A few years ago, we reported that a wave of waste to energy (“WTE”) projects were expected in the Middle East.  It now appears that the wave is about to break. From Saudi Arabia, to the UAE and to Oman, these planned projects will signify a significant milestone in the Middle East’s burgeoning waste sector.
In this alert we set out (i) a regional update on the waste sector; and (ii) initial thoughts on the Abu Dhabi waste sector and the announced WTE plants, including some key issues to consider.
The desire to implement WTE projects in the region remains strong due to a number of factors including the significant regional demands for power, a growing desire to establish and implement more thorough environmental regulations and, most significantly, the volume of waste generation in the countries comprising the Gulf Cooperation Council (“GCC”). The GCC’s waste generation data places the region among the world’s largest waste producers on a per capita basis. Several GCC states have ambitious waste management targets mandating landfill diversion, with the UAE seeking 75% landfill diversion in the UAE Vision 2021 plan and Saudi Arabia setting a goal to develop 3GW of waste-to-energy facilities by 2030 as part of the Vision 2030 programme. Accordingly, the development of WTE projects in the GCC continues to be both an environmental and economic necessity.
Sharjah WTE project
The most significant recent regional WTE development was the successful financial closing of the Sharjah Waste-to-Energy Project in December 2018. The project is under development by the Emirates Waste To Energy Company, a joint venture of Abu Dhabi-based Masdar and Sharjah-based Bee’ah. K&S lawyers worked on this project for the sponsors. As well as being a significant achievement for the Emirate of Sharjah, the project is viewed as a pathfinder for other Middle East WTE projects. It was the first, major, utility-scale, project-financed WTE project in the UAE. The project was financed with 20-year, limited recourse commercial bank debt by a syndicate led by Abu Dhabi Commercial Bank, with the facility agreement being signed on 31 July 2018. The financing is structured as a soft mini-perm (discussed further below).
The facility will use up to 37.5 tonnes of solid waste an hour to generate 30MW of electricity. It will divert 300,000 tonnes of waste from landfill per year and displaces almost 450,000 tonnes of CO2 emissions per year
The project is also noteworthy for its unique structure which involved the Sharjah Water and Electricity Authority signing the Power Purchase Agreement (“PPA”), and Bee’ah (as a Sharjah waste collection concessionaire) signing the Waste Supply Agreement, with the Emirates Waste To Energy Company. This is a notable deviation from typical governmental WTE contracting models utilised globally (which include the obligation for the procurer to provide the waste supply under the terms of the concession).
The project was originally scheduled to become operational by the end of 2021.
Al Warsan WTE Project
Following in the footsteps of Sharjah, the Emirate of Dubai is set to become home to the world’s largest single-site waste-to-energy plant later this year. The WTE plant is expected to have a minimum capacity of 2,000 tonnes a day and to produce up to 171MW of electricity. It was originally tendered as an engineering, procurement and construction (“EPC”) contract but was eventually awarded on a Build-Own-Transfer (“BOT”) model in February 2018, demonstrating the region’s renewed appetite for public-private partnerships.
The 30-year concession contract for the WTE plant was awarded to a consortium led by Belgian company Besix and Switzerland-based Hitachi Zosen Innova. Besix is also a joint venture partner in a refuse-derived fuel plant under construction in Umm Al Quwain, which will be operated by Emirates RDF on a 15 year concession and has also been awarded a 15 year contract to build and operate a 12MW landfill gas to energy project in Al Qusais in Dubai.
Progress on the project’s procurement has been protracted for the region’s typically fast-paced infrastructure sector. One issue thought to have slowed progress on the project is whether the WTE plant’s primary function will be to reduce landfill, or to generate power, with the related technical nuances arising from the chosen approach. Typically, European projects have focussed on the waste-management aspects of WTE projects with an ancillary power output, however the Dubai authorities appear equally focussed on maximising power generation.
The project is slated for completion in 2021 in time for the rescheduled Expo 2020.
