KNOWLEDGE PAPERS Financing Landfill Gas Projects in Developing Countries Design: miki@ultradesigns.com Photos (unless otherwise indicated): Farouk Banna KNOWLEDGE PAPERS Financing Landfill Gas Projects in Developing Countries Claire Markgraf and Silpa Kaza September 2016, No. 23 Urban Development Series Produced by the World Bank’s Social, Urban, Rural & Resilience Global Practice, the Urban Development Series discusses the challenge of urbanization and what it will mean for developing countries in the decades ahead. The Series aims to explore and delve more substantively into the core issues framed by the World Bank’s 2009 Urban Strategy Systems of Cities: Harnessing Urbanization for Growth and Poverty Alleviation. Across the five domains of the Urban Strategy, the Series provides a focal point for publications that seek to foster a better understanding of (i) the core elements of the city system, (ii) pro-poor policies, (iii) city economies, (iv) urban land and housing markets, (v) sustainable urban environment, and other urban issues germane to the urban development agenda for sustainable cities and communities. Copyright © 2016 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing June 2016 The findings, interpretations, and conclusions expressed in this paper are entire- ly those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Di- rectors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Request for permission to repro- duce portions of it should be sent to the Urban Development Division at the ad- dress in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when reproduction is for noncommercial purposes, without asking a fee. Contents Foreword vii Acknowledgements ix Acronyms x Executive Summary xi 1. Background for Financing Landfill Gas Projects 1 1.1 Introduction 2 1.2 Landfill Gas Investments in Developing Country Contexts 4 2. Assessing Project Value 7 2.1 Overview of Financial Analysis in LFG Projects 7 2.1.1 Assessing Financial and Economic Feasibility 8 3. Sources of Funding and Financing for Landfill Gas Systems 11 3.1 Public Funds: Municipal Finance for LFG Systems 11 3.1.1 Own Source Funds 11 3.1.2 Municipal Debt 12 3.1.3 Quasi-Public, National, and Supra-National Finance 13 3.2 Private Sector Finance of Landfill Gas Projects 15 3.2.1 Private finance mechanisms 15 3.2.2 Public-Private Partnerships (PPPs) 17 3.3 Carbon Finance and Other Environmental Attribute-Based Funds 20 3.3.1 Carbon Markets: Compliance and Voluntary 20 3.3.2 Other Saleable Environmental Attributes 23 4. Incentives Schemes and Enabling Conditions 25 4.1 Investment Support Mechanisms for LFG Projects 25 4.1.1 Direct Subsidization and Fiscal Support 25 4.1.2 Indirect Support and ‘Hidden’ Subsidies 26 4.1.3 Larger Enabling Environment 28 5. Risk Identification and Mitigation 31 5.1 Overview of Risk in LFG Projects 31 5.2 Mitigation Across Stages of LFG Projects 33 5.2.1 Risk Mitigation in the Feasibility or Planning Stage 33 5.2.2 Risk Mitigation in the Engineering, Procurement, and Construction Stage 39 6. Case Study: Thailand’s Kamphaeng Saen East & West LFGE Projects 45 7. Case Study: Latvia’s Getlini Landfill Gas Project 49 8. Case Study: Brazil’s Santa Rosa Landfill Flaring Project 53 9. Appendices Appendix A. Timing a Landfill Gas Project 57 Appendix B. Project Partnerships 58 Appendix C. Selling Products of LFG: Frequently-Used Contracts Types 60 Appendix D. Revenue Sharing Among Project Partners 61 Appendix E. Pooled Development Funds 62 Appendix F. Baseline Study 63 Appendix G. Risk Management Framework 64 Appendix H. Types of Private Participation in Infrastructure 65 Appendix I. Responsibilities of Private Sector Participants in LFGE 66 Appendix J. Proposal Security Clause as a Pre-Screening Tool 68 Appendix K. Estimated Emissions by Municipal Solid Waste Activity 69 References 70 Endnotes 78 Boxes Box 1. Anthropogenic Greenhouse Gases (2004) and Sources of Methane (2010) 2 Box 2. Relevant End-Products of Landfill Gas Processing Systems 6 Box 3. Using Own-Source Revenues to Attract Private LFG Developers 12 Box 4. First Municipal Green Bond in Africa Issued by Johannesburg 13 Box 5. Typical Structure of Project Finance for LFGE Projects 17 Box 6. PPP Contract at Odds with Unanticipated Waste Reduction Targets 18 Box 7. Non-standard PPP Arrangement in South Korean Landfill 19 Box 8. CDM Pipeline Shows Performance Risk in LFG Power/Flaring Projects 21 Box 9. Combining Carbon Finance and PPPs in Brazil 22 Box 10. Methane Pilot Auction Facility 23 Box 11. Potential Environmentally-Focused Revenue Sources 23 Box 12. National-Level Government Support for LFGE in Turkey 27 Box 13. Shifting Risk and Increasing Profitability Through a Public Sector Guarantee 32 Box 14. Timing a Landfill Gas Project 57 Box 15. Ownership-Partnership Models by Primary Developer 59 Box 16. Pooled Debt Instrument in Tamil Nadu, India 62 Box 17. Types of Private Participation in Infrastructure 65 Box 18. Proposal Security Clause as a Pre-Screening Tool 68 Tables Table 1. Change in Methane Emissions by Country Income Group (1990-2010) 4 Table 2. Revenue Considerations of Different Processing Systems 9 Table 3. Gas Availability Risk 34 Table 4. Financing Risk 35 Table 5. Partnership Risk 36 Table 6. Permitting and Regulatory Risk 38 Table 7. Contracting Risk 40 Table 8. Procurement Risk 41 Table 9. Engineering and Construction Risk 42 Table 10. Curtailment, Distribution, and Residual Value Risk 43 Table 11. Getlini Landfill Power Production and CO2 Emissions Reductions 50 Table 12. Initial Costs for Santa Rosa LFG Collection and Flaring Systems Infrastructure (2014) 55 Table 13. PPPs: Responsibilities of Private Sector Participants in LFGE Projects 66 Table 14. Estimated Emissions by Disposal Method 69 A landfill gas flaring system. Foreword Managing the gases produced in municipal landfills and dumpsites is a growing challenge around the world. Landfill gas (LFG), a byproduct of decomposing waste, is flammable, potentially explosive, hazardous to human health, and a significant source of methane, a short-lived climate pollutant (SLCP) that exacerbates climate change in the near-term1. Some countries have mainstreamed the technologies that capture and combust LFG before it is released into the atmosphere or convert it into an alternative energy source. However, financing these LFG management systems is a major hurdle in much of the world. Recognizing that landfill emissions are expected to rise into the foreseeable future, this report outlines a variety of ways that city governments, private landfill owners, or other project developers finance LFG management systems that mitigate these emissions. It is intended to offer policy-makers and practitioners an overview of financing models that have been used around the world and insights from existing projects, including key enabling conditions and risk mitigation strategies. The report is not, however, a ‘how-to guide’ on financing these projects. Each project has a set of site-specific factors that determine technical and financial viability. As a result, there is not a standard financial architecture that is consistently applied. Rather, any number of different types of financing may or may not be accessible or appropriate at different points in project development. Thus, readers with a basic understanding of landfill gas collection systems2 may use this report to gain a general sense of financing options for LFG projects, but every project requires customized financial plans developed by experts that take into account unique environmental, political, and economic conditions. Throughout the document, real-world examples are intended to illustrate aspects of financing strategies that may relate to the reader’s specific situation. Though each project’s financial arrangement is unique, the basic building blocks for financing LFG projects are not substantially different from those used in other infrastructure or energy projects. Often, these projects are developed using a combination of public or municipal finance, private sector lending or investment, and some forms of environmental finance. Other types of support, including tax benefits or public guarantees, may also play a crucial role in a project’s success. While both technically and financially complex, LFG projects are often attractive because— unlike many other types of infrastructure investments—they can generate revenue from energy or carbon credit sales. This may allow for cost recovery and even profits, though not all projects can or will be financially self-sustaining. vii Discussions of low-carbon infrastructure finance often center on the promise of new financial instruments or products that might increase financial flows to a sector. While some innovative financial mechanisms have gained prominence in the last decade or so (e.g., green bonds, low-carbon investment funds, and others), there is not yet a silver bullet for LFG finance. In fact, the current uncertainty in carbon markets calls into question whether LFG collection is a realistic option in many low- and middle-income countries. Nonetheless, governments, landfill owners, and other stakeholders recognize the pressing need for both climate mitigation tools in the waste sector and the additional energy that existing landfills can provide. While not always the perfect solution, LFG collection systems can begin to address both these issues in cities around the world—provided they can be sustainably financed. This report, as well as a complementary report entitled “Sustainable Financing and Policy Models for Municipal Composting” has been prepared in a collaboration with the Climate and Clean Air Coalition to Reduce Short-Lived Climate Pollutants (CCAC). The CCAC is a global partnership of governments and organizations that works to reduce short-term climate pollutants in a number of sectors, including solid waste. The CCAC and the World Bank generously provided financing for the work conducted. Information in the report is based on both primary sources, including practitioner interviews and public records, and secondary source material, including a number of guidance reports written in the last decade on LFG systems, which are cited throughout. viii Acknowledgements This paper was prepared by the Global Programs Unit of the World Bank with generous funding from the Climate and Clean Air Coalition to Reduce Short-Lived Climate Pollutants and the World Bank Group. Claire Markgraf is the author of this report. Silpa Kaza (Task Team Leader) and Stephen Hammer supervised the process and provided the initial vision. The team is grateful for the insight, comments, and contributions from the following individuals: Claudia Croce (Senior Carbon Finance Specialist), Farouk Banna (Urban Specialist), Daniel Hoornweg (Professor and Research Chair at the University of Ontario Institute of Technology), the Climate and Clean Air Coalition, Paul Kriss (Lead Urban Specialist), Laura De Brular (Information Analyst), James Michelsen (Senior Industry Specialist), Chengzhen Dai (Consultant), and MinJung Kwon (Consultant). Finally, thanks go to Senait Assefa (Practice Manager, Global Programs Unit), Sameh Wahba (Practice Manager, Africa Urban and Disaster Risk Management), Ellen Hamilton (Lead Urban Specialist), and Ede Ijjasz-Vasquez (Senior Director, Social, Urban, Rural and Resilience Global Practice), for their leadership, guidance, and support. ix Acronyms BOO Build-Own-Operate BOOT Build-Own-Operate-Transfer CDM Clean Development Mechanism CER Certified Emission Reduction CH4 methane CO2 carbon dioxide CO2e carbon dioxide-equivalent ERPA Emission Reduction Purchase Agreement FDI Foreign Direct Investment FIT Feed-in-Tariff GHG greenhouse gas IBRD International Bank for Reconstruction and Development IDA International Development Association IEA International Energy Agency IFC International Finance Corporation IFI International Financial Institution IPCC Intergovernmental Panel on Climate Change ITC Investment Tax Credit kWh kilowatt hour LFG landfill gas LFGE landfill gas-to-energy LMOP Landfill Methane Outreach Program MIGA Multilateral Investment Guarantee Agency NPV net present value ODA Official Development Assistance/Aid OECD Organisation for Economic Co-operation and Development PPA Power Purchase Agreement PPP Public-Private Partnership PRI Political Risk Insurance PTC Production Tax Credit RFP Request for Proposals RPS Renewable Portfolio Standards SLCP Short-Lived Climate Pollutant SPV Special Purpose Vehicle UNFCCC United Nations Framework Convention on Climate Change x Executive Summary The world’s landfills and dump sites contain a significant amount of biodegradable waste, including food scraps and agricultural refuse. When these organic materials break down in landfills, various gases known collectively as landfill gas (LFG) are produced and either build- up within a landfill or discharge into the atmosphere. Because of its chemical make-up, LFG is flammable, odorous, and a potent source of greenhouse gases (GHG). LFG management systems that collect and either burn (flare) or convert these gases into energy can help mitigate these problems and contribute to the overall safe operation of a landfill.3 As an additional benefit, the energy or carbon reductions that are produced by LFG systems can—in some cases—be sold to generate revenue. However, finding the resources to finance these systems can be a challenge, particularly in low-resource settings. Assessing the value of a prospective LFG project is one of the first steps in determining whether to undertake a project and is critical to attracting financing. Though the process of project valuation is complex, it can be done in a step-wise fashion. At a very basic level, this process requires: A technical feasibility assessment to determine the quantity and quality of gas available over the course of decades; point to best options for gas usage or sales; and highlight whether a landfill needs retrofitting. An initial financial feasibility assessment that gives a scenario analysis of likely costs and revenue for each of the gas usage options identified in the technical assessment; and potential incentives or assistance that might be available. A detailed financial & economic assessment that gives context-specific information including material cost estimates based on manufacturer quotes; various tax liabilities; financing options and payback periods; cash flows, etc. This report is applicable if the initial technical and financial feasibility assessments conclude that the LFG project can meet stakeholders’ environmental and/or financial goals. This de- tailed assessment describes—as accurately as possible—project-specific financial elements over the lifetime of the system. Ultimately, this process should produce a pro forma financial state- ment with project-specific financial information over the lifetime of the project. Both private sector investors and public sector backers frequently expect this type of information in order to make investment decisions. With this detailed assessment as a base, project owners can compare various scenarios with different system design and financing options. xi Assessing financial and economic feasibility requires detailed knowledge of the various resourc- es available for funding or financing an LFG project and knowledge of market opportunities and challenges. While there is no standard financial architecture used in financing LFG proj- ects, there are four main sources of capital and/or operating funds often used in combination to develop and maintain LFG systems: ●● Energy sales or offsets from selling LFG as a substitute for natural gas or heat; electricity generated from the gas; or using the LFG products on-site to off-set energy expenditures. ●● Public sector funding or financing via municipal direct investment; municipal bonds; intergovernmental transfers; development aid; and others. ●● Private sector investment, including commercial loans; equity investments; specialized credit facilities; and a variety of public-private partnerships. ●● Environmental attributes, which are project characteristics valued for their environmen- tal benefits and may either directly contribute to the project’s bottom line (e.g., through sale of offsets on carbon markets) or attract specific types of funding/finance (e.g., envi- ronmentally-focused pension funds). Whether these sources of finance are available largely depends on project-specific characteris- tics and larger economic or policy factors, such as the current market rate for natural gas or electricity, the availability of tax credits or renewable energy incentives, and even the global price of carbon. Risk mitigation techniques, such as purchasing risk insurance, can sometimes help fill gaps in the enabling environment or improve the overall profile of a project in order to obtain better financing terms. This report offers a detailed discussion of the types of risks often found in LFG projects and provides mechanisms to help manage them. However, without a technically solid project as the base and a supportive legal/regulatory environment, adequate financing can be difficult to acquire. Report Structure This report offers an overview of the range of financial resources that may go into a financial assessment of an LFG system. This includes major sources of capital and operating funds, revenue from energy sales, and descriptions of incentives or support that may contribute to a project’s bottom line. Risk mitigation techniques, which are integral to successful financing, are also detailed and may be among the most important aspects to understand when undertak- ing an LFG project. The report is structured as follows: ●● Chapter 1 gives an introduction to LFG project development and discusses opportunities and challenges faced in developing-country contexts. ●● Chapter 2 outlines the process of evaluating an LFG project’s feasibility. ●● Chapter 3 details three broad categories of financing or funding (public sources, private sources, and sources based on environmental attributes of a project) that have been used in various permutations to facilitate the development of LFG infrastructure around the world. ●● Chapter 4 outlines incentive schemes, such as feeder tariffs, beneficial tax structures, public guarantees, subsidies, and co-financing, that are typically essential to a project’s develop- ment. ●● Chapter 5 describes various types of risk at different stages of project development and offers mitigation techniques based on the advice of experts and practitioners. ●● Chapters 6-8 offer case studies from landfill gas projects in Thailand, Latvia, and Brazil. Shorter case examples intended to illustrate aspects of successful projects or combinations of the financing or funding methods are found throughout the document. For ease of reading, key messages and lessons are highlighted at the beginning of relevant chapter or section headings. Drilling to install vertical LFG wells at an existing landfill. 1 Background for Financing Landfill Gas Projects Key Messages While each LFG project has a unique set of factors that influence which sources of finance are available and appropriate, there are some overarching lessons to take away. Key points from experience developing LFG systems in developing countries include the following: Collecting and utilizing landfill gas is an important means of mitigating GHG emissions and can provide an alternative energy resource—though financing these projects can be complex and may only be profitable under specific conditions. While there are sometimes good reasons to build LFG systems in developing countries, there are challenges that must be addressed as well. ●● Increasing use of municipal landfills and a high content of ‘wet’ or organic waste in rapidly developing countries is leading to increasing emissions from landfills around the world. ●● The current and historical waste management practices employed in a landfill are critical to the success of LFG systems, as retrofits can be expensive. ●● Finance options may be unavailable or prohibitively expensive in some markets, though demand for new energy resources may help overcome these issues in some cases. Though financing for every landfill gas project is unique, the process of evaluating the technical and financial options has a general format that can be replicated across contexts. ●● A comprehensive analysis of likely costs and revenue under several scenarios is the backbone of a financing strategy—this is complex because technical and financial aspects of LFG projects are interdependent. The sources of capital for LFG projects are similar to other infrastructure projects, but their availability is context- dependent. ●● Public funds or finance may appear to be the least expensive source capital, but onerous procurement rules and lack of existing expertise may make more expensive private sector financing appealing. ●● Given the current state of carbon markets, carbon finance may only provide a marginal amount of revenue for LFG projects. ●● Long-held principles of infrastructure finance—such as the importance of clear and consistently applied laws and a stable political environment—are key to attracting risk-averse financial institutions and private lenders. Government incentives and specific risk mitigation tactics are key to achieving viable, bankable projects. ●● Price premiums for renewable energy, priority access to the electrical grid and assistance with interconnec- tion, and other incentives may turn an unbankable LFG project into a marginally profitable one. ●● Employing proper due diligence, proven technologies, experienced vendors and consultants, and structuring contracts well are the most effective risk mitigation techniques. ●● Accurately determining how much gas is accessible and signing a long-term off-take agreement with a utility or other buyer are the two most basic ways to secure an LFG project financially. 1 2 Financing Landfill Gas Projects in Developing Countries 1.1 Introduction Cities produce more than 1.3 billion tons of municipal solid may be detrimental to human health.7 While diverting waste every year (Hoornweg and Bhada-Tata 2012), roughly organic waste entirely from landfills would obviate the need half of which is food scraps or other readily biodegradable to manage these emissions, a second-best solution is the organics.4 When mixed municipal waste accumulates in capture and combustion of LFG before it is released into landfills or open dumps, the organic materials break down the atmosphere. Flaring (burning) or converting methane anaerobically5 and produce an assortment of landfill gases gas into an alternative energy source both reduce harmful (LFG). By volume, LFG is roughly half methane and emissions8 and have the potential to generate revenue for half carbon dioxide with trace amounts of other organic local governments or other landfill owners. Though there compounds.6 Globally, this combination of gases is a are many technologies available for LFG collection and significant source of anthropogenic greenhouse gases (GHG) combustion, the challenges involved in financing these (box 1), with the contribution from landfills estimated systems continues to present a major obstacle to mitigating to be 2-4 percent of total GHG emissions. However, the emissions from waste. effects of LFG production are not confined to the climate change impact. The gas is flammable, potentially explosive, Developing landfill gas-to-energy (LFGE) or flaring and exposure to carcinogenic compounds found in LFG systems requires a financial investment that is often beyond Box 1. Anthropogenic Greenhouse Gases (2004) and Sources of Methane (2010) Anthropogenic Sources of Anthropogenic Greenhouse Gas Emissions Methane Emissions Carbon dioxide Methane Landfills Enteric (deforestation, land use, 14% 12% fermentation and etc.) 17% Nitrous manure 30% dioxide 8% Rice cultivation 7% Carbon dioxide (other) 3% Waste water 7% Fluorinated gases 1% Other 12% Carbon dioxide (fuel, cement, etc.) Natural Gas, Oil, 57% and Coal 31% Methane is the second most prevalent greenhouse gas by volume (after carbon dioxide), making up approximately 14% of global anthropogenic GHGs. Of this, landfills are estimated to contribute approximately 12% of methane emissions. Release of methane is of particular concern because it absorbs heat (infrared radiation) that would otherwise escape the planet. In its fifth assessment report (2013), the Intergovernmental Panel on Climate Change (IPCC) determined the 100-year global warming potential of methane to be 28 times that of carbon dioxide. Sources: IPCC (2007) based on 2004 emissions, U.S. EPA (2012) based on 2010 estimates 1. Background for Financing Landfill Gas Projects 3 the reach of local governments or landfill owners alone financed entirely through private debt or equity. More (KPMG 2011). In some cases, installing LFG collection often than either a fully governmental or fully private pipes9 and flaring or energy generation equipment can operation, a mixture of both innovative and traditional cost tens of millions of US dollars. Obtaining financing infrastructure-finance methods—including municipal typically requires a host of public and private actors infrastructure bonds, public-private partnerships, and (e.g., local government, landfill owners or operators, leveraged government incentives—have been used to build commercial banks, developers, local utilities) to agree on LFG systems. how to incentivize development, equitably assign risk, divide potential project revenue, and support ongoing Key project characteristics that influence both revenue operations. Adding further complexity, the profitability generation and finance options vary widely from landfill of LFG systems is subject to volatility in natural gas, to landfill. Further, as in many long-lived infrastructure electricity, and carbon markets, as well as other factors projects, the most appropriate types of financing may such as regional variation in the cost of maintenance, change over the course of project planning, construction, availability of skilled labor, and ability to obtain spare parts. and operation. However, recognizing that LFG projects Consequently, LFG is a largely untapped municipal asset typically rely on customized financial arrangements, across both developing and many developed countries. this paper outlines four broad categories of financing or funding,11 and specific enabling conditions that have been Because financing options are highly context-dependent— used successfully in various permutations to facilitate the reliant on the conditions of both the landfill (e.g., gas development of LFG infrastructure around the world: availability, quality) and the larger economy (e.g., local energy demand, global price of carbon)—there is no single ●● Public funding, including sub-sovereign or municipal standard financial architecture that can be widely applied direct investment, municipal bonds, intergovernmen- to LFG projects around the world. In many instances, the tal transfers and assistance from public financial inter- particular goals of a landfill gas program may determine mediaries; how the project’s financing is structured.10 For example, if a landfill gas project is motivated by compliance with ●● Private sector investment, such as commercial loans, greenhouse gas emission regulations, the target capital equity investments, and public-private partnerships; return may be low, as compared to projects that are ●● Environmental attribute finance and/or energy sales, primarily concerned with generating profit or offsetting including carbon finance from both compliance and energy expenditures. Similarly, the division of ownership voluntary markets, emerging financing options linked over landfill assets (landfills and attendant gas rights may to the climate or broader environment, and direct LFG be public, private or jointly controlled) and operations or energy sales; and (e.g., whether there is internal capacity to develop LFGE infrastructure) will define implementation options and ●● Publicly-backed incentives schemes such as feeder tar- directly impact the means of funding. That said, project iffs, beneficial tax structures, public guarantees, subsi- goals and even asset ownership may themselves be altered dies, and co-financing. to adapt to available financing tools. Beyond financing sources, this document outlines areas of How then does a landfill owner or other developer raise risk inherent to LFG project development and operation funds for the capital investment and operations and that impact a project’s financial viability; provides maintenance (O&M) of a landfill gas system? Some LFG techniques for minimizing or off-loading risk based on systems have been funded by public sector resources and practitioner advice; and offers case-studies of financing central government transfers, while others have been approaches from projects around the world. 