In the second of a series of real asset investment case studies, Katia Brisson, Associate Director at Gravis Capital Management, looks at energy-from-waste.
The earliest known landfill site dates back to ancient Greece, but it wasn’t until the 20th century that they became the most common form of waste management. Today, not only are landfill sites around the world reaching capacity, but they are contributing more to global CO2 emissions than most daily activities combined.
To curb this problem, governments and businesses have had to find waste-reduction strategies. One of these strategies is producing energy-from-waste. GCP Infrastructure Investment Limited (the ‘Company’) first invested £48 million in the Gloucester Energy-from-Waste facility in 2017.
The investment case
After the residents of Gloucestershire have separated out as much of the recyclable and green waste elements of their household waste as they can, there is inevitable some rubbish remaining. This waste, that would otherwise go to landfill, is instead processed by the Gloucestershire Energy-from-Waste facility.
The facility is largely automated and combusts up to 190,000 tonnes of waste each year (approximately 75% of which is provided by Gloucestershire County Council). Heat generated from the combustion process is then converted into electricity through the application of a steam turbine. Generating more than 14.6MW, the facility can produce sufficient electricity to power the equivalent of approximately 25,000 homes each year.
How revenue is derived
As an investment, the facility has several defensive characteristics. Barriers to entry in terms of construction are extremely high, it’s a real asset providing a valuable service and, because the Company is invested in its debt, there’s the added benefit of capital structure protection.
Construction of the facility began in August 2016 and reached completion in October 2019.
The Company first invested £48 million via senior secured debt in 2017. The loan is amortising, with the interest rate set at 7.92% and the final repayment date set for 2042.
Revenue from the project comes from various sources and is highly contracted. A significant proportion comes from ‘gate fees’ for processing waste, which are at a fixed price and index linked through a ‘Contract for Difference’ agreement with Gloucestershire County Council over a 25-year concession period.
The capacity that remains after Gloucestershire County Council has delivered all residual household waste generated within the county, is serviced by processing additional waste from nearby third party commercial and industrial parties. This presents an opportunity for the facility to earn additional gate fees.
Another significant source of revenue comes from the electricity generated by the facility, which is sold directly into the grid via a Power Purchase Agreement at a fixed price.
How the sector could evolve
After reduce, reuse, and recycle, recovery of value from waste is considered the most sustainable option. It diverts the maximum amount of waste from landfill and the consequent generation and emission of landfill gas; safely manages waste that cannot be readily recycled; generates energy in the form of electricity and heat; provides indigenous energy supply, adding to the UK’s energy security; and generates renewable energy, contributing to the UK’s renewable energy targets.
However, because energy-from-waste plants process both organic and non-organic waste, they still produce some emissions. They have thresholds for these emissions, but the energy-from-waste industry is looking at the possibility of carbon capture and storage, to be able to decarbonise completely. This is limited to certain industry clusters today, but the opportunities will increase in the future.
Read case study #3: schools here.
Important Information
This article has been prepared by Gravis Capital Management Limited (the "Investment Adviser“ or “Gravis”) and is for information purposes only. It is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Any recipients of this article outside the UK should inform themselves of and observe any applicable legal or regulatory requirements in their jurisdiction and are treated as having represented that they are able to receive this article without contravention of any law or regulation in the jurisdiction in which they reside or conduct business.
This article should not be considered as a recommendation, invitation or inducement that any investor should subscribe for, dispose of or purchase any such securities or enter into any other transaction in the GCP Infrastructure Investments Ltd (the “Company”) or any other fund affiliated with Gravis. The merits and suitability of any investment action in relation to securities should be considered carefully and involve, among other things, an assessment of the legal, tax, accounting, regulatory, financial, credit and other related aspects of such securities.
No undertaking, representation, warranty or other assurance, express or implied, is made or given by or on behalf of the Company, the Investment Adviser or any of their respective directors, officers, partners, employees, agents or advisers or any other person as to the accuracy or completeness of the information or opinions contained in this article and no responsibility or liability is accepted by any of them for any such information or opinions or for any errors, omissions, misstatements, negligence or otherwise for any other communication written or otherwise. In addition, neither the Company or the Investment Adviser undertake any obligation to update or to correct any inaccuracies which may become apparent. The information in this article is subject to updating, completion, revision, further verification and amendment without notice.
Past performance is no guarantee of future performance.
Gravis Capital Management Ltd is authorised and regulated by the Financial Conduct Authority; registered in England and Wales No: 10471852 and its principal place of business is 24 Savile Row, London W1S 2ES.