The Kingdom of Saudi Arabia is responsible for over half of the GCC’s municipal solid waste, with approximately 90% heading to landfill. Diverting waste from landfill is therefore an important component of the Kingdom’s Vision 2030 environmental sustainability objectives.
With these objectives in mind, the Public Investment Fund has established the Saudi Investment Recycling Company (“SIRC”). SIRC’s mandate is to “develop, own, operate, and finance various activities across all waste types to establish recycling capacities in the Kingdom and build a circular economy for a sustainable future.” In July 2017 and January 2021, SIRC entered into two memorandums of understanding under which SIRC, the National Waste Management Center and the municipal authorities for Riyadh and the Eastern Province will take collective responsibility to meet recycling targets for municipal solid waste and construction and demolition waste. The Kingdom’s Waste Management National Regulatory Framework has set a target of diverting 100% of municipal solid waste and 60% of construction and demolition waste from landfill by 2035. SIRC’s first construction and demolition waste recycling plant was expected to be operational this year.
Interviewed in 2019, Jeroen Vincent, CEO of SIRC, confirmed government plans to develop 3GW of waste-to-energy facilities by 2030. The Kingdom’s Waste Management National Regulatory Framework has set a target of 19% of municipal solid waste to be diverted to WTE by 2035. Development of tariff schemes to incentivise incineration is underway.
Elsewhere in the GCC, the Oman Power & Water Procurement Company (“OPWP”) previously announced plans to develop a waste-to-energy project in Barka, in the South Al-Batinah governorate. However, it was recently announced by OPWP that its plans to develop the project have been suspended. This is understood to be due to weakening electricity demand and adverse economic conditions caused by the COVID-19 pandemic. It remains to be seen whether the project will be re-launched at a later date.
The Wider Middle East Region
Middle Eastern Governments outside of the UAE, Saudi Arabia, and Oman, are also looking at implementing WTE projects. The Kuwait Authority for Partnership Projects has long been seeking to develop the Kabd municipal solid waste project. After a series of false-starts, CNIM was awarded the contract to develop the 3,275 tonnes a day WTE plant in 2017. The Bahrain’s Ministry of Works, Municipalities Affairs & Urban Planning have also issued a tender for consultants to advise on a new WTE plant which is due to be tendered in the next year. Meanwhile, in Egypt, the Ministry of Environment recently sought expressions of interest to develop a WTE project following the government’s sign-off on the feed-in tariff for energy produced from municipal waste late in 2019.
ABU DHABI’S NEW DEALS
Most excitingly of all, two major waste-to-energy plants are planned for the Emirate of Abu Dhabi. In April 2020 Taqa Global (formed by the merger of AD Power and Taqa), Emirates Water and Electricity Company (“EWEC”) and Abu Dhabi Waste Management Center – Tadweer – announced that they have entered into agreements to develop two of the world’s largest WTE plants.
The larger of the two will be located in the Industrial City of Abu Dhabi in the Mussafah region. The WTE plant will have an expected processing capacity of 900,000 tonnes of waste per year. Once commissioned, it will be one of the world’s largest WTE facilities, with a generation capacity of 90MW. It is expected to result in carbon dioxide emissions reductions of 1.5 million tonnes per year and will power an average of 22,500 UAE households.
The second plant will be located in Al Ain, with a processing capacity estimated at 600,000 tonnes of waste per year and capable of generating 60MW of electricity.
These projects are expected to be tendered out to private sector developers under a procurement process which closely follows the well-established I(W)PP model used in the Emirate of Abu Dhabi (see further below).
WHAT PROSPECTIVE DEVELOPERS CAN EXPECT – ABU DHABI DEALS
Procurement and Contractual Structure
The Emirate of Abu Dhabi has a well-established track record of successfully procuring utility scale infrastructure projects. In the last year alone, EWEC has successfully procured a 2.4GW combined cycle gas turbine power plant on behalf of the Emirate of Fujairah and a 2GW photovoltaic solar project, the world’s largest single-site solar project. The success of Abu Dhabi’s efforts in developing world-leading infrastructure projects is driven by the use of consistent, market tested Independent Power Project (“IPP”), Independent Water Project (“IWP”) and Independent Water and Power Project (“I(W)PP”) contracting models. It is anticipated that the new WTE projects are likely to follow these models, or a variant reflecting the particularities of WTE projects.