4 Financing Landfill Gas Projects in Developing Countries 1.2 Landfill Gas Investments is often spread thin without cover materials or liners, leading to more aerobic decomposition and less ability in Developing Country Contexts to control factors that impact gas production, such as While recent efforts in wealthy countries have slowed rainwater content. the overall rate of growth for methane emissions globally Some practitioners believe that it is only advisable to (U.S. EPA 2012), emissions from landfills in developing consider an LFG project in landfills that have a record regions are expected to grow into the foreseeable future of proper management unless one or more stakeholders (IEA 2009). Thus, targeting LFG projects outside high- is able to retrofit the site and commit to appropriate income countries may be an important means of abating landfill maintenance moving forward. Though this future global methane output and of capturing new paper focuses on financing the landfill gas collection energy resources for developing markets. and combustion systems themselves, it is worth noting that the expense of capping or otherwise upgrading a Financiers and project developers cite a number of dumpsite may be cost-prohibitive from the outset12 or challenges, as well as potential upsides, to working outside rely on substantial public funding or development aid the highly regulated markets of developed countries. to prepare the site. Countries with rapidly growing populations, increasing ●● Material and labor. While labor and materials may be energy needs, and large volumes of organic waste may inexpensive in some developing countries as compared offer substantial support for LFG project development. The following are issues to consider when developing with many highly industrialized nations, practitioners LFG systems in developing country contexts: have cited the lack of a supply chain for certain materials and a dearth of in-country experience developing LFG ●● Waste management practices. While waste in developing systems as major roadblocks. This lack of knowledge countries tends to have a high biodegradable of or exposure to LFG projects has been an issue at all content—a desirable characteristic for landfill gas levels—from the ability to hire experienced construction recovery projects—the existing and historical waste workers to gaining support from policy-makers. management practices of a landfill also play a major role in determining the volume of gas any landfill will ●● Political, legal, and regulatory environment. As in any produce. Accurately modeling gas production potential infrastructure project, LFG projects are most easily from an improperly designed or managed landfill financed in markets that support a dynamic financial or dump site with little or no historical data on the sector that allocates financing efficiently. This is typically volume and composition of waste is often impossible, achieved when sound financial regulation, robust and thus a serious impediment to investment. LFG institutions, and clear and predictable signals from the systems are most productive in sanitary or engineered government are able to allay the real or perceived risk landfills that have liners, leachate management systems, that is often associated with investment in developing active compaction and covering in confined areas, and markets. While a change of political party or leadership capping. In open or minimally managed dumps, waste may impact the viability of any LFG project in both Table 1. Change in Methane Emissions by Country Income Group (1990-2010) Total thousand MtCO2e Percent Change (2010) (1990-2010) World 7,515,150 +16.9 Low income countries 494,111 +8.4 Middle income countries 4,901,207 +35.8 High income countries 2,119,832 -10.2 Source: World Bank World Development Indicators (2014) 1. Background for Financing Landfill Gas Projects 5 developed and developing countries, a predictable legal sites are key to overall project success in both developed and regulatory framework around landfill operations, and developing country contexts. A history of contracts, and other ancillary activities or industries (e.g., mismanaged community relations by LFG developers energy markets) act as a backstop to this type of risk. may be a red flag to potential investors. ●● Carbon finance and other saleable environmental In addition to these considerations, the choice of attributes. Generating revenue for LFG projects via technology for processing LFG may be dictated by the carbon markets held great promise in the early 2000s, income level and maturity of the LFG industry in a particularly for projects in developing countries that particular region. Some countries with established LFG could sell carbon credits to wealthy countries through sectors are experimenting with novel uses for the gas— the Kyoto Protocol’s Clean Development Mechanism for example, as vehicle fuel. However, this report mainly (CDM). While carbon markets have proven less considers three technologies—gas capture and flaring, profitable than once expected, these markets can still direct-use of gas, and electric power or co-generation provide some added incentive to invest. Further, in both of heat and power—that are the most prevalent uses developed and developing countries, governmental in developing country contexts (box 2). There are less actions that incentivize LFG recovery (e.g., tax breaks, common examples in developing countries of LFG feeder tariffs) can be crucial to attracting investment. being scrubbed for use as pipeline-quality gas and so it is mentioned here, but not elaborated on. ●● Energy infrastructure. Existing energy infrastructure may require upgrades before it can accommodate electricity With this introduction as a base, the following chapters or gas produced by LFG systems. Selling methane will present more detailed considerations of the range gas for direct use and selling electricity onto a local of commonly used financing mechanisms described grid are important means of recovering costs in LFG above. Chapter 2 briefly outlines the process of financial projects, though they require transmission infrastructure evaluation of an LFG project. Chapter 3 describes three and consistent regulation around distributed energy major sources of funding or financing for LFG projects— production. Some landfill operations may find value public, private, and environmental attribute-based. in direct usage of the gas. However, the availability of a Chapter 4 addresses the range of incentives for LFG grid connection and consistent government regulation development, typically enacted by a local or national around the small-scale production of energy is a clear government, which can enhance overall project timelines signal to investors that there is potential for ongoing and revenue. Chapter 5 describes the various types of risk profit to be made. that a typical LFG project, particularly in a developing ●● Community engagement. Beyond purely financial country, is exposed to and proposes means of mitigating or considerations, employing appropriate social and distributing these risks. Last, Chapters 6-8 offer a series of environmental safeguards as well as obtaining the case studies to present lessons that have been learned from support of communities surrounding LFG abatement prior attempts at LFG projects in a range of countries. 6 Financing Landfill Gas Projects in Developing Countries Box 2. Relevant End-Products of Landfill Gas Processing Systems System Description Open or enclosed flaring systems are used to combust the methane content of landfill gas, converting it into carbon dioxide and water. Though flare systems require monitoring and assessment,13 they are Capture and generally less expensive to install than power-generating alternatives. However, options for monetizing flaring the end product are limited to carbon finance markets. Enclosed (shrouded) flame flares tend to be more reliable and efficient than open flame flares, though they are somewhat more expensive (Cheremisinoff 2003). Landfill gas can be used on-site or piped to nearby industry (<10 km) (World Bank 2004) to be used as a substitute for conventional fuels. Medium-grade or low-grade fuel (denoting level of treatment of raw LFG) is the form most often used in direct applications. These grades of LFG are typically used in fuel-intensive activities such as in firing water boilers, heating cement kilns, running microturbines). LFG is sometimes combined with standard natural gas if a higher energy value is required. Depending Direct-use on the quality of fuel generated, some direct-use applications may require greater O&M to manage the effects of impurities in the gas. End-users may also have to make hardware adjustments so that methane can be used instead of LFG or other gases. Boilers are among the least expensive technologies and have the least carbon monoxide and nitrogen oxide emissions of the available combustion technologies (Cheremisinoff 2003). Electricity generation can be a lucrative use of LFG, provided there is demand and sufficient capacity within existing utilities to accommodate distributed energy providers. Reciprocating or Electric power internal combustion engines and micro- and combustion turbines are typically chosen, based on the and/or volume of gas and emissions considerations. Cogeneration of electricity and thermal energy, which cogeneration is typically used in steam production, is possible, so long as there is a local, year-round use for the product. Internal combustion engines are considered the ‘dirtiest’ technology in terms of emissions (Cheremisinoff 2003). Gas turbines are comparatively more environmentally friendly. After purification to create a high-grade fuel, LFG can be injected directly into existing natural gas pipelines that go to homes/businesses for heating or cooking. A similar level of processing is required for other advanced applications, such as creation of auto fuel additives or industrial chemicals. Natural gas is nearly entirely methane, whereas unprocessed LFG contains only about 50 percent. Pipeline gas The carbon dioxide, hydrogen sulfide, water vapor and other impurities must be scrubbed from LFG and the remaining gas then needs to be pressurized before it is connected to the pipeline distribution network. This is not currently a widely-used option due to the expense of cleaning the gas, though it may become an area of expansion if the price of natural gas increases. 2 Assessing Project Value Key Messages ●● While the financing for every landfill gas project is customized, the process of evaluating the best technical and financial options has a general format that can be replicated across contexts. ●● A comprehensive analysis of likely costs and revenue under several scenarios is the backbone of a robust financing strategy. ●● Initial technical and financial feasibility of LFG projects may be assessed using freely available models, though experts in LFG project design and finance are vital to obtaining comprehensive project valuations. ●● Potential financiers typically need to understand financial and economic performance indicators such as: – Annual and lifetime capital and O&M costs – Internal Rate of Return (IRR) – NetPV of annual and project lifetime cash flows – Simple Payback Period – Debt Coverage Ratio 2.1 Overview of Financial B. An initial financial feasibility assessment that in- cludes analyses of likely costs and revenue for each Analysis in LFG Projects of the gas usage options identified in the technical assessment, often based on models or typical costs/ Assessing the value of a prospective LFG project is one revenue; estimated financing costs; potential incen- of the first steps in determining whether to undertake tives, assistance or other support; and estimated tax an LFG project and how to finance it.14 Not only do liability in addition to other aspects.16 private-sector investors and public sector backers often expect detailed financing projections in order to make in- If these analyses are satisfactory, the next step is a detailed vestment decisions, evaluating the lifetime costs and reve- financial and economic assessment, which describes proj- nues of different system designs is important for selecting ect finances over the lifetime of the LFG system as accu- among the available technologies. Producing this detailed rately as possible. financial analysis to compare the options is an iterative process that relies first on the following: C. A detailed financial and economic assessment in- cludes project-specific information on capital and A. A technical feasibility assessment that includes the O&M costs, project revenue, financing costs, infla- quantity and quality of gas available in each landfill tion rates, tax liabilities, and other financial consid- erations. From this assessment, potential investors cell over the project lifetime; best potential options will look at factors such as annual and lifetime capital for gas usage or sales; and information about and O&M costs, Internal Rate of Return (IRR), Net whether landfill retrofitting is necessary. Often, a Present Value (NPV) of annual and project lifetime first pass at this type of study can be done using cash flows, and debt coverage ratio. any one of a number of freely available landfill gas modeling tools,15 though a thorough study should Typically, these measures of economic performance are follow up. generated using a financial pro forma, a spreadsheet-based 7 8 Financing Landfill Gas Projects in Developing Countries Key Steps Leading to Detailed Assessment Cost factors for LFG (Step 1). Quantifying the costs of LFG Project Economics and Finances of different LFG systems requires information that is specific to a landfill and economic factors in its location. A. Technical feasibility assessment For example, the lengths of pipes required will depend on • Gas quality and quantity over time landfill depth and the cost of purchasing and installing • Potential gas utilization options those pipes depends on the existing market factors. • Landfill retrofit needs However, common capital and O&M expenses (U.S. EPA 2015b) across all systems include: B. Initial Financial Feasibility Assessment ●● LFG collection infrastructure • Costs and revenue of each gas usage option, typically ●● System design and engineering based on models ●● Construction and materials • Other revenue streams, incentives, etc. ●● Labor Is it likely the project will meet the environmental ●● Financing costs and/or financial goals of the stakeholders? ●● Taxes ●● Permitting costs C. Detailed Financial & Economic Assessment ●● Insurance coverage • Context-specific cost and revenue estimates based on actual bids, quotes, etc. ●● Administration and oversight • Pro forma financial statement with total expected capital ●● Site preparation costs, IRR, debt-coverage ratio, NPV, etc. Estimating Revenue (Step 2).18 The products generated • Financing resources and associated cost of capital by LFG systems are monetized in a number of ways, • Scenario analyses of different gas usage options ranging from the sale of greenhouse gas emissions reduction credits on carbon markets to off-setting on-site tool used to estimates annual and lifetime cash flow of energy expenditures at the landfill (table 2). Identifying a project. Experts in LFG finance often have pro forma one or more off-taking entities that will commit to a models that account for conditions of a specific place and medium- or long-term purchase agreement (in the range time, though few are publicly available. of 5-20 years) is among the most important means of securing the project’s financial sustainability and attracting 2.1.1 Assessing Financial and outside investment. Identification of an off-taking entity Economic Feasibility early in the project cycle may also inform what type of The initial and the detailed financial analyses rely on processing system is used. similar information, though they require different depths Assess financial feasibility (Step 3). As described in of knowledge. The U.S. EPA, in their LFG Energy Project the previous section, a detailed financial assessment is Development Handbook,17 breaks down the financial most often carried out using a specialized pro forma that assessments into the following required steps: details costs and revenue over the lifetime of a project Step 1 Quantify total capital and O&M costs (for every and includes information or assumptions based on system design option) economic, environmental, political, and landfill-specific Step 2 Estimate total revenue conditions.19 Cost and revenue information from prior Step 3 Assess financial feasibility using performance mea- two steps should be included, as well as costs of financing, inflation rates, tax considerations, expected product price sures (IRR, NPV, etc.) escalation rates, risk sensitivity, etc. (U.S. EPA 2015b). Step 4 Compare all the feasible options and choose win- From this analysis, the following indicators are often used ning designs to assess financial feasibility: Step 5 Assess the project financing options for the chosen designs ●● Annual and lifetime capital and O&M costs 2. Assessing Project Value 9 ●● IRR on their economic indicators. Non-price factors, such as ●● NPV of annual and project lifetime cash flows likely investor preferences or appetite for risk, may be ●● Simple Payback Period considered as well. Often, project designs are not selected ●● Debt Coverage Ratio purely based on the financial assessment, but based on different stakeholder requirements. Sources of finance are Compare feasible options and assess financing (Steps 4 then fully analyzed to find the right mix of funds over & 5). Once the financial assessment is complete, different the course of the project life time. The following chapter project design scenarios can be compared and ranked based details key sources of financing for LFG projects. Table 2. Revenue Considerations of Different Processing Systems System Monetization Revenue Considerations ●● Funds available from carbon markets, if applicable ●● Ability to undertake the documentation and verification requirements ●● Sale of emissions reduction for registering for carbon credits Capture and credits on carbon markets ●● Expense of verifying output for carbon markets flaring ●● Cost savings from adhering to regulations ●● Gas-rights royalties expected from third-party developers ●● Annual estimated O&M of 4-8% of investment costs (Terraza and Willumsen 2009) ●● Year-round demand for the gas from nearby off-taker and/or ability to use gas to displace on-site energy needs ●● Modification of existing equipment for burning of LFG ●● Avoided on-site energy ●● Level of refinement needed by off-taker, as determined by higher- or expenses lower-grade methane requirements ●● Sale of gas to nearby Direct-use ●● Cost (or terms of cost-sharing arrangement) for delivery infrastructure/ industry piping ●● Sale of emissions reduction ●● Replacement of parts due to corrosive elements in low-grade gas credits ●● Price of conventional or competing fuels (California Energy Commission 2002) ●● Available subsidies and gas-rights royalties ●● Electricity buy-back rate and terms of power-purchase agreement, especially length ●● Avoided on-site energy ●● Subsidies or governmental incentives for energy production expenses ●● Ability to and cost of connecting to the grid, including connection Electric ●● Sale of electricity onto the lines, step-up transformer, etc. Power grid ●● Expected price of competing electricity over the lifetime of the LFG and/or ●● Sale of heat to local system Cogeneration industry/utility ●● Year-round off-taker for heat/steam, if applicable ●● Sale of emissions reduction credits ●● Available gas-rights royalties ●● Annual estimated O&M of 10-12% of investment costs, depending on technology used (Terraza and Willumsen 2009) ●● Price of refined LFG compared to natural gas ●● Added expense for purification ●● Cost (or terms of cost-sharing arrangement) for delivery infrastructure/ ●● Avoided on-site energy piping expenses ●● Expense of avoiding the intake of oxygen into the landfill system Pipeline ●● Sale of purified gas to local (ex-post removal of extra nitrogen and oxygen is cost prohibitive) Quality Gas utility (California Energy Commission 2002) ●● Sale of emissions reduction ●● Price of conventional or competing fuels credits ●● Available subsidies and gas-rights royalties ●● Annual estimated O&M of 17-21% of investment costs (Terraza and Willumsen 2009) A condensate knockout pot and pumping system at the Orange County MSW landfill, North Carolina. If condensate is not removed, it can block the collection system and disrupt energy generation. 3 Sources of Funding and Financing for Landfill Gas Systems 3.1 Public Funds: Municipal delivery. Aside from exceptional cases in which cities or utilities are able to take on the full financial risk of devel- Finance for LFG Systems oping LFG systems, public money usually only covers a portion of capital expenditure. Key Messages Nonetheless, motivated by profit or compelled by reg- ●● While public sector financing is typically an ulation, some local entities have found ways to mobilize inexpensive source of financing, local govern- financing for LFG capture and combustion systems. Se- ments are often not able to fully fund or finance curing local funds through direct municipal investment LFG projects through own-source revenue or or municipal debt, or tapping government policies that public debt. support investment (e.g., mandated price guarantees for re- ●● Most local governments have not developed a newable energy) can be an important first step in leveraging knowledge base around LFG projects, which other sources of finance. At a sub-sovereign level, there are necessitates bringing on experienced partners three main channels used to support landfill gas operations: and investors, despite the potential loss of con- trol and revenue. ●● municipal own-source revenue, which is mostly ●● Obtaining some public backing is often useful generated through local taxes, fees, and the lease or sale in attracting other resources. of municipal assets; ●● Though municipal bond financing can be an im- ●● debt or borrowing through bonds and special financial portant source of inexpensive financing, bond facility assistance; and markets are not well-developing in most places ●● central government transfers in the world. ●● Access to international aid or financial assis- 3.1.1 Own-Source Funds tance is often mediated through governments Own-source revenues. Direct municipal funding of LFG and may not be available to fully private op- erations. projects relies on own-source revenues, or those funds that are raised directly by a local government through taxes, fees, and the lease or sale of municipal assets (e.g., prop- Local governments around the world are facing the erty tax, parking fines, business licenses, land-lease fees). mounting challenge of providing infrastructure for grow- These are funds that make up part of a city, county, or ing urban populations. While capital-intensive infrastruc- public utility’s operating budget. In principle, funding an ture investments such as LFG plants were once predomi- LFG project entirely through own-source revenues is an nantly the domain of national governments, the trend of attractive option. It eliminates the debt servicing required devolving fiscal responsibilities from central to local gov- in conventional borrowing, making it among the cheapest ernments has left municipalities to bridge the gap between sources of capital, and seemingly gives a local authority limited local revenue and the long-term requirements of greater control over the project timeline. Further, without growing populations. In many places, local government third-party investors, all project revenue reverts to the city revenue is already stretched to cover the basic operation or landfill owner.20 However, there are very few examples and maintenance of existing infrastructure. Finding room of cities self-financing entire LFG projects. The primary in municipal budgets to finance LFG projects is difficult reason is that most municipalities do not have the funds under these conditions, particularly because gas collection on-hand and are not likely to be able to raise funds from does not constitute a core part of municipal waste service the local tax base. 11 12 Financing Landfill Gas Projects in Developing Countries Box 3. Using Own-Source Revenues to Attract Private LFG Developers Wake County, North Carolina, located in the southeastern United States, developed one of the largest landfill methane- to-power facilities in the region by starting with own-source revenue. The county spent US$2.0 million installing vertical gas wells and a blower/flare station for its landfill and, with that infrastructure in place, found a private developer to commit to installing a 6 megawatt electricity-generation system that has the potential to be expanded to 12 megawatts over time. The private company, Ingenco, sells electricity onto the local grid and will pay the county approximately US$17.7 million over 15 years for rights to the landfill gas. The initial own-source revenue investment was generated by the county’s division of solid waste through tipping fees, selling recyclables, and from a county-wide annual waste fee of US$20 per-household. With a population of nearly one million, the division has seen a surplus of approximately US$1.0 million per year for the past few years and chose to invest in the beginnings of an LFGE project. The county’s solid waste management division put in place an enterprise fund, which separates its own-source revenue from the county government’s general operating budget. These funds are then able to feed back into the solid waste program to pay for capital investment projects. Source: Roberson (2014) Local governments typically have not developed deep whether occupants of the surrounding area stand to ben- knowledge regarding LFG projects. Assuming the full efit substantially in terms of increasing land value, this project risk without adequate technical and financial-man- one-time fee could generate some of the up-front capital agement capacity effectively increases risk and costs. Thus, needed to develop LFG infrastructure. municipal governments often seek to distribute the risk by involving experienced partners and investors, despite the 3.1.2 Municipal Debt potential loss of control and revenue. As illustrated in box Sub-sovereign bonds. Subnational borrowing through 3, however, own-source revenue may be used as part of a financing mix. In particular, a city may choose to invest municipal bonds23 or an emerging asset class called “green own-source revenues in landfill upgrading (e.g., repairing a bonds” are sometimes a source of capital finance,24 though leachate collection system or adding an impermeable layer) subnational-level bonds are very rarely used in develop- to make it a more attractive investment opportunity. ing country contexts to fund this type of infrastructure. Municipal bonds are debt obligations issued by public Land-based finance. Among the methods of generating entities, such as cities or public utilities, which are used own-source revenue, land-based finance may hold some to finance public facilities and infrastructure.25 Depend- promise for generating revenue that is directly related to ing on the policies of the local and national government, LFG development. Land-based financing instruments are publicly issued bonds may be tax-deferred or exempt from used to generate public revenue while encouraging specific national taxes entirely. A well-structured bond issued by a kinds of urban development through incentives, taxes, or creditable source has a longer maturity and lower interest exactions. In some cases, proceeds from the sale or lease of rate than most other forms of debt (often 1-2 percent less public land are simply earmarked for the provision of ba- than commercial debt) (U.S. EPA 2015b). These features sic municipal services.21 Betterment levies, in which land are particularly