Policy Group Quarterly – March 2009 1

No. 3 / March 2009

Urban waste generation is rapidly increasing in India with population expansion and economic development. Improper management of this waste poses an enormous risk to human health and environment. There is thus an urgent need to address this problem with a more scientific approach than the commonly adopted crude dumping of waste. With this objective, this note explores the option of Waste to Energy (WTE) as a mode of waste disposal and reviews the experience of WTE in India to draw lessons for the future.

Urban India produces over 1.5 lakh tonnes per day (tpd) of waste which is increasing rapidly with speedy urbanization accompanying economic development. The United Nations has estimated India’s urban population to rise from 285 million in 2001 to over 600 million by 2030. The World Bank has estimated that per capita urban waste is likely to rise from the present 0.2-0.6 kg per day, depending on the city size and population, to about 1.032 kg per day during the same period due to the changing consumption pattern of the urban populace. Thus, Municipal Solid Waste (MSW) is likely to reach critical dimensions, unless treated.

Though Urban Local Bodies (ULBs) utilize a significant amount of their resources for MSW management (MSWM) i.e. waste collection, transportation and safe disposal, only 10-50% of the waste is collected. This is because these ULBs rarely have appropriate strategies, adequatefinances and proper technology for organized waste management. In fact, many ULBs ineffectively entrust MSWM to public health officials despite the MSWM Manual recommending transfer of this responsibility to the Municipal Engineering Department. About 94% of the waste collected is dumped untreatedon vacant plots, within or outside the city, posing a major health and environmental risk.

Can we do without Waste to Energy?The option of simply dumping MSW will not be available for long. A TERI publication estimates that the total land required for disposal of MSW would be around 1400 km2 by 2047. Increasingly, scarcity of land and resistance from adjoining rural areas to dumping urban waste in their backyard will accentuate problems of waste disposal. Further, GoI has issued MSW Rules that prohibit landfill of untreated MSW.

The MSW Rules 2000, which have placed the responsibility of MSW management on ULBs,permit only non-biodegradable, inert, non-recyclable rejects and residues from treatment plants to be disposed in landfills. These Rules prescribe treatment prior to disposal only through composting and biomethanation for biodegradable waste, and energy recovery and pelletisation for the combustible fraction of mixed

waste. Due to this restrictive provision, even the scientifically developed sanitary landfill at Surat ran into controversy as it did not have an accompanying composting plant. As a result the landfill remained unutilized, while MSW kept piling up in the open on an adjacent plot.

Though the deadline of December 31, 2003 for compliance with MSW Rules was extended to December 2008, ULBs have done little barring improved collection and transportation in some cities.

The two key methods of processing non-recyclable waste, before safe disposal, are composting and WTE. The most significant WTE technologies are based on biological or thermal processes. Biomethanation is a biological process where biogas containing methane is extracted from decomposition of organic waste and incineration is a thermal process involving heat generated from combustion of organic waste. Refuse Derived Fuel (RDF) process or pelletisation is also a thermal process, where the waste is dried and compressed to make pellets facilitating storing and combustion.

The appropriate technology for waste treatment depends on the quantum and characteristic of the non-recyclable waste. Estimates indicate that MSW in India contains 47% biodegradable, 25% inert, 8% paper, and 9% plastic, along with metals, glass and rags. The composition varies with climatic and socio-economic conditions, and differs between cities. MSW in India is characterized by low calorific value (500-2500Kcal/kg for most cities) as compared to developed countries. This is because of the large presence of organics and moisture in wastes, an outcome of high consumption of fresh food in India compared to consumption of more processed and packaged foods in developed countries. The large presence of inert in garbagedegrades waste quality and reduces resource recovery. Also the second hand market for waste recycling in India results in removal of large amounts of paper and packaging material at the source itself, which lowers the calorific value of waste.

The high presence of biodegradables in Indian

Waste to Energy: An Imperative for Sustainable Waste Management

PPoolliiccyy GGrroouupp QQuuaarrtteerrllyyThink Infrastructure.

Think IDFC.