The market is eagerly anticipating the release of the request for proposal (“RFP”) document for both Abu Dhabi WTE projects, slated for Q4 2020. Whilst the particular contracting model to be utilised has not been disclosed, a continuation of Abu Dhabi precedent would entail EWEC managing the bidding process from pre-qualification of bidders, issuance of the RFP to the selection of the successful bidder for each project. The RFP is the critical procurement stage document. Abu Dhabi projects often require bidders to review and comment upon the core project agreements and more recently, a prescribed form of engineering, procurement and construction (“EPC”) contract and operation and maintenance (“O&M”) contract issued as part of the RFP. Bidders are afforded the opportunity to raise commercial, legal and technical clarifications on the RFP in order to gain a better understanding of the project.
For the majority of Abu Dhabi power-generating infrastructure projects, the principal offtake agreement is a long-term (20-30 year) PPA entered into with EWEC (formerly ADWEC) as the single off-taker of the electricity. The PPA details the development and operational requirements for the plant, the tariff components and payments as well as invoicing, payment of liquidated damages for delay in performance and termination payments. A trend of recent PPAs has been the inclusion of ever-increasing local content and Emiratisation targets which must be adhered to, during both development and operation of a project, by a special purpose vehicle, known as the “Project Company”, in which the developer/developer consortium is a shareholder.
On the conventional power projects procured in Abu Dhabi, the PPA has generally been structured as an energy conversion agreement whereby feedstock risk is retained by EWEC which assumes responsibility for the procurement of the feedstock and thus availability and feedstock price risk. We anticipate that a long-term waste supply agreement with Tadweer, as the provider of feedstock waste, will either be entered into by EWEC (and then back-to-backed with the Project Company) or by the Project Company directly. The arrangements for the waste feedstock will be critical to the success of the Project, as this will ultimately dictate the structure of the tariff and the overall attractiveness of each project to the market. On a traditional WTE project, the main sources of revenue are (a) the gate fee (i.e., the fee charged to municipalities for processing collected waste at the plant), and (b) the energy payments (i.e., the electricity or steam “offtake” resulting from treatment or disposal of the waste). Typically, the gate fee would form the majority of a project’s revenue stream and generates the essential cashflow for debt service. However, given the low cost of landfill in the UAE, it remains to be seen whether issues of bankability will result in EWEC assuming a greater amount of the feedstock risk with a higher tariff apportionment to the power offtake.
The shareholding structure for the Project Company, in which the developer or developer consortium will hold an interest, varies from many of its regional counterparts. On Abu Dhabi procured infrastructure projects, the successful bidder incorporates the Project Company as an “on-shore” joint-stock company or, as is more common in more recent projects, an “on-shore” limited liability company. The Emirate of Abu Dhabi, via a local holding company holds 60% of the share capital of the Project Company with the remaining 40% held by the successful bidder/bidder consortium vehicle. The ownership of the local holding company can be held by a number of Abu Dhabi Government entities. A form of Shareholders Agreement is entered into between the shareholders of the Project Company which affords the successful bidder with operational responsibilities whilst ensuring a level of protection for the local holding company from key development risk.
While, for Abu Dhabi projects, market participants have grown comfortable with the use of “on-shore” joint stock and limited liability companies, the use of these vehicles does pose limitations as compared to alternative shareholding structures in, for example, the Abu Dhabi Global Market financial free zone. From the perspective of all project stakeholders (including procurers, lenders, developer shareholder and the local shareholder), a company limited by shares established in the ADGM is, in almost all ways, a superior corporate vehicle to the onshore alternatives.