helpful in financing landfill gas and oth- owners are assessed a one-time fee based on the increase in er infrastructure projects that have a natural lag between land value that results from a public work (Peterson 2009) when capital investment is required and when the project may be a source of revenue that could be directed to LFG begins to generate revenue. systems. When constructed properly with adequate cover and leachate control, LFG projects can reduce odor and In general, bond issuance specifically for LFG projects is decrease the release of gases that pose a threat to human rare, likely because the transaction costs associated with health.22 Depending on the location of the landfill and a bond tender are often too high to justify the relatively 3. Sources of Funding and Financing for Landfill Gas Systems 13 specifically on financing projects with an environmental Note on Municipal Capacity or climate change impact. Though not necessarily and Market Access tendered by municipalities, green bonds and climate Accessing debt markets or attracting private sector bonds are an increasingly popular means of attracting participation often requires advanced capacity within finance for environmentally conscious infrastructure local governmental or public utilities to manage development, including LFG projects.27 Green bonds municipal finances, as well as legal and institutional finance environmentally-focused infrastructure and frameworks that protect the assets and interest of both may be linked with either a specific project or, as in the the public entity and outside partners. As a result, case with the World Bank’s Green Bonds,28 they may be municipalities of different sizes and capacities are able put toward an overall portfolio of green infrastructure to access different kinds of financing. projects.29 In concept and in practice, green bonds do not For example, small or semi-rural localities in Colombia differ significantly from other bonds—they are weighted are less able than their larger counterparts to generate by risk and the cost of capital is largely predicated on substantial own-source revenue and, as a result, depend whether the issuer is creditworthy. However, with an largely on national government transfers to finance environmental theme, they appeal to sovereign wealth infrastructure. Mid- to large-size Colombian cities, on funds, pensions, and other large institutional investors the other hand, are able to generate more own-source that want to choose climate-friendly investments over revenue in both absolute and per capita terms. Partially similarly valued options. as a result of this, the larger cities have greater access to international capital markets and can more effectively 3.1.3 Quasi-Public, National, finance infrastructure without sovereign intervention. and Supra-National Finance Source: Kim et al (2012) Public banks and financial intermediaries. Though commercial bank lending is well established in many cities small amount of capital required for the project.26 As in around the world, municipal infrastructure projects often the example from Johannesburg (box 4), however, bonds fall outside the scope of these lenders, both in terms of the may be structured so that an LFG project constitutes one amount of money a local bank is able to lend and period of several infrastructure investments covered by a large is- of time for which they are willing to sustain debt (PPIAF sue. Though there are no hard and fast rules, bonds that 2013). In some places, municipal development funds generate less than tens of millions of dollars are often not (MDFs) or specialized financial intermediaries exist to considered cost-effective (Winpenny 2008). fill this lending gap and provide local authorities with the funds to make necessary capital investments. They provide Green bonds. Green bonds or climate bonds comprise any of a range of financial products and services, including a relatively new subset of the bond market that focuses advisory services, loans, guarantees and underwriting, Box 4. First Municipal Green Bond in Africa Issued by Johannesburg In June 2014, the city of Johannesburg listed a US$140 million green bond on the Johannesburg Stock Exchange. The bond—which has a 10.18 percent annual interest rate and reaches maturity in 2024—was oversubscribed by 150 percent. It is the first of its kind listed by any government in the C40 Cities Climate Leadership Group, a network of cities from both developed and developing countries committed to addressing climate change. Though the city invested in landfill gas infrastructure prior to the issuance of this bond, proceeds will fund the city council’s green agenda, which includes addressing the climate impact of transportation, buildings, and waste. The city has a history of issuing municipal bonds for infrastructure projects dating back to 2004, but it is only one of a few municipalities on the continent to have ever successfully issued a bond. Source: City of Johannesburg (2014); Standard Bank (2014) 14 Financing Landfill Gas Projects in Developing Countries equity investment, and bond preparation (Alam 2010). Some of these institutions serve as conduits of public Note on Development Aid in LFGE funds, administering or on-lending national government Interest in LFG projects by national and multinational funds or foreign aid to local governments. Others serve as development institutions grew after mechanisms of the a bridge for local governments to access private investment Kyoto Protocol made it possible to generate carbon from both domestic and foreign markets. revenue from LFG systems. In 2002, approximately 0.007 percent of all international aid projects involved In some instances, financial intermediaries may be able landfill gas recovery (exclusive of Kyoto-related emissions to play an important role in assisting several municipal reduction purchases). However, development aid flows governments pool risk to finance an LFG system in a to LFG – which does not include funds that go to meet a country’s requirements under the Kyoto protocol – jointly used or held landfill. Not all subnational entities decreased in the mid-2000s when the compliance will be able to issue bonds or access acceptably cheap carbon market grew in prominence. financing, no matter how large their infrastructure finance needs are. Because small- and medium-size cities generally Source: Michaelowa, Axel and Katharina (2010) have less access to domestic or international credit markets than their larger counterparts, pooling their resources may allow smaller participants to engage in issuing debt. This can be facilitated by specialized banks or facilities the transfer is disbursed (Kim et al 2012). Tanzania, for dedicated to organizing financing for multiple parties.30 example, has linked local government performance in While pooling debt is not a common practice because of financial management, planning, and transparency to its complexity, it practice may be particularly relevant for capital development grants since 2005 (Alam 2010). regional landfills that accept waste from a number of small Depending on national prioritization of methane municipalities that individually lack the ability to finance mitigation, performance-based transfers could be used an LFG system independently.31 as effective tools to encourage local landfill gas system development. Intergovernmental transfers. In many countries, national government institutions have traditionally been Official Development Assistance (ODA). For both the primary or exclusive sources of funds or financing national and subnational governments, international for infrastructure investment. Though decentralization development aid has been an important source of co- in many places has devolved responsibility down to local financing or support for landfill gas projects in developing governments, concurrent powers to raise funds are often countries and is cited in examples throughout this paper. not granted. This creates a heavy dependence in some International development organizations have assisted in places on intergovernmental transfers for infrastructure developing public-private partnerships around landfill investment. There are various types of intergovernmental gas operations, undertaking pre-project environmental transfers, including ad hoc grants, formulaic recurrent assessments, funding emissions verification studies, and transfers, and capital transfers—any of which may be used building capacity within local utilities to manage power to support LFG projects, depending on national-level purchase agreements. Development agencies also provide requirements. a range of credit-enhancing products, such as loan guarantees, that are discussed in the next chapter. Performance- or output-based transfers are also gaining popularity as a tool for promoting financial solvency or service provision goals among municipal governments. Performance-based transfers differ from conventional transfers in that they rely on performance assessments and only once a specified performance or output is verified 3. Sources of Funding and Financing for Landfill Gas Systems 15 3.2 Private Sector Finance political, and economic uncertainty and a shallow history in the local credit markets.34 of Landfill Gas Projects 3.2.1 Private finance mechanisms Key Messages There are a handful of finance mechanisms and techniques commonly employed by the private sector to engage in ●● Private sector involvement in LFG projects may LFGE projects. The primary means of obtaining funds for add value in terms of experience and efficiency, a project are through debt or equity with vital supporting but will often demand higher returns than public roles played by insurance providers or guarantors and, in sector financing options. some instances, rating agencies. ●● Equity investment partners can typically move projects forward faster than other lenders, though Project finance. Project finance is a commonly used equity is typically an expensive means of acquir- method of structuring ownership and financing in ing capital and project developers may lose con- infrastructure projects. It relies on the success or failure trol over aspects of project design. of a specific project (as opposed to the balance sheets of a ●● While project finance offers nonrecourse project specific company) to pay debt holders and equity owners. development, transaction costs and private spon- Typically, shareholders of a project set up a new legal sor revenue expectations can be high and lenders entity or in-country company—a special purpose vehicle may require added protections, such as minimum (SPV)—intended to channel funds to the project and debt coverage requirements. capture revenue or cash flow. This new entity is often the ●● PPP contracts must be negotiated carefully in primary point of contact for a host of contracts, including order to avoid lock-in to terms that may not be the equity agreements with shareholders, concession advantageous in the long-run. contracts with local governments, operation and maintenance contracts with contractors, and others (see box 5). Project assets are typically used to securitize debt In the infrastructure sector broadly, private finance is typi- from bank loans or other sources. Because there is often cally more expensive than public finance options.33 While no recourse to the balance sheets of a larger company, some governments are able to provide relatively inexpensive project finance requires a great deal of investigation by financing or funding for LFG projects, a variety of factors lenders to ensure the quality of the project and verify the (e.g., public procurement rules, start-up costs associat- financial projections made by project sponsors.35 Often, ed with insufficient existing expertise) may render public small finance companies, banks, and landfill or energy money less efficient or less flexible than private options developers will use this approach. Disadvantages of this (Delmon 2009). Thus, private funds are sought (in addi- method of financing include high transaction costs and tion to or in place of public funds) with the expectation that lenders have a high ‘hurdle rate’ or minimum rate of that private sector involvement will increase efficiency in return, sometimes requiring 4-5 percent above a corporate the overall project such that it outweighs any added cost. loan (California Energy Commission 2002). There are a number of hurdles to private sector invest- Retail bank loans and other debt. Debt is often a ment that apply to both landfill gas projects specifically crucial part of the initial financing of LFG projects and and infrastructure investment more generally in develop- can remain important throughout the project lifecycle.36 ing economies. For example, the ability to leverage mar- Syndicated loans are among the most widely used source ket-based funds at a reasonable rate depends in large part of financing for infrastructure projects, though obtaining on the quality of local and national governance and the sufficient credit guarantees over the lifetime of a project level of real or perceived risk in a particular location (Freire can be a challenge for LFG project developers. The terms 2014). Investors are hesitant to commit large amounts of of loans are dependent on the risk of the borrowing money to projects such as LFG systems in the face of legal, entity or project and may including the project sponsor’s 16 Financing Landfill Gas Projects in Developing Countries Drilling to install vertical LFG wells at an existing landfill. 3. Sources of Funding and Financing for Landfill Gas Systems 17 Box 5. Typical Structure of Project Finance for LFGE Projects Project finance is not unique to LFG, though it is often an important mechanism in financing these projects. Below is a graphical representation, modified slightly from Engel et al (2010), that shows the variety of contractual relationships that are generally managed through a special purpose vehicle (SPV) in landfill gas projects using project finance. Construction contractor building contract service fees & Sponsors equity finance subsidies Procuring Debt holders debt finance authority Special contract Purpose enforcement debt insurance Vehicle Insurance companies purchase price Rating agencies debt rating Gas off- service taker contract service & quality O&M contractor delivered Source: Engel et al (2010); Gatti (2014) experience in the sector, the status of permitting, and the risk they take on and the financial success achieved factors such as the stability of the regulatory environment by the project. The project preparation and construction around the project. phases of LFGE projects are complex and often require highly specialized technical expertise. Thus, construction Amortization periods from bank loans are often short companies or other firms with the ability to oversee relative to the lifespan of an LFGE project and to other changes in LFGE project design, manage construction financing options, as commercial banks tend not to hold delays, and monitor the costs may often provide equity long-term assets on their balance sheets. However, some (Ehlers 2014). A high hurdle rate is expected by a private development banks have special financing options for investor and is often on the order of 15-25 percent specific sectors or borrowers that suit the longer lifetime (California Energy Commission 2002). Most projects, needs of infrastructure projects. Corporate or project including those structured using project finance, involve a bonds offer a longer term option for financing, however mix of debt and equity.37 the transaction costs involved with engaging a rating agency and finding investors (often large institutional 3.2.2 Public-Private Partnerships (PPPs) investors) may be too high for the relatively small amounts Though PPPs may be considered an ownership structure of money required to undertake most LFGE projects. rather than a mechanism of finance, they are discussed here because the two are often intertwined. As discussed Private Equity. Equity investors purchase partial previously, one of the main goals in partnering with the ownership of a project with their investment. Thus, these private sector is to increase both the technical efficiency of investors take on more project-related risk than other a project and prevent the wasteful use of inputs (OECD/ types of financiers and stand to gain proportionally to TUAC 2010). Functionally, this means creating a risk- 18 Financing Landfill Gas Projects in Developing Countries balanced project in which each party has been designated ●● Public/private ownership. Though ownership is risks and responsibilities in line with their comparative retained by the public sector, slightly greater control advantages—which is a difficult task for both public and of a project may be given to the private sector through private sector participants. This section briefly highlights management contracts or O&M contracts, which are a number of PPP arrangements that are used in LFGE broad categories that that generally give contractors a projects, beginning with the least amount of private control: short-term (2-5 years) responsibility for aspects of an LFG project. There is usually a fixed fee that includes ●● Primarily public ownership. When the public sector the cost of labor, though it can also be performance- is able to maintain primary ownership over an LFGE based. O&M contracts are typically more sophisticated project’s financing and operation, cooperation with the and may include incentives for better performance. private sector may be limited to public procurement Design-Build-Operate (DBO) contracts are similar of private firms through Design-Bid-Build (DBB) or to turnkey contracts with the addition of an operations Design-Build (DB) contract38 and/or service contracts, agreement. A private sector partner will design, build, in which private sector operators are typically hired to and operate a public-sector asset for a fee and may be do environmental assessments, independent analysis of responsible for some infrastructure maintenance, but gas availability, design of the LFG collection system, these contracts typically do not require the private sector construction, and sometimes limited management to manage any financing for the project. In these cases, some aspects of the project. Within these models, most the government or landfill owner is usually responsible risk lies with the government or project owner, though for the off-take agreement and for the interconnection private contractors take on some liability for the design costs associated with that off-take agreement. and construction. These private sector participants do not hold equity in the project. Box 6. PPP Contract at Odds with Unanticipated Waste Reduction Targets A landfill in the city of Vancouver, Canada provides a useful example of a public-private partnership (PPP) that was able to successfully distribute capital expenditures and risk, as well as some of the potential pitfalls of relying on the private sector to provide a public good (i.e. GHG emissions reductions in the context of increasingly “green” municipal policy) when private revenue generation motives are not fully checked. Since 1991, the city has funded and maintained an LFG collection and flaring system in their landfill. In 2001, seeking better use of the LFG, the city tendered an RFP seeking private firms that might be able to productively utilize the LFG. The tender stipulated that the proposed system should be financed with a Build-Operate-Transfer (BOT) structure, but left the specifics to the firms to propose. The winning firm, Maxim Power Corporation, invested approximately CA$10 million to construct a pipeline and co-generation power plant producing 7.4 MW of electricity and heating a greenhouse. Under the terms of the 20-year contract, the city continues to maintain and operate the LFG extraction system that provides LFG to the privately operated pipeline and receives 10% of electricity revenue. Pursuant to the PPP contract, the city has an ongoing obligation to produce and extract a minimum quantity of LFG for its private partner. However, subsequent to the start of this LFGE project, the city committed to significant waste reduction goals, including increased recycling and diversion of organic waste to composting sites, potentially imperiling the LFG production rate of the landfill. Should the diversion plan significantly cut the LFG production rate before the contract term ends, the city will be either required to maintain waste delivery to the landfill in excess of its own goals or be financially liable for the contractual breach. In this way, the case both offers a clear example of the successful distribution of finance and operational responsibility with a private enterprise as well as the risks in attempting to align multi-layered public sector goals with private enterprise. Source: Colverson, Samuel and Oshani Perera (2012) 3. Sources of Funding and Financing for Landfill Gas Systems 19 PPPs that are structured as Build-Operate-Transfer or rights to claim tax benefits from the government (BOT) and Build-Operate-Own-Transfer (BOOT) entity or landfill owner over some period. Design-Build- require that a private sector contractor build and operate Finance-Operate (DBFO) PPP arrangements resembles an LFGE facility for a pre-agreed period, after which time BOT and lease arrangements, though this is the first it is transferred back to the public sector. The terms of these instance discussed thus far that requires the private sector arrangements may allow the private sector operator to have to take responsibility for financing the project. DBFOs are functional control of the gas or facility for decades, though arrangements in which the private sector participants take the public sector is responsible for providing long-term primary ownership of design, construction, operation, finance and maintains ownership throughout. These PPPs and finance risk for a negotiated period, at which point transfer a variety of risks, including design, construction the facility reverts to the public sector. This model often and operating risk, though they incentivize a lifecycle utilizes private equity and debt. However, the tendering costing approach (as opposed to DB/DBB/DBO) because process is complex, given the risk involved in handing an of the long span of control the developer is assuming from operation fully over to the private sector for an extended the outset. However, these contracts are complex and there period of time. The government may be expected to offer is significant expense if the private operator is unable to credit guarantees and other incentives. fulfill their obligations under the contract. ●● Primarily private ownership. In a privatively owned and In terms of projects with greater private participation developed LFG operation—sometimes called Design- in financing, lease arrangements for some or all of an Build-Own-Operate (DBOO) or Build-Own-Operate LFG project can be financed through a private lease of (BOO)—the private sector project owner or group of some aspect of operations for a specified period of time. shareholders is often responsible for the project end-to- Depending on local tax and environmental law, the end. This likely includes both acquiring debt and putting investor may lease rights to the environmental attributes in equity, as described previously. Box 7. Non-standard PPP Arrangement in South Korean Landfill The Sudokwon landfill is the largest landfill in South Korea and the largest sanitary landfill in the world. It houses the largest landfill gas fired power plant in the world, a 50 MW steam turbine plant. It is located approximately 40 minutes from Seoul and receives around 18,000 tons of waste daily from the Seoul Metropolitan Area. The Korean Ministry of Environment, which oversees the landfill, incorporated the Sudokwon Landfill Site Management Company (SLC), a governmental corporation, in 2000 to manage the disparate operations of the site. Seeking novel methods of revenue generation and a means of reducing greenhouse gas emissions, the SLC held an open bidding process and awarded a contract for landfill gas extraction and use to Hyundai Mobis with SCS and KOPEC as subordinate awardees. These organizations incorporated the new entity Eco Energy Holdings to administer the project. The landfill gas contract was awarded as a Built-Operate- Transfer (BOT) contract to Eco Energy. According to Eco Energy Holdings, financing was obtained from an number of private organizations, including: Hyundai Mobic Corp., Korea Power Engineering Co., Doosan Heavy Industries and Construction Co., and Eco Energy Holdings. The project additionally applied for and received CER credits with the UNFCCC CDM starting in 2010. Due to its public nature, SLC has remitted revenue to the Korean treasury when its power sales have exceeded 100% of projections. The landfill is expected to continue generating landfill gas through 2040. Source: Goldman (2008); UNFCCC (2015); SLCorp (2014, 2015); KDI (2010); Korean MOE (2015) 20 Financing Landfill Gas Projects in Developing Countries 3.3 Carbon Finance and Other despite the recent downturn in the markets. This section provides an overview of environmental-based sources of Environmental Attribute-Based revenue used in LFG projects. Funds 3.3.1 Carbon Markets: Compliance and Voluntary Key Messages Carbon markets exist on a number of scales—there are ●● Carbon markets are currently not as dynamic as markets that mediate sales of carbon credits or offsets once hoped or expected. internationally and those that operate on a national, re- ●● Carbon finance can help increase marginal reve- gional or local basis. These markets may either be compli- nue or bring down project risk profiles—it should ance-based or voluntary. Compliance markets are based not be expected to cover capital costs of a project on regulation or other legal mandates or agreements that in addition to generating profit. bind countries, states, or other entities to lower GHG out- ●● Because carbon finance is output-based, LFG put and allow for trading carbon offsets to help do this. projects that underperform in terms of gas output Voluntary markets are open to a broader field of partic- will also fall short in terms of expected revenue. ipants and mediate the sale of carbon offsets or carbon credits to organizations and individuals seeking a lower ●● Revenue from renewable energy price premiums are often key factors in LFG project success. carbon footprint. Unlike compliance markets, voluntary markets are not necessarily tied to a mandated or capped ●● The World Bank’s Pilot Auction Facility (PAF) is emissions output. one of a few credible sources of carbon finance dedicated to the sector (see box 10). A carbon credit typically represents a metric tonne of car- bon dioxide (tCO2) or its equivalent measured in other Carbon markets—which came to prominence in the 1990s greenhouse gases (tCO2e). These credits are generated in and early 2000s—have been among the most important a landfill through flaring methane or by collecting the gas means of channeling funds toward LFGE projects around and putting it to a productive use, such as electricity gen- the world and sparking interest in the concept of saleable eration. In both compliance and voluntary markets, there environmental attributes. The advent of carbon markets are usually required third-party verification processes to and the introduction of schemes to limit emissions (e.g., ensure the amount of carbon offsets claimed are accurate. emissions trading schemes, renewable energy premium However, the stringency of these requirements varies be- pricing) shifted the financial incentives of LFG projects tween markets and the level of rigor used to verify the by introducing additional revenue sources that, in many offset will often be reflected in its price. Once emissions cases, could make the difference between a bankable or reductions from a landfill gas system are verified, they are non-viable project. There is a general misconception that commoditized and sold on a compliance or voluntary carbon finance will pay the full capital costs of a project market. Depending on the volume of gas produced, the in addition to generating profit (Clapp et al 2010). In re- credits from an LFG project may be sold to an aggregator cent years, the price of carbon has fallen such that carbon who would bundle the project output with others and act markets are