Prove me wrong: the EPA doesn’t trust the market to sort this out

I’d like to write about the New South Wales Environment Protection Authority (NSW EPA) Better Regulation Statement, as I find it is quite revealing. Why? Let me first tell you what it actually says.

The NSW EPA published its “Better Regulation Statement” for the Energy from Waste (EfW) Regulation 2022 in July 2022. 

In Chapter 5, headed “Need for a regulatory response”, the Statement says that, since the release of the NSW Energy from Waste Policy Statement in 2014, there has been a lot of interest in the market in developing energy from waste facilities in NSW. Then it goes on: “without intervention, there could be a significant oversupply of energy from waste facilities in NSW”.

Then it says: “An oversupply of energy from waste facilities also risks a class of stranded assets as the circular model of waste and resource management takes effect and the volume of available residual waste feedstock declines.”

Chapter 4 of the Statement tells us that “there are eight energy from waste development proposals at various stages of assessment within the planning system.”

Chapter 7 repeats to a degree what Chapter 5 says: “Without decisive and well-targeted regulatory intervention, the current regulatory approach could lead to a significant oversupply of energy from waste facilities in NSW.” It goes on to say “the amount of feedstock available to energy from waste facilities will fall in absolute terms” and “persisting with the current regulatory framework will generate adverse outcomes for the community, industry and the environment, including creating financial risks for those who invest in energy from waste facilities”.

At the same time, the Statement refers to the NSW Waste and Sustainable Material Strategy 2041 and says in chapter 3 that “NSW waste volumes are forecast to grow from 21 million tonnes in the 2021 financial year to nearly 37 million tonnes in the 2041 financial year.”

Okay, let me summarise what we have read and what we know so far.

First, there is no EfW facility in NSW as yet. As written in my last article, there have been several development applications in the system since 2013 but none has obtained a development approval (DA).

Waste volumes are increasing from 21 million tonnes to 37 million tonnes over the next 20 years, but there is a danger that not enough available feedstock will be around and EfW facilities will become stranded assets for the poor investors, if we do not prohibit them, except for four locations, all outside Sydney.

I guess a lay reader would think the EPA would have thought this through a bit better. Even at face value it sounds a bit odd, given that waste volumes are set to nearly double over the next 20 years.

Basically, what the EPA is saying is this: we have eight development applications in the system and that’s just too much. Without “well-targeted and decisive intervention” the market will fail, investors will lose money and the consequences of this will be dire. In other words, the market cannot be trusted.

So much for a fictional story, now let me tell you some facts. 

How much does an EfW facility cost to build?

Well, of course it depends on the size of the thing, but we know that the one being built in Kwinana, WA will cost around $650 million and one in Rockingham around $500 million. At least, if not more. Not exactly small change.

How does anyone finance such a facility?

Well, not with cash – that much is clear. What you need is debt, probably several layers of it. How do you get debt finance? Anyone tried to get money from a bank lately? It’s not that easy, is it?

You need to convince financiers to give you several hundred million dollars to build the facility before the first dollar of revenue is earned. The financiers will employ the best experts they can find and the worst lawyers you will want to face to test your financial model, your technology, your contracted revenue, all your existing and potential risks and then some…

Before the first spade can be put into the ground to build the EfW facility the project needs to get to what is called “financial close” meaning finances need to be sorted, debt approved etc. How do you do that?

Well, first you need to find a site where you can build an EfW facility.

Then you submit a development application for a State Significant Development (SSD) and the Department of Planning will determine the criteria you will need to answer to their satisfaction.

If you get a DA, which no one has done so far in NSW, then you need to find waste. That means you need to get signed contracts for at least 70 to 80 per cent of the volume of the facility, enough anyway to make a financial model stack up that show how you will earn enough money to pay for your debt and make a profit.

Then come the financiers’ experts and lawyers and take apart everything you have so far. No page will remain unread, no stone unturned, no risk, no matter how remote, unmentioned. The technology will be examined in minute detail by real experts, not some EPA officer googling what it all means and how it all works (sorry, I don’t mean to sound derogatory, but that’s the reality, I have seen it many times).

These people are not dumb. They know how much waste is available and the risks associated with any contract for the supply of the waste. They will ruthlessly discount whatever contract is in place for every risk they find or perceive to be there. They understand the difficulties and costs of logistics of getting waste to a facility outside Sydney. You will also need a contract with a transfer station operator and a rail operator, unless you can afford a dedicated truck fleet just for this facility (unlikely).

Any chance of mum and dad investors playing in this market needing protection from the State by “Better Regulation”? Not a chance.

In other words, the fact that eight development applications may be in the system for EfW facilities doesn’t mean that eight EfW facilities will be built. Far from it. It is a race to get there first. Once someone has a DA, they can go and find waste, before then it is a “waste of time”, unless the applicant themselves control sufficient amounts of waste to provide feedstock for such a facility. 

Realistically, it will be very difficult to sign up enough waste in NSW, unless you are in control of transfer stations in Sydney. That means in reality Veolia and Cleanaway have a real life chance to get a facility financed. For anyone else, it will be much more difficult, or nearly impossible. 

That also means these other potential applicants will need to spend more time and money to get to financial close. You need to spend at least $6 to $10 million to get through the process. Who has got that sort of money to play with, as success is very elusive? 

Yet, the EPA thinks a decisive market intervention is needed now, before anyone has been successful in obtaining a DA.

The stark reality is that this regulation is a ludicrous farce, or, to paraphrase the Better Regulation Statement: a decisive and well-targeted erosion of trust.

You can also think about it this way: The EPA didn’t trust the market to sort this out.

Yet in its 2041 Waste and Sustainable Material Strategy, published in June 2021, it identifies that we are running out of landfills or better landfill airspace. The very thing we are trying to avoid. The Strategy says “NSW is running out of space to deal with residual waste”. Sydney will have no airspace left for non-putrescible waste by 2028 and none for putrescible waste by 2036.

How long does it take to get a landfill approved in NSW? The EPA says between six to eight years, but it can also be 10 years. The Strategy has been published since June 2021. The EPA has not intervened in the market. That can only mean the EPA trusts the market to come forward and build those landfills we urgently need (but not want). What has happened since June 2021? Nothing. Unless I am mistaken, no large scale application is in the system for the development of a landfill. I would be happy to be proven wrong, of course. 

Time is running out. It is already 2022. We will have no airspace left for non-putrescible by 2028. In terms of landfill approvals and development that is not a long time at all. What is the EPA doing? Nothing. 

It pains me to say this but the only conclusion I can get to, comparing the two “issues” of EfW and landfills in NSW is this: The EPA lacks any real understanding how the markets and the industries, which they are in charge of regulating, actually operate.

Any political solution on the horizon?

When asked about this issue, the new Minister, James Griffin, said at a breakfast organised by the Waste Management and Resource Recovery Association of Australia (WMRR) that he will take advice from the EPA. No further comment necessary!

Local Governments like to call out “market failure” if something doesn’t work as well as might be expected. 

I reckon we should all rethink this and be honest with each other: this is regulatory failure at its worst, at a time when we need trust in the system more than ever to attract the investment needed to transition to a more Circular Economy. 

Want any more proof? On 2 August it was published that Energy Australia has withdrawn its application for an EfW power station at Mt Piper, one of the four locations (called West Lithgow), the EPA has decided in its wisdom, where such a facility can be built. This was entirely clear and predictable some 12 months ago to anyone who bothered reading the news and knowing a bit about this matter, except the NSW EPA, of course.

Good night, NSW.