13 June 2022
Where did all the contractors go? The trouble with EfW
Linking both circular economy and net zero goals, the UK energy-from-waste (EfW) should be vibrant. In reality, heavy losses have seen many contractors leave the market. The industry should consider alternative contract and risk-sharing models to attract them back.
UK energy-from-waste (EfW) contractors have suffered from well-publicized difficulties over the last half decade. A pattern of cost overruns has left many ruing their involvement in the sector – and announcing their exit.
One bitten, twice shy: contractors shun the EfW sector
Among those who have suffered from involvement in the EfW sector, France-based construction firm, CNIM, announced the collapse of its EfW plant construction business in January 2022. The company had already signaled its departure from the EfW contracting sector back in February 2021, after the bankruptcy of its partners on the Beddington EfW plant and Earis Gate EfW projects left it holding the ball. CNIM is not alone in shunning the EfW sector. The exodus of contractors has left UK EfW developers of UK with limited options. Those contractors that do remain have relatively full order books; project owners are therefore having to pay more to secure their services, compounding the price inflation experienced across the construction sector. This combination of factors has led to EfW projects facing significantly higher price hikes other segments of the construction market. As a result, fewer projects are actively being brought forward.
"The exodus of contractors has left UK EfW developers of UK with limited options"
Why is EfW so troublesome?
The challenges faced by EfW in the UK are at odds with what should be advantageous conditions for its development (and are in contrast with more successful efforts to establish EfW in the rest of Europe). After all, the UK is running out of space in landfill and it is committed to low-carbon forms of energy generation. EfW ticks both of the boxes. And yet…
To understand what one commentator has called the ‘curse of EfW contracts’, it’s important to consider the structure of those contract. EfW plants are traditionally awarded under EPC contacts (the new Edmonton plant being a case in point). This type of contracts place full responsibility for project delivery on the contractor, including responsibility for any increases in project costs. The EPC model works well for industrial plants that rely on consistent and established processes, the costs of which are well understood. The problem with EfW plants is that they are hard to run consistently, and may rely on novel technology. Taking the first of these issues: the waste used to fire EfW boilers is (literally) a mixed bag of materials. Burning this waste is not as easy as using more homogenous feedstocks, such as fossil fuels. Dealing with inconsistent fuel properties is a technical and engineering challenge that makes it much harder to deliver a consistently-operating EfW plant. These issues are added to when the project utilizes technologies other than the traditional moving-grate technologies used in the vast majority of EfW plants. Waste-based gasification plants, for example, have faced particular challenges in the UK. When dealing with new technologies it is not practicable to hold a contractor to a fixed price, since there are almost guaranteed to be unforeseen challenges and hurdles to project installation. These cases should be let on an EPCM basis, where the risk is more evenly shared between contractor and owner. Given the challenges contractors have faced with even traditional EfW plants, however, there’s an argument for considering EPCM more generally in the EfW sector, as a way of attracting contractors back into the market.
Implications for insurance
The EPCM model may also be a benefit when it comes to obtaining insurance coverage, as it places the focus on delivering a working plant, rather than delivering to a specific (possible unrealistic) price. As always, it’s important to engage early on with a broker, such as Gallagher, who understands the construction contracting process and has experience in obtaining coverage for EfW projects, in order to adequately assess project risks and ensure insurability. The contractor market is also challenging coverage of existing EfW plants built under fixed-priced contracts in the last couple of years. Assuming the fixed-price contract value is carried over into the insured value, owners may well find their coverage is inadequate to cover the costs of replacing or reinstating a plant in todays inflationary environment. It is again advisable to work with an experienced broker to ensure insurance coverage remains fit for purpose.
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