infrequently a major source of funds for these as broker within the chosen carbon market. Each market projects. In addition, revenue generated by these carbon typically has a set of criteria the project must meet and finance mechanisms often does not directly provide cap- many markets require a demonstration of additionality, ital as they are largely output-based—that is, purchasers meaning that the project would not have been undertaken ultimately only pay for the carbon credits generated or gas without carbon finance. For small landfills, it is import- produced by a project after it is in operation. However, ant to note that CDM may be one of the few sources of the prospect of carbon or environmental attribute sales as revenue, as the output of gas may be too small to justify a future revenue source has been an important factor in le- electricity generation. In these cases, additionality is au- veraging both public and private finance early in a project, tomatic. However, verification requirements may prove 3. Sources of Funding and Financing for Landfill Gas Systems 21 expensive or onerous and must be weighed against the other contract that guarantees the purchase of a given projected benefit of obtaining this type of revenue. number of carbon credits or has been obtained. Some purchasers have been willing to make up-front payments One of the most basic difficulties in LFGE financing on a percentage of the expected return, though usually is the gap between when funds are needed (often the of no more than 50 percent (Economic Commission for outset of the project) and when the project begins to Europe 2010). However, as demonstrated by data from generate revenue. Carbon markets can help address this the CDM pipeline, the projected emission reductions are issue, as banks or other creditors may be willing to lend not always delivered in the quantities expected from the to LFG projects based on the present value of revenue initial planning (box 8). expected from carbon finance. This is likely only possible if the project is in an advanced planning stage and an Emissions Reduction Purchase Agreement (ERPA) or Box 8. CDM Pipeline Shows Performance Risk in LFG Power/Flaring Projects Though the methods and models for determining the availability of gas in a given landfill has been steadily evolving, under- delivery of landfill gas is a frequent issue in the field and can affect the finances of a project significantly. Terazza et al (2007) anecdotally attribute this to poor management and operation of landfills. The frequency chart below shows the number of LFG flaring or power CDM projects that have produced the emissions reductions that were expected from the project outset, as noted in the project design document (PDD). For CDM projects, the emission reduction is called a Certified Emission Reduction (CER). Most projects in this dataset produce between 0 and 50% of the expected output, though a few projects exceeded expectations. One project in the dataset more than doubled its expected output. Frequency of LFG Flaring & Power Projects Achieving Projected CER Output 18 16 14 Number of Projects 12 10 8 6 4 2 0 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% % 0% 0% 0% 0% 0% 0% 0% 0% % 00 11 12 13 14 15 16 17 18 19 20 21 10 -2 -3 -4 -5 -6 -7 -8 -9 -1 0- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0- 10 20 30 40 50 60 70 80 0- 90 10 11 12 13 14 15 16 17 18 19 20 Percent of Output Projected in PDD Achieved Source: UNEP DTU (2015) 22 Financing Landfill Gas Projects in Developing Countries Compliance markets. There are a number of compliance standards on emitters of carbon. Participants in this market markets around the world, including those that cover multi- range from multi-national corporations to individuals country regions (e.g., EU Emissions Trading System) and interested in offsetting their carbon emissions. The bidders sub-national domestic markets (e.g., Regional Greenhouse in these markets are often motivated by a number of factors, Gas Initiative in the northeastern United States). The including demonstrating corporate social responsibility, largest international compliance market and the most individual concern over emissions impacts, marketability pertinent example for the purposes of landfill gas finance in as ‘green’, and demand from clients. There are several developing countries falls under the CDM, which operates standards that are used to monitor and verify the quality of under the auspices of the United Nations Framework the carbon credits, though often not as extensive as those Convention on Climate Change (UNFCCC). The CDM in the compliance market. As in the compliance market, validates emission reductions and allows wealthy countries demand in the voluntary market has declined recently. to meet their Kyoto obligations by purchasing CERs from From 2012 to 2013, the market size fell from 101 MtCO2e projects located in developing countries. The first LFG to 67 MtCO2e and the price dropped by 17 percent to flaring project was registered with CDM in January 2003. US$4.9/tCO2e (Ecofys and World Bank 2014). Since then, a total of 291 landfill gas power or flaring projects have been registered and 28 are undergoing the Costs of engaging with the carbon markets. Whether validation process.39 The CDM requires a rigorous process carbon credits are issued under a compliance or of calculating and verifying the number of CERs a project voluntary market, there are additional costs associated produces using a set of UNFCCC-approved methodologies. with monitoring, verifying, and registering emissions CDM requires producers to show additionality—or reductions that must be factored into the decision about proof the project would not have taken place without the whether to pursue carbon finance.40 In particular, the benefit of carbon finance. The CDM market has slowed project preparation process to register a CDM project significantly in recent years—after trading for tens of Euros can be extensive and time consuming, usually requiring a for several years, CERs now trade for tens of cents (World specialized consultant.41 As estimated by the World Bank in Bank Group 2015b). 2004, it may cost between US$150,000 and $250,000 to complete the full CDM process for an LFG project (World Voluntary market. Voluntary carbon markets differ Bank 2004). Another estimate (2009) puts this range for all from compliance markets in that there is no over-arching CDM projects at between US$58,000 and $500,000 per government or group that imposes mandatory regulatory year, depending on the project’s complexity and size (Reed Box 9. Combining Carbon Finance and PPPs in Brazil Belo Horizonte, Brazil’s third largest city, opened a public landfill in 1972. It was the city’s first sanitary landfill and provided landfill methane to a subsidiary of the local energy company (CEMIG) from 1989 through 1995 until output dropped and the extraction equipment was removed. After the landfill officially closed in 2007, municipal authorities sought a means to mitigate the GHG emissions of the site and opened a bidding process for domestic and international firms to extract landfill gas. One of the requirements was that the firm would register the project with the UNFCCC’s Clean Development Mechanisms (CDM) carbon marketplace. An Italian firm, Asja Ambiente Italia SpA, won a 10 year exclusive contract to extract the LFG and sell energy to CEMIG in exchange for: (1) building the extraction infrastructure; (2) registering the methane destruction as a CDM project; and (3) paying the city 6% of the value of energy sales. The project was registered and began receiving Carbon Emission Reduction (CER) credits in 2011. It is expected to sell 1.3 millions CERs over the 10 year project period. By combining the profit generated from energy production with CER revenue, the city of Belo Horizonte was able to offer an LFG extraction project that could competitively attract private financing and partnership. Source: Oliveira de Medeiros (2012); Gruppo Asja 3. Sources of Funding and Financing for Landfill Gas Systems 23 2010). This very broad range must be further investigated means that LFG operations must rely increasingly on in light of the particular characteristics of a given project. other sources of finance. As detailed previously, there are some enabling conditions—including tax structures, 3.3.2 Other Saleable Environmental regulatory requirements, cost of capital/materials/labor— Attributes that facilitate the development of LFG programs. Local In general, carbon markets are currently less dynamic governments can also help LFG projects capitalize on than once hoped or expected and a falling price of carbon environmental attributes, as detailed in box 11. Box 10. Methane Pilot Auction Facility Donor organizations have struggled to address the current weakness in carbon markets that has put many LFG sites at risk of decommissioning. Among the proposed answers by development institutions, the World Bank announced in 2014 the Pilot Auction Facility for Methane and Climate Change Mitigation (PAF), a new program to auction off the rights to carbon credits from methane-reduction projects and provide a minimum price guarantee to investors for these credits. Because the carbon markets are not currently offering significant incentive for private investors to complete methane-mitigating projects, many have gone dormant or have been left incomplete. In the program’s first year, the PAF will focus on this kind of methane-producing projects—those registered under CDM involving methane from landfills or animal/water waste that could be re-started fairly easily, but need the right incentive to do so. The program will use an auction system in which project developers can bid on a put option that will allow the right to sell their credits at a guaranteed price. The put option acts as insurance against the price of carbon credits sinking below a certain level. That is, the purchaser pays a premium for purchasing the put option, but has the option (not the obligation) to sell their future carbon credits to the PAF if there is not a better alternative available on the market. The facility is backed by several donors and expects to be capitalized by donors at $100 million. It will target around 800 projects in its first year, though new solutions for sustainably funding LFG systems are still required. Source: World Bank Group (2015b) Box 11. Potential Environmentally-Focused Revenue Sources Landfill gas flaring or energy generation projects may be able to take advantage of one or more environmentally-focused revenue streams in order to boost the overall project return. Some added revenue might be generated from: In some places, energy produced from LFG is considered renewable and commands a premium Renewables price. Voluntary green pricing programs or compliance-based programs, such as Renewable Premium Pricing Portfolio Standards at the local level, may require a percentage of energy purchases come from renewable sources, which may provide ongoing revenue. Businesses, institutions, and private citizens seeking to reduce their environmental footprint or Renewable demonstrate corporate social responsibility may seek renewable energy certificates through a Energy voluntary market or even through bilateral agreements in which project funding is exchanged for Certificate future carbon offsets. Some organizations or institutions may be interested in leasing the rights to claim tax benefits Lease associated with environmental activities from LFGE producers. If there is a difference in the value Agreements of the benefit for this LFGE operation and the prospective purchaser, this can be an ongoing source of income and benefit for both parties. Digital gas monitoring enables regular and precise measurements. 4 Incentives Schemes and Enabling Conditions Key Messages ●● Public sector financial and policy interventions are often essential to supporting LFG projects at the margins of profitability and leveraging outside finance. ●● Key support mechanisms that are widely cited as useful to LFG projects include: – Renewable energy premium pricing, including feed-in-tariffs – Priority access to the electrical grid and assistance with interconnection – Direct tax benefits – Fast-tracked permitting processes – Credit guarantees – Concessional loan programs ●● In the long run, enhancing the overall enabling environment—especially ensuring predictable policy/regula- tion, a strong legal system, and economic stability—supports investment in LFG. Investment Support 4.1 ●● Enhancing the larger enabling environment, including support of tradable permitting schemes and Mechanisms for LFG Projects broader education around LFGE. LFGE projects tend to be complex, capital intensive, and often carry a heavy risk profile,42 making it challenging 4.1.1 Direct Subsidization and Fiscal for investors to find an appropriate, risk-adjusted Support investment vehicle in the sector. Further, hurdle rates for Renewable energy generation incentives.43 Renewable private sector investment can be considerably higher in energy generation incentives are financial incentives for developing-country contexts. Governments are singularly specific energy production modalities that are typically positioned to address these issues through a range of public offered for a set number of years to encourage the devel- interventions that reduce or share risk, improve lending opment of energy sources that would not be financially terms, decrease tax burdens, or directly subsidize a project. sustainable in the absence of such programs (Kerr 2009). This chapter offers an overview of existing incentives, both LFGE around the world have benefitted under a number those that are explicitly intended to increase the value of of such incentives, including: an LFGE system and those that may augment the larger enabling environment for private investors. The following ●● Feed-in-Tariffs (FITs). FITs are a widely used incentive are covered: mechanism (Tongsopit and Greacen 2013) designed to channel funds to renewable energy generation ●● Direct subsidization and fiscal support, including technologies for a specified period of time and price renewable energy generation incentives, tax abatement that will allow them to gain a foothold in an energy schemes, and grant/investment programs; market. FITs typically involved assured access to a local ●● Indirect support, including risk-sharing through grid, rates that reflect the higher costs of some renewable credit enhancements or mechanisms that improve the technologies, and medium- to long-term contracts terms of loans, fast-tracked permitting processes, and (10-20 years) that offer a predictable income stream (Kerr property rights benefits; and 2009). FITs can either take the form of a fixed price for 25 26 Financing Landfill Gas Projects in Developing Countries a certain type of energy or a premium (or ‘adder’) paid ■■ Renewable energy investment and/or production tax above the prevailing price of a non-renewable source. credits. Under some tax law, investment costs for LFGE Adder schemes, which are a subset of FITs, also provide projects and/or their energy production costs are an incremental increase in the price paid per unit of eligible for a tax credit. For example, the Investment energy above the prevailing market price. Tax Credit (ITC) in the U.S. may allow investors to ●● Renewable Portfolio Standards (RPS). An RPS mandates obtain a tax credit that offsets 35 percent of the initial an increase in renewable energy usage for a given area, capital investment (Li et al 2014). typically through a regulation that obliges utilities to purchase energy from renewable sources. An RPS may Direct investment grants or concessional financing. In be instrumental in giving an LFGE operations more many countries and at the international level, there are business, but they may not offer a guarantee of this special funds available for improving green or distributed because they allow for price competition among the energy technologies. Loans with concessional terms providers. (including extended tenures, partial debt forgiveness, and below market-rate interest) are sometimes offered ●● Green Pricing Programs. Green pricing programs are by municipal development corporations, non-profit typically opt-in services that allow consumers to organizations, regional agencies, and multinational purchase a portion of their power from renewable institutions for LFGE projects. Similarly, full or partial sources via a premium on their utility bills. LGFE may investment grants may be offered to assist in initial be within the array of energy providers available in development or technology enhancement. This type such a program. of assistance can provide the funding necessary to get a Direct tax benefits. LFGE operations may benefit from project off the ground as well as reduce overall project risk a number of tax exemptions, deductions, subsidies, and and attract other lenders. exclusions. Depending on the tax regime in place, the prospect of tax credits may entice investors. Tax credits 4.1.2 Indirect Support and ‘Hidden’ and abatements may reduce operating costs and provide Subsidies investors greater return (Meyers 2009). For example: Special land-use rights and property tax abatement. Governments are sometimes able to provide land-based ●● Tax reduction or exemption on equipment purchases. benefits to LFG operations. These benefits may include In some locations, LFGE projects have qualified for long-term development rights on government land, exemptions from international customs duties on inexpensive land-lease of government property, land energy production-related construction materials. Tax exemptions or reductions are also sometimes offered grants, access to and/or usage of government land or for projects using domestically produced equipment. facilities, and reduction or elimination of property taxes. Land-based assistance may also include changes in zoning ●● Value-added and sales tax exemption or reduction. to allow specific types of renewable energy generation, as Reducing or removing value-added taxes on LFG well as government investment in remediation of landfill projects that make electricity from biogas can add sites in preparation for an LFGE project. to the project’s lifetime value and incentivize private investment. Limited liability contracts. Offering project developers ●● Accelerated depreciation tax deductions. In some environmental indemnities or limited liability for the jurisdictions (e.g., under U.S. federal law) (Burkett sanitary landfill after the project has been closed helps 2008), various capital expenditures on LFGE projects reduce long-term investor risk. may be eligible for accelerated depreciation—that is, a deduction on project income that is higher than would Utility interconnection assistance and priority grid otherwise be taken based for typical asset depreciation access. While some LFGE project enjoy priority grid can be taken within the initial early years of project access as part of a power purchase agreement (PPA), many development. projects find interconnection costs and unclear regulation 4. Incentives Schemes and Enabling Conditions 27 Box 12. National-Level Government Support for LFGE in Turkey Istanbul skiline. Photo credit: prmustafa/Thinkstock.com Partly in response to EU-wide efforts to increase the proportion of energy produced from renewable sources, the government of the Republic of Turkey enacted legislation intended to incentivize the construction of new renewable energy projects, including LFGE. The Turkish Law on Utilization of Renewable Energy Sources for the Purpose of Generating Electrical Energy went into effect in 2005 and was amended in 2010. The law establishes six means by which investment in LFGE projects initiated between 2005 and 2015 are supported: ■■ Purchase guarantees: Local electricity suppliers to end-users are required to purchase a certain percentage of elec- tricity from renewable sources. ■■ Feed-in Tariff: This guarantees a minimum price, though electricity producers are free to obtain a higher market price. The 2005 price set was €0.05-0.055/kWh. This was revised to US$0.133/kWh for biomass energy (inclusive of LFG, per Turkish law). ■■ Registration Discounting: The government will discount the initial registration fees for power plants by up to 85 percent. ■■ Domestic Equipment Incentives: Further operational discounts are offered for projects using domestically produced equipment. ■■ Priority Grid Access: Renewable energy producers are entitled to priority access to local electricity distribution systems ■■ Land Access Protection: The law restricts development of undeveloped land, which could be used for renewable energy generation. Sources: Gonen & Can (2013); Republic of Turkey (2005); Akat 28 Financing Landfill Gas Projects in Developing Countries can present a major hurdle.44 Clear information on the contribute to research and speeding the evolution technical requirements and/or restrictions for connecting of LFG technologies. As the IEA notes in its report to the grid (current, voltage, etc.) (World Bank 2004) can of LFG policy, in France, “grants are available for help reduce project delays during the application process. demonstration projects in the renewable energy sector Renewable energy producers can be granted priority [and] Finland’s well-known technology innovation access to local electricity grids. Similarly, the U.S. EPA agency has a programme dedicated to waste-related suggests a screening process that allows large or small projects including biogas from landfills”(Kerr 2009). energy providers to have different processing times, fees, ●● Awareness campaigns and educational efforts. An LFG- insurance requirements, etc. (U.S. EPA 2006). focused program, such as the U.S. EPA’s Landfill Methane Outreach Program (LMOP), can develop Credit enhancements. Credit enhancements are technical assistance, create guidance materials and mechanisms used in debt transactions to mitigate risk feasibility studies, and enhance partnerships that may that investors or creditors are unwilling to take (Kehew deliver financing. This kind of work may also help raise et al 2005). Guarantees,45 subsidized credit lines, and awareness in local engineering universities about the co-financing provided by a creditworthy municipal need for training in this field and allow policy-makers government, national government, or multinational to gain a basic understanding of the important issues institution can help project developers diversify risk and around LFG (Kerr 2009). attract other financing for LFG projects: 4.1.3 Larger Enabling Environment ●● Comprehensive and partial credit guarantees. Comprehensive guarantees cover interest and principal Plans to improve local capital markets. LFGE and other irrespective of the reason for default while partial credit infrastructure projects benefit from an improved overall guarantees are structured so that risk is shared between investment environment. Lowering both political and the guarantor and the borrower. commercial risk and bolstering the substructure (legal, in- stitutional) that underpins a healthy financial sector will ●● Co-financing and debt subordination. Co-financing of help capital markets mediate money effectively. Demon- projects by a trusted partner can enhance the general strating to credit rating agencies that, for example, a city creditworthiness of a project. Debt subordination can has a plan to improve its creditworthiness can pay divi- be used in the case where a partner wants to enhance dends in the long run. This would mean that bonds and the creditworthiness of the primary borrower, but the other municipal debt that could be put toward infrastruc- secondary partner’s funds will be tapped last if a project ture projects like LFGE systems will be less expensive.46 falters. Part of doing this is focusing on predictable regulation, Programs/policies that promote the sector. Promotion removal of perverse policy incentives, and support of of the LFG sector can be useful for project developers transparency, as policy risk is lowered when laws are clear- seeking exposure and greater assistance from policy- ly written and consistently applied. makers in making projects work. There are a variety of ways this can be done: Creation of tradable permit schemes. The development of local carbon emissions trading or permitting schemes ●● Donation of government staff time. Government staff may open the door for higher value to be obtained with a high level of knowledge about LFG projects can from reducing carbon emissions. These markets can help expedite permitting, play a liaison role between be facilitated by local, regional, or national regulation different levels of government, assist in the general of carbon emissions, but the scope is much wider than improvement of waste management by a city and its LFGE projects. contractors. ●● Technology innovation support. Public-sector Development of high-level or national-level planning policies for improving technology development can around mitigation. Planning for mitigation action in an 4. Incentives Schemes and Enabling Conditions 29 integrated way requires both the national and local level Actions (NAMAs), which are discussed as part of the Bali to align priorities and set broad targets that are appro- Road Map (2007). NAMAs are a mechanism by which a priate for a country’s level of development and ability to national-level government can transparently outline pol- limit emissions. This alignment is intended to broadly icies and mitigation actions that are domestically appro- assist in the creation of a funding environment that is priate. Similarly, Intended Nationally Determined Con- coordinated and more effective. High-level climate talks tributions (INDCs) were proposed in Warsaw (2013) as a led by the United Nations have offered several means of means of outlining a country’s proposed actions vis-à-vis developing such high-level planning in developing coun- climate change (Boos et al 2014). tries, beginning with Nationally-Appropriate Mitigation Gas pipe installation in Cumberland County, North Carolina. 5 Risk Identification and Mitigation Key Messages ●● Mitigating risk is key to gaining investor confidence, keeping the cost of financing down, avoiding cost over- runs, and ultimately limiting the possibility of a failed venture. ●● Employing proper due diligence, proven technologies, experienced vendors and consultants, and structuring contracts well are the most effective risk mitigation techniques. ●● Apportioning risk appropriately between project partners is more important than trying to mitigate all risk. ●● The two most important means of mitigating financial risk are (1) obtaining accurate gas availability esti- mates and (2) getting off-take agreements for end-products. Others include: – Conservative estimates of LFG availability – Warranties and performance guarantees for equipment – Output-based payment schedule to incentivize on-time construction and project delivery – Political risk guarantees/insurance to hedge against policy/regulatory changes – Fixed-price or turnkey contracts that shift some risk to contractors – Delay guarantees (delay penalty) and/or incentives for faster delivery of project components Due to their high upfront costs and long investment time- 5.1 Overview of Risk in LFG lines, LFG projects—like many infrastructure projects— Projects are perceived to carry elevated financing and/or liquidity risk. The nature and significance of these and other proj- Political Risk. In concept, risk in landfill gas projects can ect-specific risk factors directly affect the cost of capital be roughly divided between political risk and commercial and, in many cases, the overall viability of a project.47 Ad- risk (Matsukawa and Habeck 2007). Political risk49 is a dressing risk is key to gaining investor confidence, keep- broad category that may be particularly relevant in de- ing the cost of financing down, avoiding cost over-runs, veloping or fragile contexts (Kossoy 2005). It can include and ultimately limiting the possibility of a failed venture. the possibility of government expropriation of property A crucial aspect of initial project planning is to anticipate or gas rights, restrictions on currency conversion, civil the project’s risk profile at different stages so that it can unrest, policy changes that eliminate key subsidies, or be managed over the course of implementation, as well as even the non-payment of a sovereign guarantee. Though actively mitigated when risk factors emerge unexpectedly. this type of risk may impact the project’s profitability or This chapter offers advice from LFGE project-developers, viability, there is often little a project implementer can financiers, legal counsel, and engineering professionals do beyond obtaining third-party Political Risk Insurance on risk mitigation techniques that are specific to different (PRI)50 to improve an LFG project’s overall risk-return stages of landfill gas project development.48 profile (box 13). 