Initiative in Focus

Waste to Energy

Infrastructure Development -Turning Points

CERC Tariff Regulation 2009-14

Policy Group News & Events

For Queries,Please Contact :

Ritu Anand(ritu.anand@idfc.com)

Nirmal Mohanty (nirmal@idfc.com)

Sambit Basu (sambit.basu@idfc.com)

Manisha Gulati (manisha.gulati@idfc.com)

Lavi D’Costa(lavi.dcosta@idfc.com)

Bharati Sawant(bharati.sawant@idfc.com)

Policy Group Quarterly – March 2009 2

waste and the approach prescribed in the MSW Rules suggests that composting should be the preferred option for waste treatment. However, composting has several limitations. These include difficulty in producing compost from unsegregated waste, poor yields and fertilizer value of composts, large storage requirement and vast land required for disposal of rejects. Other factors that constrain composting are poor marketing and distribution of compost products in the absence of a national compost market, absence of incentives compared to the subsidies available to chemical fertilizers, and unsuitable indigenous species for vermi-composting. In fact, the Government of India (GoI) gave subsidies to compost plants in major citiesin 1970s, but the initiative failed and most of the plants were abandoned due to the above reasons.

Given the daunting reality of solid waste that India will produce in future and problems with all waste treatment options, India cannot do without WTE. WTE reduces the volume of waste going to landfills by 60-90%, saving land, ensuring safe waste disposal and reducing greenhouse gasemissions from residual waste finally going into landfills. In fact, it is these very concerns that is leading to increasing reliance on WTE in many developed and emerging countries (refer Box 1).

Past experience with WTE: What went wrong?There are several success stories of WTE in industrial and small decentralized operations where energy is used locally for captive consumption. However, experience ofenergy recovery from MSW has been far from satisfactory.

MSW based WTE facilities were set up by private sector entities who signed a contractual agreement with a ULB for delivery of waste. International experience indicates that ULBs often pay a gate fee or tipping fee to the WTE operator for accepting the waste. But in India, there was no tipping fee. On the contrary, ULBs demanded royalty on profit from waste treatment. The energy generated by the facility was generally sold to the local electricity distribution company (DISCOM) under a Power Purchase Agreement (PPA).

The first such facility was set up in 1987 at Timarpur, Delhi, based on incineration technology to produce 3.5 MW power. It soon became inoperative due to mismatch in quality of waste received and plant design.

The fate of the 5 MW project in Lucknow, which started commercial operation in 2003, was similar. Based on an

imported biomethanation technology used in over 50 WTE plants worldwide, the plant only reached 1 MW and was closed down within six months due to several reasons. Prime among them was the ineffective waste segregation system which led to poor quality of MSW being delivered to the plant. The waste contained only 12-15% biodegradables. Problems were aggravated by poor accountability on part of the ULB for the waste supplied.

The RDF technology based power plants at Vijayawadaand Hyderabad, of 6 MW each, also started commercial operations in 2003. However, to overcome the poor heat value of MSW received, viz. about 1000Kcal/Kg and way below the optimum 2500Kcal/Kg, the plants supplement MSW with agro wastes as auxiliary fuel. The RDF plants remain grossly underutilized as the desired amount of MSW is not being received.

It is clear from the above that the failure of WTE has

Box 1: International experience with WTE WTE technology has been used in about 800 facilities worldwide of which nearly 400 are located in Europe where the Landfill Directive of the European Union supports WTE and discourages landfill. It aims to reduce landfill of biodegradable MSW by 65% by 2020 from 1995 levels. The thrust for WTE in Europe arises mainly from the need to tackle issues of climate change by tapping sustainable sources of energy besides disposal of solid waste. In the United States, there are 90 WTE facilities for processing up to 30 million tons (MT) waste yearly. The figure below illustrates the WTE facilities in various countries worldwide.

Asian countries such as Singapore, Taiwan and Japan have also increasingly adopted WTE for MSWM. Japan uses WTE to tackle 70% of MSW. China which converted only 2% of its waste into energy in 2005 is promoting WTE to tackle its growing MSW. Traditionally China has sent almost all of its MSW to landfill, but the growing economy and increasing responsibility to address climate change issues influenced it to promote WTE in a big way. It now aims to use 30% of its waste for energy recovery by 2030.

WTE facilities worldwide

Source: U.S Department of Energy

Box 2: Comparison of past and renewed initiatives on WTEPast experience Recent initiatives

Method for project award

MoU route Competitive bidding

Waste Characterization

Proper waste analysis not undertaken prior to finalization of technology and size

Extensive studies undertaken to assess waste characteristics and quantum

Technology Not suited for waste type (composition, moisture and energy content)

- Geared to waste characteristics- Use of mixed technology

Involvement of ULBs Low to nil HighLevel of project development prior to private sector participation (PSP)

Low - Concession agreements for waste delivery with ULBs- Land license agreements with the ULBs/State Government

company for land - Approval from SERC on the PPA- Sewage Supply Agreement with water utility, if needed

Extent of private sector involvement

Only in WTE facility - In Stand alone WTE facility in Delhi- In the entire MSWM chain in Guwahati

Royalty Yes No

Policy Group Quarterly – March 2009 3

largely been due to issues in MSWM although there were problems of project development and adaptation of technology (refer Box 2). The variability in quantum and heterogeneity of delivered waste due to lack of integrated MSWM strategy in our cities, and poor administration of ULBs, affected plant operations. With the ULBs performing the activities of collection and transportation of waste, the private developer operating the WTE facility had no control over the quantum and quality of waste supplied to them by the ULBs.