Key differentiators include the following:
• the ADGM has adopted English law as its governing law giving greater comfort and, because of hundreds of years of binding precedent, greater visibility, to all parties as to the enforceability of key provisions of the Project Company shareholders’ agreements and any share security arrangements with the project lenders;
• the ADGM permits lenders to register a share charge over some or all of the shares of a vehicle and, more importantly, to exercise the self-help remedies available under English law;
• flexibility in agreeing the key provisions of the articles of association for an ADGM company means that important/complex shareholder-specific “class” rights can be entrenched in the constitutional documents of the company rather than only in the separate shareholders’ agreement; and
• compulsory transfer provisions, including those triggered as a result of a shareholder default, are more easily enforced.
The recognition of the superiority of these vehicles is growing, as evidenced by their use on significant joint ventures in the UAE (including a recently announced joint venture between ADQ and ADNOC) and complex multi-billion-dollar oil & gas and LNG project financings in jurisdictions other than the UAE.
While ADGM companies limited by shares are, as of the date of this alert, only permitted to undertake activities “on-shore” in the UAE in narrow circumstances, this limitation can be resolved quite easily. In addition, there have been a number of interesting changes to Abu Dhabi’s regulatory environment (e.g. the announced dual-licensing regime, the establishment of the Abu Dhabi Investment Office and the issuance of the Foreign Direct Investment Law) that indicate that a more progressive view will be taken to these vehicles and that, perhaps, in time they will be utilized in the UAE for complex utility projects.
It can be expected that the financing structure will adhere closely to the well-established Abu Dhabi model that has been implemented successfully on numerous power and water projects in the UAE. That structure is based on the fundamentally strong credit of EWEC as the offtaker and Abu Dhabi’s long and successful operational track record for power and water projects.
A common feature of GCC utilities financings in recent years has been the use of the so called “soft mini-perm” structure. Under this structure, a series of refinancing incentives (principally a cash sweep) take effect from two to three years post completion, even though the final maturity date is long-term. There are now signs in the market that the alternative and less frequently seen “hard mini-perm” may become more popular. Under the hard mini-perm, the final maturity date occurs shortly after completion, effectively forcing (rather than merely incentivising) a refinancing. The advantage of such a structure is that it allows cheaper bank debt and therefore a more competitive tariff, whereas the downside is the heightened refinancing risk. The viability of this structure depends largely on the willingness of the procurer to fully underwrite the refinancing risk. It also depends on a very clear and well executed refinancing strategy.
Like all WTE projects, the Abu Dhabi WTE projects will undoubtedly be technically challenging projects to undertake. The pursuit of increased WTE plant efficiency as well as reducing the environmental impact of WTE plants are two of the most significant technological challenges facing developers in the sector today. Developers will need to partner with creditworthy EPC contractors in order to maximise bid competitiveness and ensure bankability. It is common in Abu Dhabi (and the wider Middle East) for requests for proposals to contain stringent experience requirements for EPC contractors. The available pool of bankable EPC contractors is undoubtedly limited, and a select group are routinely sought out by project developers across the globe. Interested developers will need to act promptly to secure a reputable and experienced EPC contractor to support their proposals.
The government of Abu Dhabi has been developing policies for the promotion of renewable and alternative energy and environmental sustainability. This has led to the successful development of some of the largest solar PV plants in the world. The development of WTE projects is a natural extension of this reform agenda. In order to further develop the WTE market, we would anticipate that regulatory measures to introduce a real incentive to divert waste from landfill (be it landfill tax or restricting the availability of land for landfill) will be required. This is not only a challenge for Abu Dhabi, but is applicable to governments across the Middle East.
At a time where the global infrastructure sector is experiencing a slowdown due to the impact of the COVID-19 pandemic, it is encouraging to see a high level of resilience from GCC countries eager to continue their ambitious infrastructure programmes. Given the high level of waste generation in the region and the collective political will to deliver on ambitious landfill diversion ambitions, we anticipate that the WTE projects highlighted in this piece will only mark the start of this burgeoning infrastructure pipeline.