31 32 Financing Landfill Gas Projects in Developing Countries Adding this insurance to a project can decrease its overall Risk-ownership. A key part of mitigating risk is setting up financial risk profile, likely lowering the cost of borrowing an explicit risk-ownership structure to divide it appropri- and potentially increasing the tenure of loans. Ideally, the ately between project implementers based on each party’s savings a company might see from a lowered cost of bor- ability to assume and manage risk. A well-considered risk rowing would be greater than the purchase price of the allocation strategy can offer benefit to all project partici- PRI, but sometimes adding insurance is the only means pants, reducing both overall uncertainty and the potential of acquiring any other financing and is necessary even if for decision-making that may lead to an increased cost the expense is not recouped in lower financing costs (Boza of bids and longer estimated schedules. Risk-ownership 2015). The premium paid for this insurance is typically plans must be structured cautiously, as poorly-designed calculated based on the type of project or sector, the finan- risk transfer strategies can create perverse incentives that cial risk level, and the location. Predictably, these factors lead to cost overruns or inefficiencies.51 have major implications for investment. In fact, there is evidence that the country risk rating in emerging markets Profits or gains from jointly-executed projects should, in and developing economies is a reliable predictor of overall principle, be divided proportionately based on the risk infrastructure investment levels (Araya et al 2013). allocation and the material contribution to the project (California Energy Commission 2002). However, negoti- Project implementers have greater control over the factors ating a fair division among stakeholders at various stages that make up commercial risk, which include all of the of the project is a complex process, as each party’s capacity production-related activities such as site construction and to bear risk may fluctuate over the course of implemen- the ability to sell a product at a competitive price. These tation. Identifying the specific competencies of different are discussed at greater length in the following sections. partners early on allows for planning and compensation Box 13. Shifting Risk and Increasing Profitability Through a Public Sector Guarantee Though many emerging markets have dynamic investment climates, addressing political risk through purchasing a third- party financial guarantee may play a key role in attracting investors and lenders. In 2006, BioEnergia, a subsidiary of a Canadian energy technology company, began construction on an LFGE system in El Salvador. As part of its financial calculation, BioEnergia expected to earn profit from selling Certified Emission Reductions (CERs) on the international carbon market through the Kyoto Protocol’s Clean Development Mechanism. While the company received a necessary letter of support from the Salvadoran government and successfully registered the project with the UNFCCC, there remained some political and Kyoto-related risk of under-delivery of CERs that had the potential to negatively impact the project’s financing. To obtain better financing terms, the company sought to address the risk by purchasing insurance from the World Bank’s Multilateral Investment Guarantee Agency (MIGA). MIGA makes financial guarantees for companies investing in developing markets. MIGA provided an equity guarantee of US$1.8 million, covering expropriation or damage of assets, the potential for political or regulatory action that might decrease the amount of waste going to the landfill, war and civil disturbance, and breach of contracting, including a breach of the Salvadoran government’s letter of support to the UNFCCC. With this risk mitigated, BioEnergia was able to obtain financing and sold their emissions reductions to the government of Luxemburg in 2007. A MIGA guarantee can be up to US$200 million (though more through special arrangement) and will cover up to 90% of equity and 95% of debt. The premium is based on country-specific factors, but MIGA requires a US$5,000-$10,000 application fee that is credited toward the premium and a processing fee of up to US$25,000. MIGA is a major multi-lateral political risk insurer but there are also regional development banks and bilateral insurers, such as Australia’s Export Finance and Insurance Corporation (EFIC) and the U.S. government’s Overseas Private Investment Corporation (OPIC), that provide these services. Private insurers also provide these guarantees. Sources: Marais (2013); Biothermica Technologies, Inc; Matsukawa and Habeck (2007); Quintrell 5. Risk Identification and Mitigation 33 that will help avoid risk from materializing and leading to 5.2 Mitigation Across Stages financing shortages at later stages. of LFG Projects Typically, those parties holding long-term debt are the 5.2.1 Risk Mitigation in the Feasibility most risk adverse and will seek to off-load risk through or Planning Stage requiring collateral, debt guarantees, and recourse to other stakeholders’ assets. Project developers or other equity As in many infrastructure projects, risk in LFG projects investors will anticipate taking on most of the financing is typically highest during the development phase and risk—in exchange for a higher return52—though they also tends to decrease as the project moves toward operation will likely seek to spread the risk broadly among project (Schwartz et al 2014). Thus, risk mitigation during the participants.53 feasibility analysis—which often takes the form of prop- er due diligence—is critical to the overall success of the There is an extensive literature on risk allocation in energy project. The chief purpose of this phase is to determine infrastructure development, which is not replicated here. whether the project is viable based on the condition of the Rather, the remainder of this chapter offers advice on risk landfill, the availability of LFG, the predicted generation mitigation in LFG projects based on the experience of rate and lifetime, and the potential for financing. A full practitioners. Risk mitigation instruments and strategies feasibility assessment should allow project developers to exist at various phases of the investment lifecycle, make basic decisions about the most appropriate end-use beginning in the feasibility planning stage and continuing of the gas. Though there are examples of projects that rely through critical milestones in the project development primarily on desk-reviews to model the amount of gas process. However, a good management strategy requires an a landfill might produce, a feasibility assessment should end-to-end or lifecycle assessment of risk, as the handling always include a pump test as a risk-mitigating measure. of risk at one stage will often impact levels of risk later. This entails gathering gas from test wells for a sufficient period of time (up to 3 months54) to allow for a definitive This section outlines various strategies used to moderate assessment of gas quality and quantity (Flores and Stege political, technological, partnership and market risk at 2005). Identifying the project partners and explicitly de- each stage of the process and is based on practical sugges- veloping a risk-ownership strategy is also a key part of tions from developers, legal counsel, engineers, and other this phase. The primary areas of project risk at this stage practitioners in the field. The major stages of LFG projects include: outlined in this section are: ●● Gas availability risk ●● Feasibility or Planning Stage ●● Financial risk ●● Engineering, Procurement, and Construction Stage ●● Partnership or counterparty risk ●● Operation and Distribution Stage ●● Permitting and regulatory risk 34 Financing Landfill Gas Projects in Developing Countries Table 3. Gas Availability Risk Over-estimating the amount of gas available during the project lifetime has caused many projects to fail in the last two decades. Underperformance is a known problem in the sector, though many of the issues that plague developers might be avoided with proper due diligence from the outset. Risk Mitigation Technique Considerations ●● Avoid the tendency to push for LFG recovery projections as quickly or cheaply as possible. ●● Considerable expertise is required in site-specific coefficients that feed into the Contract a reputable firm to models used to make initial estimates of gas availability. For example, climatic undertake the initial gas potential conditions and organic content of the waste will be different for models in analysis. different regions. ●● Both a desk review of historic landfill data and an on-site verification of the landfill systems (flow meter, operations practices, etc.) should be undertaken (Pierce 2003). ●● Before taking on any project risk, ensure a high-level of comfort with gas-pro- Verify gas-availability studies duction estimates, including those produced by project partners. presented by other project ●● An independent auditor or other third-party verifier and can validate gas avail- stakeholders. ability through a pump test. ●● Test wells should be drilled and gas output should be monitored over time. Gas Availability Decouple feasibility assessment ●● This avoids situations in which contractors are incentivized to overestimate the contracts from other project gas available—e.g., in a competitive bid that is partially based on promised development work. output. Obtain a conservative estimate of LFG availability by using a low ●● This helps avoid planning around overly-optimistic estimates. This should be multiplier in estimation models done in each landfill cell. (World Bank 2004). ●● Once a satisfactory desk review has been completed, a test drilling of several gas wells should be done with special attention to the location of the wells. In developing countries, historical data may not be available and a pump test will help mitigation some of the risk associated with this lack of information. ●● Pump testing should include at least three vertical test wells and some pressure Always build in funds to perform probes to test suction. a pump test as part of the ●● The duration of the test should be as long as practicable (some suggest 6-8 feasibility assessment. weeks while others suggest up to 3 months55). ●● Gas content, especially methane and oxygen content, should be analyzed prior to moving forward with the project. ●● Moving forward should be contingent on the results of the pump test. This should be reflected in any agreements with other contractors. 5. Risk Identification and Mitigation 35 Table 4. Financing Risk The primary financial risks from the outset of a project relate to (1) the availability of funds and (2) the cost of capital or lending terms. Identifying an off-taker and obtaining a purchase agreement from the eventual end-user of LFG or energy, such as the local power utility, is one of the most important aspects of financially securing the project. Risk Mitigation Technique Considerations ●● In terms of project security, identifying a market for the end product is second in importance only to obtaining an accurate estimate of gas availability. ●● Pre-screen the off-taker’s creditworthiness. Obtain an off-take agreement for the end product— ●● The kind of product needed will determine the type of technology purchased. If electricity, gas, steam, etc. a purer gas is required by the end-user, this has upfront cost implications for the infrastructure developer. ●● Note that market access for power distribution is not always a given in all jurisdic- tions. Signing long-term off-take ●● When negotiating with utilities or other off-takers, achieving a long-term off-take contracts can increase the arrangement of 10-20 years is optimal, though not always possible. financial stability of the ●● If the market value of LFG is expected to increase, a shorter obligation time and project. room for renegotiation may be an advantage. Ensure that supply obligations ●● Initial estimates of gas supply should be conservative. and contingencies are spelled ●● Understand where responsibility lies for supplying energy to off-takers if the LFG out. generator has to be shut off for some period of time. ●● Obtaining third-party guarantees or insurance on equity or other investments is a standard method of risk mitigation. These may include support from private, local, national, or international bodies, if available. Limit finance risk and/or ●● Enhancements can also include providing collateral or a letter of credit from a bank acquire better financing terms or other backer. through credit enhancements. ●● Public policies that support renewable energy may guarantee some future revenue Financing and may help secure loans and lines of credit. Note that not all jurisdictions classify LFG as ‘renewable.’ If applicable, begin documenting the project development process for ●● Acquiring carbon finance can help ensure the overall financial sustainability of a registering with compliance project and moderate the overall project risk profile. and/or voluntary carbon markets. Identify sources of funding/ financing whose repayment ●● This is to ensure, to the extent possible, on-time repayment and limit the prospect periods coincide with the of default. expected period of project revenue generation. ●● If projects are funded on a non-recourse basis, financiers do not absorb project risk Consider using project finance as an equity investor might, thus it has to be distributed among the other project to avoid exposure to greater participants. liability. ●● Separate or local limited liability companies or a single-purpose subsidiary may shield assets of a parent company or municipality in the event the project fails. ●● Types of output-based financing (e.g., agreements that base payments to financiers, contractors, and others based on the production of gas) can be used in some situ- ations to incentivize active problem solving that is in all participants’ self-interest. Use output-based financing (results-based financing) ●● This can be as simple as developing a payment schedule based on LFG quantities where possible. produced. ●● Carbon finance is a form of output-based finance, in which project owners are paid upon delivery of CERs. 36 Financing Landfill Gas Projects in Developing Countries Table 4. Financing Risk (cont.) Risk Mitigation Technique Considerations ●● Landfill gas projects may not always qualify for ‘renewables’ benefits and that should not be presumed. Comprehensively investigate the potential for renewable ●● Find out if the national or local energy policy obligates purchase of ‘green’ power. energy tax incentives or ●● Review the terms under which power might be purchased (e.g., the feed-in tariff other benefits (as well as tax rates). Financing liabilities). ●● If land is leased for the LFGE project, payment of property or other taxes may be required over the course of the project. Diversify the funding/ ●● Projects with too much reliance on a single public entity for guaranteeing loans financing sources. may be seen as suffering from elevated policy risk. Consider possibilities for ●● If debts exist in a hard currency (e.g., USD) and revenues are generated in a local denominating both debts and currency, there is risk of devaluation of a local currency that could cost investors revenue in the same currency. enormously. Obtaining financing in local currency could help eliminate this issue. Table 5. Partnership Risk Identifying project-implementation partners with adequate expertise in their field and divvying up rights and responsibilities early will help ensure coordination issues do not impede the project development. Risk Mitigation Technique Considerations Ensure adequate planning and project-structuring expertise/ ●● An experienced project manager can undertake adequate due diligence of con- experience in the core project tractors before they are selected and anticipate issues before they materialize. management team. Develop a risk-ownership strategy early in the process ●● Outlining responsibilities with regards to risk ensures ongoing accountability and that anticipates potential may help drive partner or contractor behavior (Beckers et al 2013). problems. ●● A site lease agreement between the existing owner-operator of the landfill and the LFGE operator/developer may prevent territorial disagreements. Spell out site access and any The site lease should include site access rights to the LFGE facilities on landfill Partnership ●● shared infrastructure rights property and any usage of other infrastructure that will be used in common with with the landfill owner/ the landfill owner/operator and other participants. operator. ●● For example, if the LFGE system needs to process condensate through the landfill’s leachate control system, this arrangement should be explicit within the site lease contract. Review all site lease documents and management ●● Investigate the landfill owner by ensuring there are no pending requirements (e.g., contracts for the landfill, and environmental) to be fulfilled and there is not a history of censure by the regulatory ensure the landfill is up to authority. code. ●● Sometimes, ownership over gas rights or site-use rights are not clearly understood Clearly define the existing or enforced by law. ownership structure of the landfill and resources. ●● All existing concessions connected with the landfill operation should be identified at this stage. 5. Risk Identification and Mitigation 37 Table 5. Partnership Risk (cont.) Risk Mitigation Technique Considerations ●● Revenue sharing can offer some incentive for proper maintenance and care for LFGE infrastructure (e.g., not running over well-pipes with backhoes). ●● For example, structuring a project so that any payments from the LFGE project to Ensure landfill operators the landfill operator are tied to payments from delivery of gas offers this incentive. have incentives to maintain Payments may even start only after a large portion of the gas is delivered. the landfill in manner that is ●● Agreements should include requirements for well-trained landfill technicians to ad- conducive to gas-collection. just the gas collection system and maintain a flow of LFG with a good quality (% of oxygen) to prevent unintended consequences to the landfill such as landfill fires.   ●● Greater assurance may be obtained by putting a recognized environmental man- agement system in place (e.g., ISO 14000). Make an agreement with the landfill owner/operator ●● Though landfill owners may be able to split large landfills geographically and about gas rights that disallows offer different parcels to different LFGE operators, LFG migration patterns are not building a second LFG system always known and two operators may be in competition for the same gas. that competes for gas. Ensure that with equity Partnership partnerships, the roles and areas of responsibility of each ●● Investors and equity owners must decide which lenders take priority in repay- partner are clearly delineated ments, particularly in the event of default. from the outset and there are contracts that spell out which parties are paid first. ●● For smaller LFGE projects, interconnection costs (step-up transformer, etc.) could Project owners may be significantly affect the profitability of a project (Jaramillo and Matthews 2005). able to negotiate shared Different utilities will have different expectations and potential cost-sharing options interconnection costs and for power transmission infrastructure. eventual network upgrade costs with the local utility. ●● Note that it may take some time (3-6 months or longer) (Pierce 2003) for an inter- connection application to be accepted. Ownership of infrastructure ●● Both for a planned end date and in the event of early project termination, it is and other project property necessary to clearly define which parties have rights to liquidate gas pipelines, (e.g., gas rights) should be generators, and other infrastructure or project property. clearly spelled out. The general public should be viewed as a partner ●● Even if community outreach is not required by law, public acceptance of the proj- and community outreach is ect may make the difference between bankable and non-bankable project. advisable. 38 Financing Landfill Gas Projects in Developing Countries Table 6. Permitting and Regulatory Risk Moving through the permitting process quickly may avoid lost profits and holding costs. Extended permitting processes have a history of impacting the delivery of carbon reduction credits from LFG projects. Risk Mitigation Technique Considerations Use political risk guarantees/ insurance to hedge against ●● This type of guarantee can run less than one percent of project costs, though it may regulatory changes that affect be much higher depending on the existing political situation and other risk factors. profitability. ●● Developers sometimes overlook existing leachate control regulations, air quality measurement requirements, standards for gas purity, and noise ordinances. For example, reciprocating generators can be very loud and if noise limitations exist, they may require the added expense of building surrounding structures to dampen Permitting and Regulatory Comprehensively investigate noise. Further, there may be required air quality or other tests that will add to the relevant local and national cost of the project in the long-run. ordinances, including which ●● In some jurisdictions, independent power producers are unable to sell electrical agency makes them (or gives power onto the grid or are otherwise limited in their abilities to use, for example, permits), the associated transmission infrastructure. timelines, and the potential for ●● Public consultation may be a requirement in some jurisdictions. them to change. ●● LFG may not be considered ‘renewable’ in some jurisdictions and therefore may not be eligible for tax or other presumed benefits. ●● If LFG collection is required by existing authorities, that may limit the value of emissions reduction credits because of a lack of additionality. Comprehensively investigate ●● Understanding when and how the relevant authority might impact operations can the relevant regulator(s) allow a project developer to anticipate and head-off potential problems. This is (national level, local level, both in terms of the landfill itself and the relevant energy regulators. provincial level) and determine the potential for political ●● The existing authority should be able to identify other existing concessions on a change to impact operations. landfill site. ●● Project stakeholders from the public sector can most easily mitigate change-of-law Make binding agreements in risks. order to limit financial impacts ●● As an example, upgrading direct-use landfill gas to reduce the oxygen content from regulatory changes can be an expensive, but could be required by a change in local utility policies. (“change-of-law”). A long-term (10- to 20-year) off-take agreement with a utility is ideal, but may not be feasible. Those working on the ●● The application process for the UNFCCC and others can be time-consuming and application and validation delay project profitability. processes involved in carbon ●● The verification process for voluntary markets can be shorter than for compliance. credit registration/sales should Existing projects have sold initially to voluntary markets and then later to compli- have experience in the field. ance markets. ■■ Contractors or other implementers may ask the landfill owner (or vice versa) Request environmental for an environmental indemnity to protect against financial loss as it relates to indemnification. environmental degradation. 5. Risk Identification and Mitigation 39 5.2.2 Risk Mitigation in the When working in countries with little or no history or Engineering, Procurement, and LFGE project development, project developers must Construction Stage be cognizant of deficits in the experience of potential engineering or construction companies. Addressing this Following the feasibility assessment stage, risk must be area of risk may require that a developer bring experienced addressed during the process of engineering, procurement staff from abroad or invest in training local staff. There are and construction. During this phase, careful selection always risks that cannot be avoided. For example, in many of project contractors and partners will help ensure the cases, those countries that are new to LFG collection do project is delivered as expected and, as such, financially not have supply chains to deliver necessary construction protected. Some of the risks in this phase are common materials and a labor pool that is familiar with the across all construction projects, while others identified operations. Some of the risk inherent in these contexts here by practitioners are specific to LFGE work. may be diffused among project participants, though it is reasonable to expect that the primary project developer As the work in this phase of project development may absorb them to a large extent. typically involves specialized contractors, many activities lend themselves to results-based contracting, in which The principal areas of project risk at this stage can be payments are remitted based on the successful completion grouped in to: of pre-defined activities. Some of the financial risk that can be anticipated in project development (e.g., from ●● Contracting risk construction delays or increases in the price of materials) can be off-loaded to contractors using a results-based ●● Procurement risk approach, so long as contingencies are built into contracts. ●● Engineering & construction risk 40 Financing Landfill Gas Projects in Developing Countries Table 7. Contracting Risk Proper due diligence during contracting for various aspects of an LFGE project is important for identifying and hiring suitable contractors/sub-contractors; ensuring work is properly completed on a specified timeline; confirming that certain types of risk (e.g., financial risks based on late completion of tasks) are either mitigated or borne by the contractors to the extent possible; and clearly spelling out the responsibilities of project participants. All contract negotiations include the possibility of deliberate contract manipulation, hedging, the inclusion of perverse incentives, and other activities that may erode the value of the relationship. Often, specific requirements in written contracts can limit risk. Risk Mitigation Technique Considerations ●● “Buy-as-needed” contracts are considered less secure (financeable) than lon- Sign long-term (as opposed ger-term contracts (Szymanski et al 2013). to buy-as-needed) off-take agreements. ●● A contract that does not allow the energy buyer to default for any reason is the most secure type for the seller (Szymanski et al 2013). Develop a thorough construction specifications ●● An initial bid document should outline the project and include very specific informa- document outlining and tion including definitions of terms, payment schedules, legal restrictions, insurance defining all work and requirements, timelines, site usage allowances, and other relevant information.56 expectations. ●● Described in Appendix J, a proposal security can be used to pre-screen engi- Require a proposal security or neering/construction firms and dissuade under-qualified firms from putting in an bid bond from major project application or bid. contractors. ●● A highly qualified bidding pool will increase the likelihood of hiring a contractor capable of designing and/or executing LFG plant construction. ●● Surety companies do prequalification for services and will evaluate a contractor. Consider requiring surety ●● Performance bonds compensate the project owner if the contractor fails to perform Contracting bonds that cover performance in accordance with a contract. and payment. ●● Payment bonds ensure that materials suppliers, workers, and other subcontracted firms or individuals are paid even if the contractor defaults. Fixed-price or turnkey contracts ●● There is usually a premium to be paid for shifting risk via turnkey contracts. can shift much of the risk of project implementation and ●● Fixed-price contracts should be entrusted to experienced LFGE developers only and completion to contractors. there should be mechanisms to ensure adequate quality-for-money. Ensure that contractors/ subcontractors have ●● Often, a subcontractor may be asked to have professional liability insurance to appropriate insurance account for omissions and negligence. coverage based on local laws. Write into contracts a delay ●● If there is a delay in completion or specified tasks, a delay guarantee is designed guarantee (delay penalty) to cover interest costs on a construction loan. and/or incentives for faster ●● Faster delivery can be a win-win for all stakeholders and can be incentivized delivery. through pay. A feedstock supply agreement can help ensure that organic ●● If gas is expected to be collected from a series of cells over the course of 20+ waste is not diverted years, a lender and project developer will want assurances that the feedstock will elsewhere during the course of continue to be provided (Szymanski et al 2013). the project. 