Business Model and Financing for RDF Infrastucture Seminar

Business Model and Financing for RDF Infrastucture Seminar of PBDE – 9 January 2017 Lusy Widowati

Reference Ministry of Industry, 2016

Content Introduction Business Model Benefit Evaluation Method Financial of RDF Plant 3

Introduction • MSW as endless source of alternative fuel opportunity: Indonesia’s emerging middle class population means huge opportunity for alternative energy from waste. Waste volume continuously increasing indicating the need for solution. This is huge opportunity if waste can be processed into sustainable fuel. There is a requirement for the Local or Regional Government to either develop a new landfill site, or to look into alternative methods to manage the MSW. • In 2013, West Java Govt decided to start exploring the opportunity. In 2014, Holcim started to approach Cilacap Gov Regency in Central Java regarding the opportunity to utilize the AF from MSW. Some studies were done and came into decision to have RDF Plant as part of MSW manamgement system. • It was believed that the RDF Project are very valuable since it can be: ▶ First sustainable MSW solutions in Indonesia (currently no available solution other than landfilling) ▶ Proof of technology to convince the cities and country ▶ The 1 st Project which serves the Bogor City, Bogor Regency and Depok City the 2 nd Project will serve Cilacap Regency. They are for future replication in Indonesia. • The project has been through technological assessment, design adjustments, challenges from stakeholders, so many chances of being terminated (organizational changes, CAPEX constraint, legal issues, etc). • Leason learned that the final concept is now shaped and considered to be viable for all stakeholders 4

Introduction n Cement manufacturing is an thermal energy intensive due to the high temperatures n n n required in the clinkerization process. A wide range of wastes are suitable to be combusted in cement plant, but because cement kiln emissions are site specific, there is no uniform type of waste that can be used in a specific plant. Only waste of known composition, energy and mineral value is suitable for co-processing in cement kilns. Most cement plants do not directly burn unsorted MSW due the heterogeneous nature of the waste and components which could pose quality and environmental concerns. Therefore, a processing MSW to be RDFwill be required. RDF, the high calorific value fraction of MSW then can be employed in cement kilns to obtain its energy recovery. Utilization of RDF in cement industry has a long tradition in Europe, USA, East Asia, etc. but this is relatively new in Indonesia. Some studies regarding RDF as AFin Indonesia cement plant has been done and Regulation Draft of Ministry of Industry concerning RDF quality is on going. Some location of TPA is near to the big cement plant in Indonesia. This project highlighted the primacy of location in considering future project sites, to minimize the transport of RDF to the cement plant.

MSW Processing to Produce RDF MBT = Mechanical-Biological Treatment MBS = Mechanical-Biological Stabilization MSW Platform Dispos al Source : Holcim, 2013 Recyclin g Power Plant RDF Refuse Derived Fuel Cement Plant

MSW to RDF Technology Source : Holcim, 2013

13. 09. 2011/MAI

RDF – Definition and Characteristic ASTM standard (2006) defines that RDF is a shredded fuel derived from MSW which metal, glass and other inorganic materials have been removed and has particle size 95 weight % passes through a 2 in square mesh screen. Source : Holcim, 2013 RDFf RDFc NCV MJ/kg 18 15 H 20 % 18 -20 25 Ash % 10 15 Chlorine % 0. 8 Sulfur % 0. 5

Co Processing of Waste in Cement Plant Source : Cembureu, 2009 The use of RDF in cement manufacturing kilns seems to be posi tive, as the combustion of RDF allows for a reduction of about 1. 61 kg of CO 2 per kg of utilised RDF compared to conventional combustible materials (coal), 0. 36 kg NOX/t of burned RDF. (European Comission, 2003)

Environmental Benefit The use of RDF as alternative fuels in the cement kiln has several environmental benefits such as: n Reduced the use of non-renewable fossil fuels such as coal, and reduces the environmental impacts associated with extraction of these natural materials. n Contributes towards a lowering of emissions such as greenhouse gases by replacing the use of fossil fuels with materials that would otherwise have to be incinerated with corresponding emissions and final residues. n Reduced requirement of land required for landfill option thereby reducing the emissions and also liability associated with the landfills.

