relying on tax incentives and guaranteed waste and energy contracts.

Accelerated depreciation and investment tax credits defrayed the capital costs of building WTE plants. A plant that processes 1,000 tons of waste per day can cost between $100 and $120 million, according to the industry-sponsored Waste-to-Energy Research and Technology Council. Most WTE facilities in the United States process from 500 to 3,000 tons per day, the council says.

To fund construction of the facilities, municipal bonds did the heavy financial lifting. And to make the bonds attractive to investors, WTE plants signed 20-year contracts with municipalities that guaranteed sufficient municipal solid waste (MSW) to fuel the plants. As part of their contractual obligations, municipalities adopted flow control ordinances directing haulers to deliver MSW to WTE plants and to pay the contractual tipping fees.

Additionally, WTE plants negotiated 20-year guaranteed contracts for the sale of electricity to utilities. The Public Utility Regulatory Policy Act (PURPA) made these contracts possible. Enacted in 1978, PURPA requires utilities to buy a percentage of their power from independent energy producers, such as WTE plants, that generate power at lower costs than utilities. “PURPA gave us our original marketplace,” Zannes says.

The model worked because guaranteed revenues from waste tipping and energy sales serviced the bonds, paid the operating and maintenance costs, and provided profits for the WTE plants.

Guarantees, Yes, But…

The WTE business model stopped working in 1993, when market, legal, and regulatory issues combined to call the industry's future into question. At the time, energy prices began a decade-long decline. While existing PURPA contracts preserved existing revenue from electricity sales, WTE no longer represented a lower cost alternative for utilities, which accordingly lost interest in signing new PURPA contracts. As new landfills opened nationwide, the WTE industry suffered a second blow. Competition reduced tipping fees and set the stage for a legal battle over the right of municipalities to direct waste to WTE plants, whose tipping fees were set by contract.

Private haulers with municipal contracts written around flow control ordinances sued to be allowed to send the waste they collected to the lowest-priced disposal sites. In 1994, the U.S. Supreme Court declared that municipal flow control ordinances, many of which directed trash to WTE plants, interfered with interstate commerce and were unconstitutional. Because municipalities could no longer specify where their waste would be taken, they had to find other ways to meet the obligations of contracts with WTE plants.

Then in 1995, WTE costs surged when plant regulations issued under the federal Clean Air Act kicked-in. “Facilities had to meet Maximum Achievable Control Technology or MACT standards,” says Ted Michaels, president of IWSA. “These are very stringent standards.”

Fueled for Growth Today

Since the mid-1990s, the WTE industry has been clawing its way back. Municipalities have developed a legally acceptable economy-based solution to the flow control problem. “Communities found that they could control MSW by adding fees to garbage taken out of local jurisdiction for disposal,” Zannes says.

By making alternative disposal options as expensive as WTE, municipalities have preserved feed stocks for WTE plants. The plants also have developed clean air technology to meet MACT standards. Meanwhile, energy prices rebounded strongly, particularly in the past two years, putting PURPA's requirements back in play.

Today, WTE owners are revising their business models to sustain plants when existing 20-year waste and electricity contracts end. “Our first plant opened in 1989, and its contracts will rollover in 2009,” Miller says. “The economics of WTE have changed significantly.”

Original WTE power contracts, written in the late-1980s and early-1990s, envisioned steadily rising prices for electricity. Price escalation clauses drove prices much higher than market prices.

On the waste tipping side, however, market-based fees have generally fallen. “When existing contracts rollover, I think generally that power prices will come down toward the market level, and waste tipping prices will move up toward the market,” Miller says.

While the change to market pricing for energy sales and tipping fees may end up as a wash, the bonds used to build WTE plants will be paid off when the contracts rollover. According to Miller, most WTE plants were designed to operate for 50 years, given adequate maintenance. “We'll have to negotiate market prices for the waste as well as the power,” Miller says. “But we won't have the debt burden we had when we opened the plants.

“My outlook for the industry is bullish,” he continues. “Right now the economics are not unfavorable. And in my view they are becoming more favorable all the time. Compared to landfills, we are becoming more competitive. That's why you're now seeing some WTE plants expanding.”

Observers expect that WTE owners will pursue expansion rather than new development strategies for the next few years. Large new plants are not easy to permit and even more difficult to finance. But an existing plant with two boilers may be able to finance third and fourth boilers.

The driving force is the market situation in the region surrounding an existing plant. Is waste being ferried outside of the market? How far does it have to travel? What are the transportation costs?

“At this point, most WTE companies would not want to add capacity without long-term contracts that facilitate financing,” Miller says. “Then again, you may not have to cover 100 percent of the additional waste capacity — [you may need] just enough to reduce the risk to investors.”

New Legislative Incentives

As WTE facilities position themselves to enter the economic marketplace, new legislative tools such as the production tax credit — if it is extended — may make WTE's position stronger.

State governments are developing incentives that may fuel WTE growth, too. In 1998, five states enacted legislation requiring that some percentage of energy sold within the states be generated from renewable energy sources, such as WTE. According to the IWSA, 14 states and the federal government have implemented similar programs, and a number of states are considering them.

Called Renewable Energy Standards (RPS), new state programs can help fund the WTE industry in two ways. First, utilities can purchase energy generated from renewable sources such as WTE plants to satisfy their renewable energy obligations. Second, utilities can purchase credits to meet RPS obligations. A WTE plant earns one credit for every unit of electricity it produces. Utilities can purchase credits from WTE plants or other renewable sources to satisfy their statutory responsibilities.

“There has been some use of these credits,” Miller says, “but the market isn't that well-developed yet. As time goes buy, I think RPS will become more important.”

All in all, WTE producers cannot rely on the development of an RPS credit market or an extension of federal production tax credits. Their future will depend more on the workability of their new economic business models.

Michael Fickes is Waste Age's business editor based in Cockeysville, Md.

WTE'S ROLE IN THE RENEWABLE ENERGY MARKET

According to the U.S. Department of Energy (DOE), five sources of renewable energy can help meet the nation's energy requirements: hydroelectric, geothermal, solar, wind, and biomass (which includes waste-to-energy and landfill-gas-to-energy).

Hydroelectric power, by far the largest source of renewable energy, adds between 30,000 and 40,000 megawatts of electricity annually to the nation's energy supplies, compared to 17,362 megawatts, the combined total energy supplied by the emerging renewable sources of geothermal, solar, wind, and biomass.

Within the category of emerging renewables, excluding hydroelectric power, biomass is the largest, providing 10,120 megawatts or 58 percent of the total 17,362 megawatts.

The DOE lists wood and landfill gas, municipal solid waste used for WTE fuel, and wood and wood wastes as the primary sources of biomass power. Wood is the largest category, supplying 62 percent of the total energy from biomass. WTE ranks second, providing 2,500 megawatts or 25 percent of the biomass total. Landfill-gas-to-energy supplies about 9 percent of the electricity generated from biomass sources.
— MF