5. Risk Identification and Mitigation 41 Table 8. Procurement Risk Procurement risk originates from (1) uncertainty or disruptions in the material supply chains that interrupt construction timelines or threaten operational continuity and (2) the selection of equipment and warranties. Often, vulnerabilities in global supply chains are out of the control of small operators, such as those that might be undertaking an LFG project. However, rather than reacting to issues as they arise, a sound procurement risk strategy anticipates disruptions and identifies alternate suppliers. Some ‘technology risk’ is covered in this section. Risk Mitigation Technique Considerations ●● Proven reliability of the LFG technology and infrastructure is paramount, though Select proven technologies cost per kWh of installed capacity is often the primary criteria used when selecting and require references from energy generation technology. technology suppliers. ●● References and data on the projects of similar size and fuel type should be provid- ed by technology suppliers. ●● Request of a fee schedule for service and maintenance in order to plan accord- For technologies, obtain ingly. warranties and performance guarantees, and review the ●● Project developers/partners should transfer all warranties for major machinery to maintenance agreement the project owners. terms with an eye toward the ●● Note that maintenance agreements may require project owners to pay for some warranty restrictions. aspects of repair, such as flying repair-people to the landfill location. ●● Depending on the level of impurities in the gas, infrastructure may corrode at a Take stock of expected O&M faster or slower pace—a factor that should be input in the lifetime costs of the based on grade of gas. project but is often forgotten. ●● Ensure that product warranties do not exclude corrosion-related repairs. Maintain some liquidity ●● While it is easy to do financial planning around routine maintenance, major equip- to address “non-routine” ment failures that fall outside warranty (California Energy Commission 2002) or equipment failures. outside the purview of insurance can stall or halt projects. ●● While routine maintenance and the costs of operating machinery can be predicted Contracting with a fair amount of certainty, unexpected repair or replacement costs that fall outside the scope of a reasonable warranty can be very expensive. ●● Product warranties cover costs of repair/ replacement of specific pieces of ma- Consider purchasing property chinery, but do not typically cover income losses resulting from gas supply disrup- and business income tions—these are borne by project owners/investors. insurance. ●● This type of insurance can also cover costs incurred when supply chains are dis- rupted (e.g., if the supplier becomes insolvent). ●● There is also third-party insurance covering economic loss from product malfunc- tion, breach of contract with product suppliers, etc. ●● Outlining responsibilities by accounting for procurement risk ensures ongoing ac- countability and may help drive partner or contractor behavior (Beckers, et al 2013). Early in the process, outline ●● Procurement risk is difficult for any entity to control in many instances. procurement responsibilities ●● In turnkey projects, contractors can be expected to take on the risk of procurement, (and attendant risk) that can though a thorough analysis of the firm’s ability to take on this risk will ensure the be shifted to a construction best outcome. firm. ●● Contractors can fail to procure materials for legitimate reasons—a lack of local market for certain goods, a global supply shortage, customs hold-ups. ●● Penalties for inability to deliver based on procurement should be reasonable and taking on this risk should be compensated. When possible, develop ●● This helps hedge against one supplier that has a shortage of equipment/materials relationships with more than and the potential for late delivery of materials. one supplier. 42 Financing Landfill Gas Projects in Developing Countries Table 9. Engineering and Construction Risk Once engineering and construction have commenced, many of the risks inherent in this stage of project development should have been anticipated and accounted for in prior stages. For example, delay guarantees on construction should have been written into contracts. The additional risks at this stage largely relate to (1) carrying out work that has been detailed in previous stages and (2) assessing that the work has been done properly and on time. Risk Mitigation Technique Considerations ●● The project scope and quality expectations should be well-defined within this doc- Create a construction schedule ument. with installation payments ●● These milestones should be clear and thoroughly understood by all parties. based on progress. ●● Bonus or penalty clauses should be clear, as well. Seek guarantees or ●● For example, there should be financial guarantees in place that cover the schedule warranties on those aspects and plant performance for a specified period. that are under the control ●● Traditionally, these contractors have given only warranties limited to re-designing of the design/architecture/ inadequate infrastructure, but many—especially turnkey operators—are increas- engineering firm hired. ingly willing to take on added project risk (California Energy Commission 2002). ●● This monitoring is the responsibility of both the project owner and the contractor. Engineering & construction Monitor construction costs and ●● Detailed records and cost accounting is a ‘best practice’ that is not always fol- estimated timelines closely lowed. throughout the project. ●● Accurate and realistic estimates of both cost and timeline should be encouraged. Subcontractors on the project should be accountable (just ●● This accountability can be mediated through the primary contractor, given suffi- as contractors) to the project cient trust exists between the contractor and project owner. owner in terms of quality and insurance. ●● A performance test is intended to demonstrate the LFGE plant meets its emissions criteria or the heat rate expected. Require a performance test ●● A longer performance test (>7-10 days) is best, though it is in the contractor’s once construction is complete. interest to push for a shorter test (e.g., 24-hour). ●● A performance bond may be required from the contractor to guard against under- performance. Re-enforce the expectation of site safety and quality ●● A close, working relationship between a contractor and employer can make iden- workmanship through tifying potential problems easier and more timely. contractual requirements ●● The specifications document should include requirements for insurance and em- and ongoing contact with ployee safety. contractors. 5.2.3 Risk Mitigation in the Operation to power disruptions that would put the project in and Distribution Stage financial jeopardy—a significant disruption may mean the project loses the contract price for undelivered energy Risk mitigation at the operation and energy distribution stage relies heavily on monitoring to ensure that systems and potential compensation, any renewable energy that were set up in prior stages are operating as expected. credits it was expecting, and associated production tax Technology service contracts and landfill O&M credits (EUCI 2010). Ongoing assessments ensure that agreements should be in place at this point. Failure to O&M can be proactive and adaptable. Disruptions in carefully monitor the day-to-day operations can lead energy production can also occur as a result of failure 5. Risk Identification and Mitigation 43 in distribution technology or infrastructure, such as a equipment sold on a secondary market and/or the cost downed power line, which may or may not be under the of dismantling and disposing of the equipment—comes control of project owners but can be anticipated. The into play at the end of the project lifecycle, but should be residual value of the technology—including the price for assessed as part of a project exit strategy. Table 10. Curtailment, Distribution, and Residual Value Risk The risk of curtailing gas collection and energy production is foremost at this stage of project development. Residual value should be assessed as part of a project exit strategy. Risk Mitigation Technique Considerations ●● An expected maintenance schedule should be in place. A technology provider and current users of a specific technology can help create a reasonable schedule. Ensure proper monitoring and ●● Some service agreements include remote monitoring and diagnostics. maintenance of LFG collection and energy production ●● If the technology provider does not have in-country technicians, provisions need to technologies. be made to (a) bring in mechanics on short notice or (b) develop capacity in-house. ●● Stakeholders should seek a trusted local supplier for replacement parts or pre- emptively establish a network that can ensure speedy delivery of parts. Budget for periodic equipment ●● If the project does not already have a fixed-price service agreement with the tech- overhauls and have a plan in nology provider for all annual operations and maintenance, there should be a place to work with off-takers reserve account for these expected overhauls. It should be periodically re-capital- if there will be disruption in ized. output. Curtailment, Distribution, & Residual Value Ensure that landfill operation ●● Many operations issues impact the amount or quality of gas that is available. This practices align with the goal of includes daily capping and the final cap of a landfill, leachate management, pump gas collection. pressure, and how waste compaction is done (Terraza et al 2007). Use pumps in gas wells to remove excess leachate that ●● Removable pumps can be used at different sites, as needed (Terraza and Willum- may block LFG extraction sen 2009). holes. ●● Assigning curtailment risk can be contentious. ●● A seller can sometimes, though not often, fully shift the risk to the buyer via a contract that requires the buyer pay for a specific time period of energy production whether or not the agreed-upon energy is fully delivered. Negotiate potential energy ●● Sometimes the seller will be expected to absorb the costs for a certain period of delivery curtailment scenarios time, after which the buyer is expected to pay whether or not energy is delivered. with energy-buyers in the PPA before situations arise. ●● Some make arrangements to treat curtailment scenarios differently based on the reason behind the curtailment (e.g., emergency versus operator error) (Stoel Rives LLC 2010). ●● Expected curtailment for maintenance should be scheduled and understood by the buyers. If generating carbon credits, be vigilant about specific ●● Depending on the carbon market, the process of verification may require specific documenting requirements types of data that are not collected for normal business purposes. Failing to collect based on the carbon market the proper data in the required manner may risk losing all carbon credit funding. being used. Factor the expected residual ●● Residual value of the infrastructure may depend on how the infrastructure is main- value of infrastructure into the tained over the course of the project. overall project finances and negotiate the items that might ●● Some comprehensive risk guarantees may cover residual loss (Schwartz et al be left on site. 2014). Installation of a LFG conveyance pipeline: The gas is conveyed through this pipeline to a station where it is used to produce electricity. 6 Case Study: Thailand’s Kamphaeng Saen East & West LFGE Projects Located approximately 80 km outside Bangkok, the Kamphaeng Saen East and West landfills serve much of the area’s waste needs and—with the technical and financial support of a third-party developer and the international carbon market—began to generate significant quantities of electricity from landfill gas in 2011. These two 8 MW electricity-generation projects highlight how financing of LFGE can be successful when public and private sector incentives are aligned. Key components of the project’s success are: ●● An experienced private developer with the ability to self-finance and access outside capital beyond the municipal budget ●● Functioning international compliance and voluntary carbon markets ●● National energy policy reforms including tax exemptions on imported equipment used for renewable energy systems ●● Local feed-in tariff incentive schemes for electricity generated from renewable sources 6.1 Context Renewable Energy Targets 2012-2021 Municipal solid Wind waste 400 MW As Thailand develops economically, the country’s demand 1800 MW for electricity is increasing dramatically. Faced with an in- Hydropower Solar 324 MW efficient electricity sector and insufficient domestic power 3000 MW production capabilities in the early 1990s (EPPO 1992), Oceanic/ the country began to promote the development of small, Geothermal/ Biogas Biomass independent power producers—especially those that pri- 3600 MW 4800 MW Hydrogen 3 MW oritize renewable energy sources (World Alliance for Thai Decentralised Energy Association 2013). Among a series of national-level reforms, the government set renewables standards and enacted new policies and incentive schemes Source: Thailand’s Updated (2013) 10-year Alternative Energy intended to attract foreign direct investment (FDI) to fill Development Plan (AEDP 2012-2021) gaps in the country’s existing capacity. As part of these schemes, the government introduced capital grants in Waste Composition in Bangkok 2003 for renewable57 energy equipment and subsequently offered tax exemptions for the import of equipment used to produce renewable energy (World Alliance for Thai Organics: Food scraps, Decentralised Energy Association 2013). Thailand was wood, leaves 55% among the first countries in Asia to institute an ‘adder’ or Recyclables feed-in tariff (Tongsopit and Greacen 2013), which pays Paper, plastics, foam, glass, metal a premium above the wholesale price of electricity to re- Non-recyclables: 11% newable energy providers in select industries, including Paper, plastics, leather, landfill gas production. rubber, bones, shells, 34% Thailand’s landfills hold major potential for methane Source: Bangkok Metropolitan Administration (2011) production—there are a number of well-managed 45 46 Financing Landfill Gas Projects in Developing Countries sanitary landfills in the country and the composition of waste is heavily organic (BMA 2011). The national energy Project Drivers and Risks in Thailand development plan anticipates municipal solid waste From the project developer perspective, the contributing up to 3 percent of Thailand’s renewable primary project drivers include: electricity by 2021 (Tongsopit 2014). However, achieving this goal requires the right incentives to be aligned at the ●● Strong market for carbon reduction credits appropriate time and, in the case of the Kamphaeng Saen through CDM at the time landfills, it took many timely factors to make the project ●● Relatively inexpensive construction materials financially viable. Nonetheless, the example of investment and labor in the Kamphaeng Saen landfills offers some insight into ●● Feed-in tariffs for renewable power the complex systems that are often required to make ●● Tax incentives for renewable power projects financing LFGE possible in developing country contexts. ●● Expectation of a more stable political situation than neighboring countries 6.2 Deciding to Invest ●● Ability to sign a power-purchase agreement in Kamphaeng Saen East & The primary project risks include: West Landfills ●● Legal enforceability of contracts in Thailand ●● Local climate of humidity/rain causing excess Located about 40 minutes by car outside Nakhon Pathom, leachate Thailand (Group 79 Co., Ltd. 2014), the East and West ●● Realized political unrest Kamphaeng Saen landfill sites are among the largest landfills ●● Permitting uncertainty in the region, taking in approximately 5-7,000 tonnes of waste per day between them. The landfills are owned Sources: Wood (2011), Mariyappan (2014) and managed by two private Thai companies that have contracted with the Bangkok Metropolitan Administration (BMA) (Sasomsub and Charmondusit 2009) to take in the finance and develop projects that both reduce greenhouse area’s trash for over two decades (Chomsurin 1997). gas emissions and produce revenue streams. Not only could Sindicatum bring money to the table, the company was As early as 2003, the owner-operators of the landfills were already an experienced LFGE system developer. They came actively seeking ways to generate revenue from the gas at ready to try a proprietary LFG extraction technology that their waste facilities. Though the local universities had the company developed in China and took into account constructed a few LFG demonstration projects, there was the high organics content of the waste typically generated in a dearth of practical experience with LFG systems in Thai- southeast Asia, as well as the region’s warm, moist climate. land at that time. The owners of Kamphaeng Saen briefly connected with the World Bank in 2003 and began the Partnering with an outside firm was a natural move process of preparing financing for an LFGE system. How- for the landfill owners, as they lacked any experience ever, Bank staff were uncertain about the technical viability with LFG capture and power generation and would, of the project with the resources available in the country therefore, almost assuredly be unable to attract unsecured and ultimately opted not to invest (Mariyappan 2014). or non-recourse financing. From the perspective of an outside developer, the Kamphaeng Saen landfills were Several years later, a UK-based investor/developer called attractive investment options for several reasons, not the Sindicatum Carbon Capital was also shopping for least of which was the government’s renewable energy investment opportunities in the sector. The company was policies. Through the country’s ‘adder’ fee, renewable managing a fund capitalized mainly by institutional investors electricity producers could receive a bonus of about based around climate change, energy, and environmental 8 cents (USD) per kWh above the regular wholesale commodities. With this fund, Sindicatum sought to electricity rate, guaranteed for 7 years (Tongsopit 6. Case Study: Thailand’s Kamphaeng Saen East & West LFGE Projects 47 LFGE systems. The company did not have to manage Major Project Obstacles and Solutions bank loans or other forms of debt but rather, it was able to directly inject equity into the project, expecting to be The Kamphaeng Saen LFGE projects’ major repaid through the sale of (1) electricity onto the local challenges stem largely from the relative newness of the LFG sector in the country. The primary grid and (2) carbon emission reductions credits on the obstacles included: international carbon markets. ●● No in-country experience with engineering or operations & maintenance of LFGE systems, In order to work in-country, Sindicatum created two which required a UK-based team to train a local local subsidiary companies, Bangkok Green Power (for group over the course of months and/or under- the eastern landfill) and PS Natural Energy Co. (for the take maintenance themselves western landfill), which is a standard practice used to shield ●● A lack of available high density polyethylene the assets of parent organizations from liability. The total piping, which had to be imported from the UK, project cost of an estimated US$16.4 million was invested China and the Middle East through local and subsidiary contracting companies who ●● No construction firms had experience installing managed the building and operations of the LFGE plants. LFG pipes and wells, so a team from China had Sindicatum purchased gas rights from the landfill owners to be brought in for 77,500,000 Thai baht each (the equivalent of US$4.6 ●● LFG flares were not supplied in-country and had million in 2009).58 to be sourced from China ●● A political situation that closed the Thai De- Beyond collection and generation infrastructure, the partment of Energy, causing up to two years of landfills also required technical upgrades to the leachate delays in the CDM application process, though capture system, including collection lagoons, a major carbon credits were sold to the voluntary market but necessary expense in the wet climate. Further, the in the interim company was responsible for building grid connections, Sources: Wood (2011), Mariyappan (2014) which meant constructing cables 13 km long for one LFGE system and 15 km for the other. and Greacen 2012). The policies also encouraged For Sindicatum, carbon finance was key to mitigating the country’s utility companies to sign power- some of the financial risk typically associated with purchase agreements with renewable energy providers, developing new energy projects in emerging markets. which give long-term income security to gas producers. Prior to even beginning construction of the LFG system, PPAs, in turn, offer assurance to financiers who might Sindicatum began project preparation materials to submit otherwise see the income earning potential as too risky. to the United Nations under the Clean Development Mechanism (CDM) in order to earn CERs that could be Sindicatum also looked into a similar potential project sold to countries seeking to meet their obligations under in Indonesia, though felt that the political situation in the Kyoto protocol. Pre-selling some of these expected Thailand was more settled and so decided to invest in Kamphaeng Saen. credits generated a portion of the initial capital needed for the initial capital investment. Because the CDM project approval and verification process is time consuming, 6.3 Financing and Developing Sindicatum also sought Gold Standard approval for the the LFGE Systems projects in order to sell on the voluntary market, as well. Often, selling on the voluntary market can generate As a multi-national investor, Sindicatum was largely able revenue quickly while waiting on verification by the to self-finance the development of the Kamphaeng Saen UNFCCC. 48 Financing Landfill Gas Projects in Developing Countries A landfill gas flaring system. 6.4 Project Challenges 6.5 Moving Forward Like all complex financing and construction projects, The current climate for investing in renewable energy developing these LFGE system in Thailand had their is difficult for many firms. As the international price of share of challenges. Engineers with experience in carbon is low, many projects that rely on carbon credits to landfill gas extraction are in short supply in Thailand supplement that revenue streams from selling electricity and the local supply chain for the materials required to the grid are unable to survive. However, Sindicatum to construct LFGE systems is not well developed. As recently signed an agreement with TMB Bank, one of a result, Sindicatum sourced many of their engineers the largest retail banks in Thailand, to begin work on yet and construction materials abroad, hiring a team of another LFG project. As of August 2014, discussions about experienced landfill gas developers from the UK. Further, purchase power agreements with the utility are ongoing because of political protests, the national government— and though carbon finance may not be a huge part of the including the Department of Energy—was shut down expected return, Sindicatum’s mandate includes taking on for a period, resulting in major delays (up to two years) some of the risk of a downturned market. in permitting and in registering CDM. 7 Case Study: Latvia’s Getlini Landfill Gas Project The largest landfill in Latvia, Getlini landfill, has served residents in the city of Riga and the surrounding municipalities since 1972. As part of an effort to improve waste management throughout the country, the landfill was upgraded in 2001-2002 and now produces both electricity and heat—products that are used to offset power costs onsite and to heat a nearby greenhouse. This project highlights how regulatory pressure for landfill upgrading can create a favorable financial incentive structure for landfill gas extraction and utilization. Key components of the project’s success are: ●● Incentives provided by EU environmental regulations ●● Investment from the local city council of existing own-source revenue into the project ●● Co-investment from development aid grants and loans for upfront capital costs and technical assistance from the Global Environment Fund, World Bank, and others ●● Project revenue generation through a combination of electricity sales and heat used in a local greenhouse to produce tomatoes sold at local markets 7.1 Context European states. The World Bank, in collaboration with a consultancy called SWECO, provided technical Following independence from the Soviet Union in 1991, assistance to Latvia and Riga City regarding the the government of Latvia began a process of enacting envi- development of modern sanitary landfills (World Bank ronmental legislation to reduce pollution and contamina- 1997). They assessed the feasibility of remediating and tion. In addition, during the late 1990s, Latvia was in the updating Getlini versus establishing a new dump site and process of applying for European Union (EU) member- concluded that maintaining the Getlini site was feasible ship when the “EU Landfill Directive” was passed, provid- from both economic and environmental protection ing additional regulatory motivation for the upgrading of perspectives. Latvia’s landfills (European Commission 1999). Within this emerging regulatory context was Getlini landfill, the The primary project driver for the Getlini site upgrade largest landfill in the country. Operated continuously since was to reduce groundwater contamination and reduce 1972-73, it was a conventional open pit—a non-sanitary the greenhouse gas emissions of the landfill. Utilization landfill that had been plagued for years with open fires and of LFG for energy or heat, though not the primary concerns of local groundwater and aquafir contamination. driver of the project, was included from the outset as a The site occupies 87 hectares approximately 12 km south- means of recouping investment costs. The overall proj- east of Riga City in lightly populated marshland. At the ect consisted of three major objectives (Getlini EKO b; time of project initiation, the site received approximately Mergner et al 2012): 250,000 tons of waste annually, 80 percent of which was household waste (Getlini EKO b). 1. Reduce groundwater contamination from leachate production. 