Although the ULBs had agreed to compensation to concessionaires for non-delivery of agreed feedstock in return for a royalty on profit from waste treatment, there were disputes and litigations on these issues. This was also responsible for the closing down of projects.

Finally, low awareness amongst the public about MSWM and its imperatives as well as poor public communication initiatives on part of the ULBs resulted in resistance to WTE projects. Objections to WTE were also centred around increased levels of local environmental pollution and resulting health hazards from these facilities.

Renewed initiatives with WTEGoI’s WTE from MSW programme was severely criticised for the failure of the Delhi and Lucknow projects. Public Interest Litigations challenged GoI for providing subsidiesof Rs. 10 crore per MW and interest subsidies of 15 crore per MW through a designated agency without undertaking cost-benefit analyses of any of the WTE schemes being promoted. They also criticized the promotion of WTE technologies which have a high capital cost despite the availability of cheaper technologies such as composting. The Lucknow project is estimated to have cost Rs 65 Crore (Rs. 84 Crore with cost over-runs) i.e. Rs 13-17 crore per MW. These litigations led to a stay by the Supreme Court (SC) on GoI grants to such schemes in May 2005. Consequently WTE schemes were almost written off as a failure in India.

However, MSW based WTE got a lifeline when the SC in May 2007 allowed GoI to subsidize five WTE plants oncommercially run pilot basis and take a decision on the future of WTE depending on the outcome of these projects.In 2008, three MSW processing facilities with power plants were awarded to private players. While the projects in Delhi are MSW processing facilities with power plants, the

one at Guwahati is an integrated MSWM project. Key features of these projects are summarized in Box 3.

These projects were developed in line with the SC directions and recommendations of the SC Expert Committee on Solid Waste Management viz. facilitate project development and adopt more than one technology if required. Accordingly, the projects were developedthrough special purpose vehicles (SPVs) which undertook project development activities such as characterization of wastes, technology selection, plant design and engineering and ensured finalization of all contractual agreements. Thus, these projects have attempted to address the key challenges of the past (refer Box 2). GoI, to facilitate project viability, is providing a subsidy of Rs. 10 crore per MW.

The ownerships of these SPVs have been transferred to successful bidders following a tariff based competitive bidding process with approvals from the concerned State Electricity Regulatory Commissions (SERCs). The standard bidding documents (SBD) issued by the Ministry of Power for conventional power plants were adapted for bidding. Further the model PPA released by Uttar Pradesh SERC for renewable energy source was adopted.

Points to ponderRecent ongoing endeavours with WTE are focusing on designing projects within a comprehensive MSWM framework and mitigating systemic risks - administrative, technical and financial. While these initiatives give hope that WTE may now be successful, one would have to wait to see whether they change the way WTE is perceived. An inquiry into the initiatives so far suggests the following:Need to amend MSW rules since they are excessively

prescriptive and discourage innovationNeed to promote greater PSP along the MSWM chainNeed for administrative reforms of ULBs towards

ensuring better budgeting and allocation of MSWM responsibility to the appropriate department

WTE should be considered as a public service involving fiscal expenditure, if needed

Better structured PPP models ensure project viability ULBs should abstain from demanding royalty on waste

as it defies their statutory obligations and is misplaced. Imposing stringent emission norms, stiff penalties for

non-compliance, and Environmental ManagementSystems for WTE facilities can alleviate concerns of local pollution

Box 3: Key features of WTE projects awarded through competitive bidding in 2008Integrated MSW Processing Complex at Ghazipur, Delhi

MSW Processing Complex at Timarpur & Okhla, Delhi

Integrated MSW Management Project, Guwahati (involving activities from primary collection to disposal of waste)

Project components

-MSW processing plant based on RDF technology

-Power plant of 10 MW

-RDF plants at Timarpur and Okhla

-Biomethanation plant at Okhla -16MW Power plant at Okhla

-Composting plant -RDF plant-Power plant of 6 MW

Revenue model

-Sale of 49% power to DISCOM viz. BSES Yamuna Power Ltd. at levelized tariff of Rs. 3.66/unit

-Remaining 51% available for third party sale or captive use

-Sale of power to DISCOM viz. BSES Rajdhani Power Ltd. at levelised tariff of Rs 2.83/unit