7.2 Investing in LFGE in Getlini 2. Achieve EU regulatory compliance Landfill 3. Extract landfill gas for energy and/or heat The early 1990s was characterized by intense investment by For the original landfill site, this involved capping the the World Bank in developing newly indepndent Eastern landfill with clay 50 cm thick and installing a leachate 49 50 Financing Landfill Gas Projects in Developing Countries Installation of a horizontal landfill gas collection pipe. collection system. Landfill gas was to be collected from Table 11. Getlini Landfill Power Production the newly capped landfill in addition to the new landfill and CO2 Emissions Reductions cells. Power Production CO2 Equivalent Year (MWh) Converted (Tons) In order to undertake this project, the Latvian government 2002 5,098 18,984 created a new corporation, Getlini EKO Ltd, in whom 2003 17,887 67,200 Riga City Council has an 80 percent stake with the 2004 25,748 96,726 remaining 20 percent split between a nearby municipality and the Latvian Ministry of Environment (World 2005 25,425 95,529 Bank 2003). Power production from the landfill gas 2006 26,331 98,931 commenced in 2002 and had increased by nearly six-fold 2007 27,361 102,795 by 2011 (Getlini EKO 2012). 2008 28,742 107,982 2009 31,130 116,949 2010 31,099 116,844 2011 31,295 117,620 Source: Zaļoksnis 7. Case Study: Latvia’s Getlini Landfill Gas Project 51 7.3 Financing and Revenue Additionally, the company was initially unable to successfully monetize a significant portion of the excess Generation heat produced by the generators even after using it for all on-site buildings. Because there was not nearby industry As opposed to many other projects described in this report, interested in making an off-take arrangement, the unusual the Getlini Landfill project was not primarily focused on decision was made to install a series of greenhouses on the developing LFGE. Rather, within the context of required landfill site to make use of this heat to grow tomatoes. leachate reduction and landfill capping, landfill gas offered Begun in 2011, the greenhouse effort is on track to a revenue generation system to be used to help service the produce 165 tons of tomatoes this year (Breiksa 2014). outstanding debt. Getlini EKO obtained a number of funding sources. The 7.4 Project Challenges total funds required to complete the project was $25.21 million, approximately $5 million of which was earmarked From the perspective of financing LFGE projects, the for debt service (Getlini EKO b). The financiers were: difficulties that Getlini Eko has faced in obtaining the favorable electricity rates are perhaps most instructive. ■■ World Bank Loan: US$7.95 million The primary take-away is that basing a financing model ■■ GEF grant: US$5.12 million on government subsidies that are not guaranteed rather ■■ SIDA grant: US$1.5 million than prevailing market prices contains significant risk. ■■ Riga city council investment: US$6 million According to the World Bank, significant disagreements ■■ Getlini EKO investment: US$4.64 million between the municipal shareholders—Riga City Council The LFG processing system initially consisted of the land- and Stopini Pagast—as well as lack of initial agreement fill gas treatment plant, gas pumping station and five Jen- with Getlini EKO on some key project components were bacher gas engines that each have a power capacity of 1.05 responsible for the project delays that jeopardized the MW and heat capacity of 1.23 MW (Mergner et al 2012). favorable electricity purchase rates. A sixth engine was added in 2009. Each of these cost ap- proximately EUR1 million (Breiksa 2014). The project The project also has encountered some technical challenges developers did not apply for CER credits to offset the in the form of significant chemical residue from siloxanes, costs of the renovation, as is common for LFGE projects. hydrogen sulfide, chlorine and fluorine that has damaged various components of the engine and generation system Getlini EKO pursued electricity sales and in 2011, requiring the installation of new gas filters (Getlini EKO reportedly earned EUR5.6 million selling electricity onto 2012). the grid. Initially, the company negotiated a 2-year power- purchase agreement with the local electric utility with a premium price for green power (World Bank 2004). 7.5 Moving Forward Under this initial agreement, the sale price for electricity was US$52/MWh—about US$12 higher than standard The Getlini site continues to receive waste at the rate of pricing (World Bank 2004). However, the project was approximately 300-400k tons per year. It has been pro- delayed and the agreement expired. In the second round ducing 2000-2200 m3/hour of LFG with an average of negotiations, the power utility did not provide the methane content of 52-54 percent. The company antici- premium. The Latvian parliament did subsequently pass pates continuing to produce electricity at a rate of 35,000 a law establishing higher payments for green electricity MWh through at least 2020. The Getlini Eko company, producers, but the law was not made retroactive (Mergner created for this project, now offers consulting services on et al 2012; EMCC 2013). Nonetheless, the income from sanitary landfill management and LFG extraction. Addi- energy sales allowed Getlini EKO to subsidize the rest of tionally, this case study highlights that an LFGE project the landfill operation, keeping tipping fees at 2007 levels need not be a stand-alone endeavor but is sometimes used (Mergner et al 2012). to add value to a larger landfill upgrade project. Landfill gas pipes aesthetically masked as palm trees at the Sudokwon landfill near Seoul, Korea. 8. Case Study: Brazil’s Santa Rosa Landfill Flaring Project 53 8 Case Study: Brazil’s Santa Rosa Landfill Flaring Project Landfill gas collection and flaring systems were installed in 2012 at Central de Tratamiento de Residuos (CTR) Santa Rosa, Brazil’s largest landfill located within the state of Rio. The project was initially conceptualized by the landfill developer and operator, a private concessionaire. Lacking expertise, the private operator sought partners with greater technical know-how and access to carbon finance. The financing, technical assistance, and project oversight were facilitated by a large Brazilian semi-private bank, Caixa Economica Federal, using funds from a World Bank loan coupled with domestic funding earmarked for municipal solid waste projects. Key points are as follows: ●● Brazil lacked domestic regulatory or financial incentives for LFG collection at the time of this flaring project’s installation ●● Financing for the project flowed from a semi-private national bank acting as a government representative for a development project to the private landfill developer ●● Carbon finance through the UNFCCC and support from a bank with international market access were critical to the development of this project ●● Despite initial plans to do so, Caixa has not yet replicated this model in other landfills 8.1 Context National Waste Management Law and Brazil’s National Energy Plan 2030 both provided general incentives for The CTR Santa Rosa landfill is one of the largest land- landfill improvements and reduced pollution. However, fills in South America, occupying over 2.2 million nationally the majority of landfills were small and man- square meters. It is a modern sanitary landfill with lin- aged by local municipalities highly constrained in their ings, leachate collection and management, compaction ability to make significant infrastructure investments. and coverings. It is situated 9 km from the city center of Also at the time of construction of the landfill, the only Seropedica, west of Rio de Janeiro. The landfill was con- LFG extraction systems in Brazil were financed with CER structed to receive waste from the greater Rio de Janeiro credits and undertaken by private landfill concessions, a region as well as two nearby municipalities. It was devel- relatively new development in Brazil (UNFCCC 2013). oped by a private consortium called Ciclus Ambiental59 In addition, due to the lack of any supportive pricing or as a concession from Rio de Janeiro’s solid waste compa- financing mechanisms within Brazil, even the extraction ny. The initial contractual term is 15 years with options and direct sale of LFG or energy derived from LFG was to extend and the landfill itself has an initial operating not considered profitable for a corporation without the license of 18 years. The landfill began receiving waste in additional revenue provided by carbon finance. 2011 but, recognizing the potential uses of landfill gas, Ciclus sought a partner with expertise and market access to carbon finance to help develop landfill gas operations 8.2 Infrastructure Costs and (Drutra 2013; Ciclus Ambiental; World Bank Carbon Financing Finance Unit). With the assistance of partners, as discussed below, the At the time of project initiation, there were no Brazilian landfill gas collection and flaring system at Santa Rosa laws or regulations directly addressing the flaring or col- landfill became operational in November 2012. The lection of landfill gas (Bureau Veritas 2012). The 2010 system consists of a networked series of vertical and 54 Financing Landfill Gas Projects in Developing Countries horizontal gas extraction wells, condensate extraction, to provide blended sources of financing that use future LFG pre-treatment and two flares. The first flare went live carbon revenues either as partial loan guarantees or to in 2012, while the second was added in 2013. Together, reduce future interest rate payments in order to make the flares can burn 7,500 m3 per hour of landfill gas. The the financing more enticing to private firms (UNFCCC project partners intend to build either LFGE systems or 2013). purified LFG piping systems to maximize the usefulness of the extracted LFG, but as of the most recent reporting The CTR Santa Rosa landfill was thus the first Component period only flaring is being conducted (UNFCCC 2015). Project Activity, or CPA, to be implemented as a component of the Caixa PoA (UNFCCC 2013). Caixa The initial investment costs for the LFG collection and provided technical training to Ciclus staff and continues flaring infrastructure were approximately US$16.6 to play an active role in reporting carbon emissions million, though the total project costs include insurance, reductions to the UNFCCC and overseeing the progress administration and other costs that are associated with of efforts to expand beyond LFG flaring. project development. In 2014, the expected IRR was listed as 3.4 percent. 8.3 Progress and Expectations The development of the Santa Rosa landfill fortunately coincided with the implementation of a large-scale The project was registered with the UNFCCC in May Brazilian development project focused on municipal 2012 and flaring began that November. The second solid waste and carbon finance. In 2010, the World flare came on-line in August, 2013. During its first Bank approved a five-year US$50 million loan to Brazil’s monitoring period through December 2013, flaring designated recipient and coordinator, Caixa Economica activities achieved GHG emission reductions of 132,000 Federal. Caixa is a large, semi-private Brazilian bank with tons of CO2, approximately one quarter of the predicted experience implementing other large-scale government value in the initial project design. GHG reductions lending and disbursement projects. Caixa subsequently increased slightly over 2014 but remained approximately created a large-scale Program of Activities (PoA) with the one quarter of the anticipated value (UNFCC 2015). UNFCCC CDM to establish a framework for carbon The crediting period is for seven years beginning finance for projects within the program’s scope. 2012, with the first CER received by Caixa in 2014 Caixa is the Coordinating/Managing Entity responsible (Caixa Economica Federal 2014). Though the terms for all coordination, financial and technical assistance, of the CPA state Ciclus’ intent to develop electricity oversight, validation and verification of carbon emissions. generation or LFG cleaning and direct sales, neither had The PoA is a large-scale agreement that authorizes Caixa been developed or were in process as of this last 2014 to facilitate LFG projects involving flaring, combustion monitoring period. This is notable, given the UNFCCC for heat, energy generation, or direct piping of LFG for analysis within the project documents indicating that for sale. Caixa also specifies that, given its analysis of the such a project to be economically viable, it would need Brazilian LFG market, it does not believe that any large- both carbon finance and the income from energy or scale LFG projects were likely to be undertaken without LFG sales. In addition, the Santa Rosa landfill remains both technical assistance and financing facilitated by the only LFG project as yet created under the large-scale carbon markets. The PoA was established to enable Caixa PoA being administered by Caixa. 7. Case Study: Latvia’s Getlini Landfill Gas Project 55 Table 12. Initial Costs for Santa Rosa LFG Collection and Flaring Systems Infrastructure (2014) Item/Activity Cost (USD) LFG collection system (Drilling + Pipeline Network) $4,530,154 Vertical Wells $6,337,778 Leachate Pump System $2,732,472 Welding and assembly $1,120,000 Flare and Blower System $1,855,000 Total collection and flare infrastructure $16,575,404 Annual Operation & Maintenance $288,427 Source: UNFCCC (March 2014) A leachate cleanout manhole at the Ann Street Landfill in Cumberland County, North Carolina. Regular maintenance of the leachate system is important for the success of a landfill gas project. 9. Appendices 57 9 Appendix A. Timing a Landfill Gas Project Box 14. Timing a Landfill Gas Project Because the breakdown of organic waste into methane is a natural process dependent on a host of site-specific factors, there is significant spatial and temporal variability in landfill gas production. Failure to take this variability into account when calculating the potential biogas reserves leads to errors in system design and puts investments at risk. Tapping the landfill prior to its peak methane production years allows the project to have the greatest impact, both environmentally and in terms of revenue generation. Ascertaining the gas production potential of a landfill and developing a temporal production curve is the first step in deciding whether to take on an LFG project. Landfills or landfill cells begin to produce methane gas as early as the first year organic waste is deposited and may continue to generate methane for 10 to 60 years. In well-managed sanitary landfills, peak gas production typically occurs within 10 years of deposit, though gas will continue to be emitted over 20 years or more. The initial increase and then decline in gas production are gradual processes and their duration depends largely on: ●● Quantity and composition of waste ●● Cover and compaction techniques used by the landfill ●● Age of the deposit operators ●● Annual rainfall/ landfill permeability ●● Landfill’s oxygen content and pH levels ●● Moisture and local climate ●● Availability of nutrients within the waste Landfill Gas Generation Curves (Hypothetical) 25,000 20,000 LFG Flow (m3/hr) 15,000 10,000 5,000 0 1991 1996 2001 2006 2011 2016 2021 2026 2031 2036 2041 2046 2051 Estimated Recoverable LFG Total LFG Generation Sources: U.S. EPA 2013; McBean et al 1995; U.S. DHHS 2001; Model for graph from U.S. EPA (2013) Appendix B. Project Partnerships LFG operations require the coordination of public and project partnerships are structured. The primary project private actors to manage finance, construction, design developers—those with the greatest stake in the out- and engineering, and regulatory aspects of the project. come—are usually local governments, private landfill Though not all actors are directly involved in acquiring owner-operators, public utilities, end-users of energy, project financing, all participants may have a role in tak- outside third-party developers, or some combination of ing on some project risk, as described in Chapter 5. In these (Godlove et al 2010). general, the following participants are involved in the de- velopment of an LFG project: A combination of each partner’s material support for the project and exposure to downside risk (the likelihood of ●● Municipal government or landfill owner losing money) or upside risk (reasonable expectations of ●● Regulatory bodies profit or other material gain) (OECD 2010) will deter- ●● Landfill operator or gas-rights owner mine how they are compensated. Different implemen- ●● Electricity or gas off-taker (public utility, local industry, tation structures will require different compensation etc.) approaches for each participant, as described in the next ●● Engineer or facility designer, construction firm, and section. These approaches are highly variable from project equipment manufacturer to project. However, under each of the four owner-part- ●● Equity and/or debt holders, including commercial nership models described in box 15, the landfill owner banks or bond holders (public or private) will most likely receive compensation ●● Loan guarantors, such as international organizations or in the form of one or more of the following: national government ●● Community liaison or participation coordinator ●● Land-lease fees and/or gas rights royalties ●● Legal advisor ●● Avoided cost of landfill upgrading to meet regulatory requirements Structuring the project partnerships, including the own- ●● Avoided energy expenditure if the LFG or its product ership of various parts of the project (e.g., establishing (electricity) is sold to the landfill owner at a price lower gas rights, access rights, long-term operations respon- than other available options sibility) should be among the initial considerations in ●● A percentage of gross revenue from the sale of power undertaking an LFG project. The ability of each stake- ●● A percentage of net revenue over the lifetime of the holder to manage aspects of the project, as well as raise project funds and take on risk will largely determine how the ●● Tax deductions or credits 58 9. Appendices 59 Box 15. Ownership-Partnership Models by Primary Developer The U.S. Environmental Protection Agency’s Landfill Methane Outreach Program (LMOP) identifies four ownership/ partnership structures that are typically used in LFG projects. Landfill owner A conventional landfill owner/operator project involves self-financing and managing development /operator and operations in the absences of a third-party developer but usually with outside technical financed consultation for the design, engineering, and construction of the plant. End-user or The end-user (e.g., industry) or a public utility opting to secure a renewable or more reliable public utility source of energy may self-finance and operate a LFG system. In this model, a municipality and financed user may share some costs, but the end-user takes on financing and operation risk. Third-party An outside developer finances, manages, and operates a project for a profit. This is sometimes developer a build-own-operate (BOO) model and sometimes a build-own-operate-transfer (BOOT) model if financed ownership and operational responsibilities remit to the landfill owner after a specified period. Hybrid or A combination of owners, end users, and developers financing, constructing, and operating. turnkey For example, in a design-build model, an owner might retain ownership of the project, while a financing developer takes on construction/financing risk in return for profit-sharing. Source: Godlove, Ganguli, and Singleton (2010); Terraza and Willumsen (2009/10) Appendix C. Selling Products of LFG: Frequently-Used Contracts Types There are a handful of contractual off-take arrangements natural gas, though there may be negotiations around that are used in LFG projects: gas transmission infrastructure and maintaining stan- dards of purification. Electricity off-take agreements 1) Projects that flare gas or generates electricity and/or provide a consistent and predictable revenue stream direct-use fuel have the potential to generate funds and are viewed as secure by investors. However, for through carbon offset contracts, depending where electricity generators, an interconnection agreement the project is located and what type of international should be negotiated carefully as the costs associated or regional carbon markets cover it. Purchase agree- with connecting to an electric grid (including time ments for emissions reduction credits can be made via investment for LFG staff) may be substantial and pro- voluntary or compliance markets before a project has hibitive. begun operations. For example, an Emissions Reduc- tion Purchase Agreement (ERPA) can be made be- Within direct-use contracts or PPAs, the price of the gas tween a project owner and off-taker under the Kyoto may be fixed or indexed to the price of other fuels. Fixed Protocol to sell future emissions reduction credits. If price off-take arrangements establish a price for gas paid the potential emissions reduction is small, these may to the producer for a specified period of time (may be be sold to a broker or an aggregator. adjusted for inflation). Indexed price arrangements track LFG with the price of natural gas, though the price is typ- 2) Direct-use contracts are typically made directly with ically 20-50 percent less (U.S. EPA 2010). Indexed price an off-taker located near to the landfill (e.g., an indus- contracts are riskier than fixed price because of the vola- trial user that adds LFG to its fuel mix), rather than through a utility. Direct-use gas is often less process tility in natural gas prices, but they can be put in place gas (lower grade) than pipeline-quality gas. This type with floor/ceiling prices to protect both the seller and the of gas is typically less expensive than natural gas, as buyer. it offers lower thermal value and may require more equipment maintenance due to impurities in the gas Within each of these contracts, financial responsibilities (U.S. EPA 2010). for building the piping infrastructure to transport gas, contingencies for unexpected outages, and responsibility 3) Both electricity and gas can be sold via a Power Pur- for maintenance, and ownership of emissions reductions chase Agreement (PPA) with local utilities, direct or other attributes should be clearly spelled out. As in oth- power purchasers, or any number of other distributed er agreements, ownership of emissions reductions or other energy brokers, depending on the make-up of local attributes, contingencies for outages, and responsibility energy markets. Typically utilities require highly puri- for purchasing/installing and monitoring transmission fied gas. High-grade gas should receive a price equal to equipment must be identified early in the project. 60 Appendix D. Revenue Sharing Among Project Partners Revenue generated from off-take agreements is divided 10 to 30 percent, varying largely based on the relative between debt repayment and among project stakehold- bargaining power of project participants (Batiste et al ers based on a negotiated revenue-division profile. Listed 2010). below are some compensation approaches that have been ●● Indexed price or minimum guaranteed royalties. A landfill used among project stakeholders in hybrid ownership owner or holder of gas-rights may sell a developer the models. These may be used in combination within a part- use of gas based on a price indexed against the prevailing nership agreement, when appropriate: natural gas rates or the royalties may be a minimum guaranteed amount with a negotiated percent of ●● Fixed or recurring development lease fee. A landfill owner may charge a developer a lump-sum fee during revenue when revenue is above a certain threshold. construction for the rights to enter and use the landfill. ●● Sharing tax benefit or renewable energy credits. If tax They also may charge a monthly or annual fee for these benefits are available based on the environmental rights. The timing of these payments may require up- attributes of a project, these can sometimes be shared front liquidity on the part of the developer. between the owner of the landfill and the project ●● Fixed or percentage royalties. A landfill owner or the developer (e.g., one party retains the state or local rights holder of gas-rights may lease or sell the right to extract/ while the other receives the federal or national-level sell the gas to a developer. Royalties paid to the owner benefits), though this largely depends on the tax law of a may be a fixed agreed fee or a percentage of profits specific locality. Similarly, landfill owners and developers from gas sales. An informal survey of LFGE projects in may negotiate a split of profits (e.g., an 80/20 split) from the U.S. found that the royalty payments ranged from the sale of voluntary emissions reduction credits. 61 Appendix E. Pooled Development Funds Box 16. Pooled Debt Instrument in Tamil Nadu, India The Tamil Nadu Urban Development Fund aims to help local governments in Tamil Nadu, India access finance for public infrastructure, including water, sewage, and solid waste. In 2002, the Fund helped 13 small- and medium-size urban local bodies (ULBs) come together to access bond funding for water and sanitation projects. Alone, none of these local bodies could afford the transaction costs associated with tendering a bond. However, when organized together under Fund’s umbrella, the costs were spread among all parties and the credit risk was diversified among stronger and weaker ULBs, making a bond issue possible. The Fund used a structured bond in which each ULB transferred a tenth of its annual repayment commitment into an independent escrow account that took priority over all other financial obligations. A separate fund devoted to servicing the bond was invested in low-risk securities. USAID provided a 50 percent guarantee and the state government guaranteed the remaining principal and interest. With these credit enhancements, both Fitch and the Indian Credit Rating Agency deemed the pooled debt instrument safe for investment. With the technical assistance of national-level financial institutions, the World Bank and USAID, they were able to successfully issue a 15-year bond. Though the municipal governments would have had a 12 percent interest rate from other sources, the bond coupon—or interest rate—was 9.2 percent. This was the first bond acquired through pooled financing in India and it set a precedent that has in subsequent years led to a stronger overall bond market in the country, including a significant increase in bond tenure throughout. Source: U.S. Department of Commerce (2008), USAID (2009), Alam (2010) 62 Appendix F. Baseline Study The following list outlines the key points to be assessed in a ●● Identify potential buyers of the power (or heat) produced baseline study for an LFG project. It is sourced from the World and the distance to distribution networks, whether an Bank’s 1999 “Guidance Note on Recuperation of Landfill Gas electric power grid or heating facility (industry or district from Municipal Solid Waste Landfills” by Lars Mikkel Johan- heating). After refinement, the LFG could potentially be con- nessen. verted to natural gas and sold to a gas utility. Before considering commercial recovery of LFG, a baseline ●● Assess the potential energy buyers’ willingness to enter into feasibility study should: a long-term contract (not shorter than 10 years) for buying power. ●● Assess the waste composition, with an indication of the ex- pected proportion of organic components, their biological ●● Determine the sales price for the energy to be sold, the half-life,60 moisture content, and concentrations of hazard- conditions for selling energy, and the means for securing ous materials. It is important to determine the amount and selling prices. type of materials that could be hazardous, or those that will ●● Assess private partnerships’ involvement in commercial re- inhibit biological activity in the waste (e.g., large quantities covery of the LFG. of gypsum). ●● Calculate the feasibility of LFG recovery, where environ- ●● Compute and predict the annual LFG yield and the re- mental benefits (e.g., reduction of greenhouse gases, re- duction over time, using the organic half-life determined placement of fossil fuel) may be included. above. Predictions of LFG generation should also take into ●● Review the socioeconomic implications of removing scaven- consideration the total amount of waste disposed of over gers from the landfill. A bioreactor landfill cannot operate time. If the computed LFG generation proves feasible61 for with scavengers on the landfill site, since extensive waste existing landfills, the results may be verified by test pumping compaction is required and fires on the landfill will interfere from several wells on-site over an appropriate time period with the bioreactions. (at least 2 months) to level out natural fluctuations such as atmospheric pressure. ●● Determine the anticipated methane content in the LFG and the LFG calorific value and calculate the potential power to be produced.62 63 Appendix G. Risk Management Framework There is an extensive literature on risk management in construction projects. For example, this diagram illus- Risk Management Procedure trates a generic risk management process, as outlined by Karim et al (2012). The steps are as follows: Make risk management strategy Developing a risk management strategy the essential first step in undertaking any construction project. Identify the risk Identifying the risk is next. According to the authors, can be done by “brainstorming, prompt list, checklist, work breakdown structure, Delphi technique, or by ask- ing expert.” Assess the risk Next is assessing the risk to evaluate each risk and its effects on the project. The authors say, risk “can be evaluated based on the pos- Apply risk matrix sibility of risk occurrence and severity of its impact by Update risk developing risk matrix.” assessment Next, risk must be negotiated between the stakeholders Negotiate the risk involved in the project. They authors say this “normally takes place after signing the contract. This is the most important step as it reflects the risk management assess- ment updates continuously.” Assess the risk After updating the assessment, the risk should be divid- ed among the project stakeholders or partners who are best equipped to handle it. Allocate the risk Treating the risk is next. One can find ways to “avoid, reduce, share, transfer, defer, mitigate, contingence, in- surance or accept the risk.” Treat the risk The last step is monitoring and controlling the risk through some sort of risk reporting mechanism—for example, “listing the details associated with risk such Monitor and report as type of risk, its probability of occurrences, its impact on project, possible treatment.” Monitoring of risk is an Source: Karim et al (2012) adapted from Li et al (2010) ongoing process throughout the lifetime of the project. 64 Appendix H. Types of Private Participation in Infrastructure Box 17. Types of Private Participation in Infrastructure Though a PPP arrangement implies each party has both an ownership commitment and financial stake in operations, the level of private or public control exists on a continuum and must be negotiated within each project. Engel et al (2010) divides private participation in infrastructure into three categories (public provision, concession/PPPs, and privatization) whereas Guasch (2004) sub-divides these categories into 12 types of private participation—ranging from total public provision with some contracted aspects to various hybrid public/private structures to full privatization. The demarcation of the different ownership categories is not strict. Depending on their characteristics, for example, some management contracts may fit better in the PPP category than the public provision category. The list below is not exhaustive, but simply an illustration of the range of options. Ownership Grouping Private Participation N/A–Public Supply and Operation Outsourcing Public Provision Greater public Corporatization & Performance Agreement control Management Contracts Leasing Franchise Concession/PPPs Concession Build-Operate-Transfer (BOT) Build-Own-Operate (BOO) Greater private control Divestiture by License Privatization Divestiture by Sale Private Supply and Operation Source: Guasch (2004); Engel et al (2010) 65 66 Financing Landfill Gas Projects in Developing Countries Appendix I. Responsibilities of Private Sector Participants in LFGE Table 13. PPPs: Responsibilities of Private Sector Participants in LFGE Projects Project Ownership Primarily Public Public & Private Primarily Private ●● Management contracts Types of ●● O&M contracts ●● DBB ●● BOO private ●● Performance contracts ●● DB ●● Divestiture sector ●● DBO/DBFO involvement ●● Service contract ●● BOT/BOOT ●● Lease agreements ●● Financing capital expenditure, often ●● Financing capital ●● Maintaining responsibility expenditure for the project, as negotiated ●● Maintaining full with private participants responsibility for the project ●● Procuring contractors to Public ●● Regulatory and operations fulfill essential roles (e.g., sector role engineering) ●● Tax and policy incentives ●● Procuring contractors to fulfill essential roles (e.g., ●● Tendering and negotiating engineering) complex contracts with PSPs ●● Regulatory ●● Assisting with permitting ●● Regulatory Tax and policy incentives ●● Fulfill terms of contracts ●● Often take on design, con- ●● Fulfill terms of contracts struction, maintenance of equipment ●● Typically design, ●● Take on some design and ●● Full ownership stake, including Private construction, maintenance of construction risk financing, design, engineering, sector role equipment ●● In the case of lease or procurement ●● Take on some design and DBFO, take on finance risk construction risk or primary responsibility for acquiring adequate financ- ing ●● Municipal or national government funds (bonds, ●● Tax exemptions grant funding, etc.) ●● Municipal or national ●● Government subsidies ●● IFI debt or finance government funds (muni ●● Private project developers bonds, grant funding, etc.) ●● Tax exemptions Sources of ●● Equipment vendors Government subsidies ●● Traditional commercial debt finance or ●● ●● Investment banks or assistance IFI debt or finance ●● Private project developers ●● institutional investors Tax exemptions ●● Equipment vendors ●● ●● Private equity firms Traditional commercial debt ●● Investment banks or ●● ●● Venture capital firms institutional investors ●● Institutional investors ●● Royalties from lease of project/environmental assets 9. Appendices 67 Table 13. PPPs: Responsibilities of Private Sector Participants in LFGE Projects (cont.) Project Ownership Primarily Public Public & Private Primarily Private ●● Government or landfill owner maintain some level of ●● Full risk and capital control of project with some ●● Government or landfill owner expenditure taken on by risk transfer to private sector maintains control of project private sector ●● Some revenue or ownership ●● Revenue reverts to ●● Implementer with expertise will reverts to government or government/landfill owner Public sector able to facilitate landfill owner at some point ●● Advantages ●● Some transfer of design and in the project lifecycle production of public good construction risk without paying for full project ●● Full or partial transfer of ●● Draws on expertise from design, construction risk, ●● Efficient use of capital private sector financial risk ●● No public responsibility for ●● Potential for tax exemption ●● Draws on expertise from interconnection and off-take private sector agreements ●● Potential for tax exemption ●● Potential for profit motivation ●● LFGE projects often require to come in conflict with some form of subsidy expectation of public goods ●● No private investment provision ●● Potential for profit motivation Government or landfill owner to come in conflict with ●● ●● Often extensive tendering take on most project risk, expectation of public goods process Drawbacks including responsibility for provision ●● Often requires public subsidy capital expenditure ●● Public sees smaller share or no (e.g., credit guarantees) ●● Potentially limited expertise share of revenue ●● PPPs entail lesser control by in the sector ●● Little accountability to public project owner ●● Long-term commitment to ●● Cost recovery not always private sector possible Design/ ●● Private sector (fee contract ●● Private sector (fee contract) ●● Private sector engineering or PPP) ●● Private sector (fee contract Construction ●● Private sector (fee contract) ●● Private sector or PPP) ●● Largely public: management contracts, O&M contracts, performance contracts, DBO, ●● Private sector responsibility, Finance ●● Public sector responsibility BOT often augmented by public ●● Largely private: Lease policies agreements, concession contracts ●● Public or private (fee ●● Public or private, depending O&M contracted), depending on ●● Private sector on arrangement arrangement 68 Financing Landfill Gas Projects in Developing Countries Appendix J. Proposal Security Clause as a Pre-Screening Tool Box 18. Proposal Security Clause as a Pre-Screening Tool Proposal securities are sometimes used to pre-screen for qualified engineering, procurement, and construction companies. In order to save time and limit the number of proposals from inexperienced contractors, governments or landfill owners will sometimes require that proposals for various aspects of an LFG project are securitized with a bond or cash. Those companies that wish to bid on the engineering, procurement, and construction aspects of an LFG project are required to submit a sum of money with their proposal. If a proposal is selected, the bond or check will only be returned if the landfill owner (local government, in this case) and the contractor can come to an agreement on the contracting of the task. This helps ensure from the outset that the contracting company has the capacity to see a proposal through to contracting. Companies whose proposals are not selected receive their security back. Below is an example of specific language used by officials in the southeastern U.S. in a recent Request for Proposals (RFP). 9. Proposal Security A proposal bond or certified check in the amount of $30,000 is required to accompany each proposal. Bonds or checks shall be made payable, without condition, to Wake County. Wake County reserves the right to retain proposal security of all reasonable proposals until 180 days after proposals are due. Proposal security for proposals deemed unreasonable shall be returned immediately. If a Prospective Bidder withdraws his proposal, fails to negotiate in good faith with the County, or if after the County and the Prospective Bidder agree on terms of a contract, the Prospective Bidder fails to sign a contract and provide the necessary bonds within 14 days after a copy of the contract has been presented to him, the entire amount of proposal security shall be forfeited to Wake County. Such forfeiture shall not constitute the limit of the respondent’s liability. Source: Roberson (2014), Wake County (2014) 9. Appendices 69 Appendix K. Estimated Emissions by Municipal Solid Waste Activity The following is a comparison of carbon output (CO2e) to this report, Sustainable Financing and Policy Models for per ton of waste based on the waste composition in Rio de Municipal Composting. Janiero, Brazil. A similar chart appears in the companion Table 14. Estimated Emissions by Disposal Method Emissions (million tonnes Disposal Method CO2e) Landfill with no methane capture 5.2 Open dump (unmanaged, >5m deep) 4.6 Recycling all paper/cardboard, metal, glass, and plastic (assuming remaining waste is sent to landfill) 2.9 Composting all food waste, yard waste, and wood (assuming remaining waste is sent to landfill) 2.9 Landfill with 50% methane capture 2.6 Anaerobic digestion of all food waste, yard waste, and wood (assuming remaining waste is sent to landfill) 2.6 Open burning 1.7 Incineration (continuous with stoker) 1.5 Composting all food waste, yard waste, and wood 5.2 Source: CURB 2016 Notes on methodology: ■■ These emissions estimates were calculated using the Other: 2% ●● tool CURB: Climate Action for Urban Sustainability Paper/cardboard: 18% ●● developed by the World Bank in partnership with ●● Glass: 7% AECOM Consulting, Bloomberg Philanthropies, and ●● Metal: 2% the C40 Cities Climate Leadership Group ●● Rubber and leather: 1% ●● Wood 1% ■■ Emissions are primarily calculated using the Intergov- ■■ Any residual waste that cannot be processed using ernmental Panel on Climate Change methodologies the outlined method was assumed to be disposed in a ■■ Emissions are calculated for a proxy city: Rio de Janiero, landfill with no methane collection Brazil using waste composition and generation data collected by the World Bank in 2014. 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Develop Landfill Gas to Energy Projects in Latin America and the Caribbean Region–Best Practice, Dissemination, and Future Program. . World Bank (2004). “Handbook for the Preparation of Landfill Gas to Energy Projects in Latin America and the Caribbean.” Prepared for ESMAP by Cones- toga-Rovers and Associates. Ref. No 019399(6). . Endnotes 1 Municipal solid waste is the third largest source hu- 9 A standard LFG system involves perforated gas wells man-generated methane. Source: CCAC UNEP Sec- installed vertically or horizontally in a covered waste retariat (2012) pile that has at least one gas-impermeable layer. An 2 Readers with limited knowledge of LFG systems may extraction blower forces gas into a system that – de- refer to any of several LFG project development hand- pending on the use of the gas – may separate moisture, books cited throughout this report. condense or compress gas, scrub impurities, and oth- erwise prepare it for use. 3 It should be noted that LFG systems do not ever col- lect all the gas generated by landfills. These systems can 10 Provided those goals are predicated on what is possi- lose 30-50% of the overall gas produced depending on ble given the existing landfill conditions, ownership structure, and legal/social/financial/technological con- the type of cap. If a landfill has a have a geo-membrane ditions. liner cap, a landfill can get down to about 10% lost gas, but if it has an earth/clay cap, it can lose over half 11 Financing, as opposed to funding, implies investment the gas. Based on comments by Farouk Banna (2016). with the expectation of repayment and some return. 4 “Organic” or “organic waste” refers to plant or animal 12 For further discussion of dump closure, see: Interna- based waste, as opposed to synthetic materials, which tional Solid Waste Association (2007) are easily broken down by environmental bacteria. 13 For a more extensive discussion of flaring, see: Scottish 5 In closed or sealed landfills, bacteria, which utilize ox- Environment Protection Agency (2002). ygen will quickly deplete the supply of the gas. The 14 There are a number of approaches to baseline feasibili- resultant oxygen free, or “anaerobic” environment, ty studies, though the model outlined here focuses on promotes the proliferation of bacteria, which thrive financing. See Appendix F for another example of a in oxygen free environments, some of which release general baseline feasibility assessment. methane gas as a byproduct of their metabolism. 15 For example, the U.S. EPA offers seven country-spe- 6 LFG is typically 50-56% methane with the remainder cific gas modeling spreadsheets for regions around the made up of carbon dioxide (~50%) and trace amounts world. of nitrogen, oxygen, hydrogen sulfide, hydrogen and 16 LFGcost-Web is a comprehensive Excel-based tool other non-methane organic compounds. that offers a preliminary analysis of project financial 7 Research findings are varied. See: Robertson, Thomas feasibility. The cost estimates from this tool are based and Josh Dunbar. (Sept 2005). “Guidance for Evaluat- on American prices and so are not applicable to most ing Landfill Gas Emissions from Closed or Abandoned scenarios outside the U.S. However, using the tool is Facilities.” US EPA. .; Hamer, Geoffrey (Dec feasibility assessment and its component parts. 2003). “Solid waste treatment and disposal: effects 17 This model originated in LMOP’s 1996 landfill gas on public health and environmental safety.” Biotech- project development handbook (U.S. EPA 1996). It nology Advances. Vol. 22, Iss. 1-2, p 71-9.; Vrijheid, was updated and simplified it in a February 2015 revi- M. (Mar 2000). “Health effects of residence near haz- sion of the handbook. ardous waste landfill sites: a review of epidemiologic literature.” Environmental Health Perspectives. 108 18 For more information, Appendix B describes contracts (Suppl 1), p 101-12.; State of New York Department types frequently-used when selling LFG or energy. of Public Health (2010). “Important Things to Know 19 LFG feasibility studies are often available in public about Landfill Gas.” . found in Attachment 2 of the Sioux Falls study under- 8 Combustion converts methane into water and carbon taken in 2006. Source: R.W. Beck (2006) dioxide, a less potent greenhouse gas. 20 It may also, however, be problematic if the sources of 78 Endnotes 79 financing for a project are not sufficiently diversified. 30 For example, see the New Hampshire Municipal Bond Investors may see a project that is heavily underpinned Bank’s pooled municipal bonding program: . policy risk – that is, there is potential that a change 31 For an example, see Appendix E. in policy or a downturn in some government revenue streams could financially disable the project. 32 For more on designing a transfer system, see: Bahl (April 2000) 21 For example, in Ethiopia, 90 percent of the proceeds from public land-lease must go toward financing infra- 33 Nonetheless, fiscal constraints in the public sectors are structure investment. Source: Peterson (2009) such that the World Bank estimates the private sector will need to provide up to 85 percent of the capital 22 It is not always the case that LFG systems improve finance for green infrastructure projects. Source: Bai- the state of the landfill, particularly if they are poorly ettie et al (2012) managed, lack leachate control systems, fail to adhere to odor control regulations, etc. 34 Bahl and Bird (2013) stress the importance of a sound public finance system in the creation of an efficient 23 A 2013 review of private participation in infrastructure private market, stating that though commercial bor- in developing countries found that, with the exception rowing and PPPs “may have important roles to play in of China’s water sector, contracts are overwhelming- developing adequate infrastructure in some countries, ly tendered by the national government, as opposed they can neither substitute for a sound local revenue to being led by sub-sovereigns. See: Jett and Verink system nor realize their full potential in the absence of (2013) such a system.” 24 Corporations or multinationals also issue bonds, 35 In particular, lenders will verify the cash coverage, or though those bonds are not discussed at length here. amount of funding the project expects beyond the 25 Conventional wisdom holds that municipal borrow- amount needed to service debt. The coverage is often ing should be used strictly for capital investments that expected to be in excess of 20 percent of the debt ser- contribute to the economic productivity of a locality, vice amount though the life of the loan. Source: Cali- as opposed to ongoing operational expenses. fornia Energy Commission (2002) 26 In addition, local authority to tender bonds is often 36 These are loans offered by a group of financial institu- subject to limitations by national governments that tions (a ‘syndicate’), but typically administered by one wish to avoid an implied sovereign guarantee. Further, institution on behalf of the group. municipal issuers that have a poor credit history or 37 New sources of equity financing have gained promi- lack the capacity to predictably raise revenue may not nence in recent years, which may benefit LFGE oper- be able to produce investment-grade bonds without ations. In particular, institutional investors, insurance special credit-enhancement schemes such as partial companies, pension funds, and other organizations credit guarantees or collateralized escrow accounts that carry long-term liabilities may be interested in used specifically for debt servicing. LFGE projects, particularly as the technologies mature 27 There is some debate about whether LFG projects and gas availability predictions become more reliable. should be classified as ‘renewable.’ For a dive into this There appears to be growing interest from private equi- discussion, see: Chen and Greene (2003) ty funds that invest in infrastructure projects and those interested in green infrastructure more specifically. 28 Since 2008, the World Bank has issued $6.4 billion in Source: Trade Union Advisory Committee (2012) green bonds with coupon rates ranging from less than 1 percent to 10 percent and maturity of between 3 and 38 DBBs are distinguished from DBs in that the former 10 years. As of mid-September 2014, there have been entails hiring separate entities for the design/architec- 68 transactions in 17 currencies. Source: World Bank ture and construction processes (a ‘bid’ is issued in Treasury (2014). order to acquire the construction contract). 29 For more on World Bank green bonds, see: . based on these requirements: (1) purchasing/installing 80 Financing Landfill Gas Projects in Developing Countries equipment to verify emissions; (2) additional moni- policy risk, civil risk, social risk, and others. Here, it is toring and record-keeping; (3) verifying emissions; (4) used as a catch-all for these. registering and issuing credits. Source: Godlove and 50 Sometimes called political risk guarantees, depending Singleton (2010) on the provider. Can include partial or full coverage 41 There are numerous publications detailing the process for agreed-upon events. of preparing a project for the CDM process. See sec- 51 Ehlers (2014) notes that government cash flow guar- tion 6.2 of World Bank (2004) “Handbook for the antees that provide full insurance against any loss may Preparation of Landfill Gas to Energy Projects in Latin “destroy the incentives for cost minimization and America and the Caribbean” for flow charts detailing quality maintenance.” Thus, achieving an optimum the process. risk distribution among project participants should be 42 Technology risks, financing risks, policy risks and oth- the goal, as opposed to maximally transferring risk to ers are outlined in Chapter 4. In terms of a risk-reward one party or another. profile, electricity-generating LFG projects often pro- 52 Often on the order of 15-25 percent. Source: Califor- duce relatively small amounts of electricity (more or nia Energy Commission (2002) less 1 to 15 MW), though their legal and development costs are comparable to larger projects. 53 There is an extensive literature on general risk man- agement procedures for complex construction projects 43 It should be noted that energy derived from landfills is that can be referred to for a broader risk management not always considered “green” and sometimes does not qualify for renewable energy incentive schemes. See architecture (see Appendix E). Chen and Greene (2003). 54 Croce, Claudia comments on paper (2016). 44 For example, a U.S.-based study of electricity inter- 55 Terraza, and Willumsen 2009 suggest 6-8 weeeks, connection costs for renewable energy sources found Claudia Croce in paper comments (2016) suggests up an average cost of US$77,560 per MW of installed to 3 months. capacity. Source: Jaramillo and Matthews (2005). 56 For an example of a bid document and conditions of a 45 For variety of guarantees offered by the World Bank construction contract document that lay out specifics, Group, including IBRD, MIGA and IFC see: World see: Engineers Joint Contract Documents Committee Bank Group (2015a) (2011). 46 Further, institutional investors, such as pension funds, 57 Thailand has included LFG among the country’s ‘re- often have strict rules around investing only in in in- newable energy’ sources and so for the purposes of this vestment-grade (BBB- or higher) bonds. Source: Win- case, it is referred to as such. penny (2008) 58 2009 USD, Based on 77,500,000 baht, number 47 Landfills in general are complex, adaptive systems sourced from CDM PDD for Project 3462: Bang- whose operations contain high levels of endogenous kok Kamphaeng Saen East: Landfill Gas to Electricity uncertainty. The unique characteristics of each land- Project and Project 3483: Bangkok Kamphaeng Saen fill make it difficult to trust risk that is modeled at a West: Landfill Gas to Electricity Project macro-level. Mavropoulos and Kaliampakos (2011) 59 Ciclus is also referred to in some documents as “SERB suggest a framework for assessing risk in biogas proj- – Saneamento e Energia Renovável do Brasil S.A.”, or ects that acknowledges this complexity. as a combined as “SERB/Ciclus.” 48 For a more general introduction to risk mitigation 60 The time it takes through biodegradation to reduce in infrastructure projects, Matsukawa and Habeck the organic content of a material to half of its original (2007) and Schwartz et al (2014) offer a broad over- views of risk types in infrastructure development, mit- organic content. igation techniques, and sources of financial assistance, 61 i.e., there is potential for generation of a minimum of including an extensive review of assistance available 250 kW electricity [...] from development institutions. 62 Methane content should on average be higher than 40- 49 Depending on who has done the categorization, po- 45% and thus the LFG should have a lower heating litical risk may overlaps in meaning with country risk, value of 14-16 MJ/Nm3 to be feasible for utilization. Previous knowledge papers in this series Lessons and Experiences from Mainstreaming HIV/AIDS into Urban/ Water (AFTU1 & AFTU2) Projects Nina Schuler, Alicia Casalis, Sylvie Debomy, Christianna Johnnides, and Kate Kuper, September 2005, No. 1 Occupational and Environmental Health Issues of Solid Waste Management: Special Emphasis on Middle and Lower-Income Countries Sandra Cointreau, July 2006, No. 2 A Review of Urban Development Issues in Poverty Reduction Strategies Judy L. Baker and Iwona Reichardt, June 2007, No. 3 Urban Poverty in Ethiopia: A Multi-Faceted and Spatial Perspective Elisa Muzzini, January 2008, No. 4 Urban Poverty: A Global View Judy L. Baker, January 2008, No. 5 Preparing Surveys for Urban Upgrading Interventions: Prototype Survey Instrument and User Guide Ana Goicoechea, April 2008, No. 6 Exploring Urban Growth Management: Insights from Three Cities Mila Freire, Douglas Webster, and Christopher Rose, June 2008, No. 7 Private Sector Initiatives in Slum Upgrading Judy L. Baker and Kim McClain, May 2009, No. 8 The Urban Rehabilitation of the Medinas: The World Bank Experience in the Middle East and North Africa Anthony G. Bigio and Guido Licciardi, May 2010, No. 9 Cities and Climate Change: An Urgent Agenda Daniel Hoornweg, December 2010, No. 10 Memo to the Mayor: Improving Access to Urban Land for All Residents – Fulfilling the Promise Barbara Lipman, with Robin Rajack, June 2011, No. 11 Conserving the Past as a Foundation for the Future: China-World Bank Partnership on Cultural Heritage Conservation Katrinka Ebbe, Guido Licciardi and Axel Baeumler, September 2011, No. 12 Guidebook on Capital Investment Planning for Local Governments Olga Kaganova, October 2011, No. 13 Financing the Urban Expansion in Tanzania Zara Sarzin and Uri Raich, January 2012, No. 14 81 What a Waste: A Global Review of Solid Waste Management Daniel Hoornweg and Perinaz Bhada-Tata, March 2012, No. 15 Investment in Urban Heritage: Economic Impacts of Cultural Heritage Projects in FYR Macedonia and Georgia David Throsby, Macquarie University, Sydney, September 2012, No. 16 Building Sustainability in an Urbanizing World: A Partnership Report Daniel Hoornweg, Mila Freire, Julianne Baker-Gallegos and Artessa Saldivar-Sali, eds., July 2013, No. 17 Urban Agriculture: Findings from Four City Case Studies July 2013, No. 18 Climate-resilient, Climate-friendly World Heritage Cities Anthony Gad Bigio, Maria Catalina Ochoa, Rana Amirtahmasebi, June 2014, No. 19 Results-Based Financing for Municipal Solid Waste Marcus Lee, Farouk Banna, Renee Ho, Perinaz Bhada-Tata, and Silpa Kaza, July 2014, No. 20 On the Engagement of Excluded Groups in Inclusive Cities: Highlighting Good Practices and Key Challenges in the Global South Diana Mitlin and David Satterthwaite, February 2016, No. 21 Inclusive Cities and Access to Land, Housing, and Services in Developing Countries Mona Serageldin, with Sheelah Gobar, Warren Hagist, and Maren Larsen, February 2016, No. 22 Sustainable Financing and Policy Models for Municipal Composting Silpa Kaza, Lisa Yao, and Andrea Stowell, September 2016, No. 24 KNOWLEDGE PAPERS For more information about the Urban Development Series, contact: Global Programs Unit Social, Urban, Rural & Resilience Global Practice World Bank 1818 H Street, NW Washington, DC 20433 USA Email: gpsurrkl@worldbank.org Website: http://www.worldbank.org/urban September 2016, No. 23