-Fixed fee from Municipal Corporation for collection, transportation and disposal of waste

-Sale of power to DISCOM at levelised tariff of Rs 4.10 per unit

-Grant of Rs. 31 Crore under GoI sponsored Jawaharlal Nehru National Urban Renewal Mission for MSW component

Policy Group Quarterly – March 2009 4

CERC Tariff Regulations 2009-14

On January 19, 2009, the Central Electricity Regulatory Commission (CERC) notified tariff regulations, which will be applicable to power generation and transmission utilities for the period 2009-14. These regulations are applicable to the Central Generating Companies, other generating companies selling power to utilities in more than one state under a power purchase agreement (PPA) and the transmission licensees engaged in inter-state transmission of electricity. These regulations, however, do not apply to power plants taking the competitive tariff-based bidding route.

A key aim of these multi-year tariff regulations is to attract more investment, which is sorely needed in the present milieu of extreme power shortage. Through several progressive provisions CERC has tried to make investment in the sector more attractive. At the same time, it has introduced incentives for timely completion of projects and tightened operational efficiency norms to better discipline producers as well as to benefit consumers. Some of these key provisions are:o Return on Equity (RoE) increased from 14.0% to 15.5%,

with an additional RoE of 0.5% for projects commissioned within given timelines

o Depreciation rate increased to ~5.28% and removal of advance against depreciation

o Move to the system of pre-tax RoE from the existing post-tax RoE with the utility paying the tax rate applicable to its form of business viz. MinimumAlternate Tax of 11.33%or corporate tax at 33.99%including surcharge

o Incentives on plant availability rather than actual generation since actual scheduling of plant and fuel availability is not within generator’s control

o Operating norms tightened through reduction in the norm for secondary oil consumption from 2 ml/unit to 1 ml/unit for coal-based generating stations, and normative target Plant Availability Factor for thermal plants increased from 80% to 85%

The regulations also provide for favourable development of hydro power projects in light of the urgency to addpeaking power capacity and promote renewable energy

for environmental consideration. Some key provisions include:o Insulation of new hydro power projects from

hydrological risk during the first ten years of operationso Enhanced free power and rehabilitation cost keeping

with the amended National Tariff Policy, o Restructuring of tariffs to incentivize supply of peaking

power

It has also, for the first time, adopted the concept of sharing the benefit of efficiency gains with consumers. Half of the saving in secondary oil consumption is to be shared with consumers.

There are, however, a number of concerns, which put to question whether the regulations would be able to achieve the desired objective. Since a large number of generation and transmission projects in the private sector are expected to be developed through tariff-based competitive biddingroute, the extent to which these regulations would be able attract investment is debatable. Further, clarity is missing on the RoE movement beyond the control period 2009-14 and CERC has not provided any scientific market-determined formula for determining RoE. The fact remains that there is need for greater clarity on future RoE movements for long term investment decisions. Another area of concern for businesses into multiple segments or with multiple power stations is in the context of the impact of tax provisions. This arises from the fact that the applicable tax rate to a company in many cases may be different from the tax rate applicable for a generating station.

Notwithstanding the concerns, the notified regulations are likely to have positive multiplier effects in view of the fact that the State Electricity Regulatory Commissions (SERCs)in specifying tariff regulations, according to the National Tariff Policy, would be guided by the CERC regulations. Thus, the higher return if allowed by SERCs is likely to make investments in distribution more attractive. Further, adoption of these rates by SERCs for state level power projects including renewable energy based projects will provide an impetus to the development of renewable energy in the country.

Infrastructure Development – Turning Points

Interactive session on CERC’s Tariff Regulations 2009-14 (Mumbai): We organized an interactive session with Central Electricity Regulatory Commission (CERC) on its Tariff Regulations for 2009-14 notified on February 9, 2009. The panellists of the session were Dr. Pramod Deo (Chairperson, CERC) Mr. Alok Kumar (Secretary, CERC) and Mr. Sushanta K. Chatterjee (Deputy Chief-Regulatory Affairs, CERC). The session provided an opportunity to power utilities, Independent Power Producers (IPPs), financial institutions, and analysts to discuss their observations and seek clarifications from CERC on theseregulations. Some of the most discussed issues were provisions related to taxation, incentives, mitigation of hydrology risksfor hydro projects, and applicability of these regulations to IPPs that are expected to provide free power to state governments in lieu of setting up projects in those states.

Policy Group – News & Events

IDFC Ltd., Maker Chambers V, 16th Floor, Nariman Point, Mumbai-400021Tel: +91 22 66226000, Fax: +91 22 66100170, Website: http://www.idfc.com