MSW to RDF – Contribution to Environment (EU, 2003) Pengurangan Emisi CO 2 dari pengolahan 1200 tpd MSW menjadi RDF sebesar 244. 000 t. CO 2 eq/tahun (CEMBUREU, 2009). Pemanfaatan RDF dilaporkan mampu menurunkan sekitar 1, 6 kg CO 2 per kg RDF dibandingkan dengan pembakaran batubara (Genon and Brizio 2008). Pemanfaatan 1 ton RDF (melalui proses pengolahan MSW dan co firing) menurunkan emisi CO 2 tidak kurang dari 1 ton CO 2 (BREF, 2003)

CO 2 Emission Reduction in Cement Plant which Co Processing of 5 tph RDF

Content Introduction Business Model Benefit Evaluation Method Financial of RDF Plant 14

Partnership in RDF Plant Project n The RDF Plant Project can be a partnership between Local Government (City, Regency or Province), business entity and cement company as user of RDF. n Once the RDF Plant is operational, the local government will provide MSW and pay tipping fee to the business entity. The business entity will operate and maintain the RDF Plant, and the cement company will use the RDF as partial replacement of the coal used in its kiln. n In order to accommodate the use of RDF, the cement company will need to incur additional capital expenses for the upgrade of its kiln, as well as operating costs for the use of RDF. But they may save on costs of coal.

General Business Model for RDF Project Activity Institution Regional ol Local Gov Business Enterprises Cement Plant Operator Operational & Waste Management of MSW to RDF Collect, Haul and Residue Management Regional ol Local Gov Business Enterprises Cement Plant Retribution Income ▪ ▪ ▪ Cost ▪ Investment and Operational of Collect, Haul and Residue Management ▪ RDF Utilization into AF in Cement Kiln Government Contribution from tipping fee RDF Selling ▪ Investment & Operational • RDF Facility • Waste Management ▪ Transport to Cement Plant ▪ Investment ▪ Storage, Feeder & Dosing System ▪ Operational Coal replacement Substitution Benefit 16

Business Model Approach

Business Model Approach

Critical Part n Projects to proceed MSW to produce RDF generally involve higher capital investment and are more complex when compared to other options of waste disposal like landfill which are common in Indonesia, but gains in terms of waste reduction are also higher. n The most critical part of the waste project is ensuring the finances are secure, which can be challenging for MSW to RDF Plant Project. n Even though the technology of processing MSW to produce RDF has been proven worldwide, its viability and sustainability is yet to be demonstrated and established in Indonesia. n Currently, MSW to RDF Project in Indonesia is not an area which is financially attractive. Private sector participation in the proposed RDF production facility as part or waste management involves a number of commercial risks.

Content Project Background Business Model Benefit Evaluation Method Financial of RDF Plant 20

Key Consideration The key consideration to the Regional Government is likely to include the following: n The amount of tipping fee paid by Regional Government. This will be determined based on the several factors, such as the capital costs of the RDF Plant and the O&M costs of the RDF Plant; n Amount of savings estimated for Regional Government from not sending those MSW to the landfill, which will be driven by the following factors: capital cost of new landfill (including cost of land, and the cost to develop the landfill) and operations cost at the new landfill.

Key Consideration From the Cement Plant as RDF User’s perspective, the following factors were considered: n Capital costs for the upgrade of Kiln; n Additional operating cost for the Kiln; n Savings from coal cost; and n Cost of RDF. From the RDF Facility Owner’s perspective, the following factors were considered: n Capital costs for the RDF Plant; n Operating cost of the RDF Plant; n Contribution to O&M cost at the RDF plant from Local Government; and n Revenue from sale of RDF.

Benefit for Both Parties The Project will only be successful if parties can achieve financial benefits from it, and the sharing of the benefits is fair. The diagram below illustrates the range in which the Project can be financially beneficial to both parties. RDF Operator Quadrant 1 Beneficial to Business Entity only Quadrant 4 Not Beneficial to any party Quadrant 3 Mutually beneficial to both parties NPV to Cement Plant Quadrant 3 Beneficial to Indocement only

Content Project Background Business Model Benefit Evaluation Method Financial of RDF Plant 24

Benefit for Parties – for Local Government These savings are a comparison of landfill costs before and after the RDF plant, whereby: The Business-as-Usual Case The business-as-usual case for Local Government is to continue developing landfills to manage the MSW. It will need to incur capital costs to purchase the land for landfill as well as to develop the landfill. Subsequently, there will be operational costs for the landfill, for example cost of purchasing soil and gravel, and manpower costs. The RDF Plant Case The costs associated with developing new landfills will be significantly reduced with the development of the RDF Plant as the waste will be used in the RDF plant instead.

Benefit for Parties – for Cement Company The Business-as-Usual Case n The business-as-usual case for Cement Plant is to continue to use coal as the fuel for the kiln. This will mean it continues to incur cost to purchase the coal, and is subject to market prices for the coal supply. The RDF Plant Case n The RDF produced by the Plant will replace part of the coal used. As such, there is saving from the cost to purchase coal. However, it will need to incur upfront investment in the RDF Plant, and for the upgrade of its kiln to be able to use RDF as the fuel. In addition, there additional operational costs, such as costs to transport the RDF and for the feeding system.

Viability of RDF Projects Benefit Evaluation Method MSW processing at landfilling site RDF consumption at cement plant Rp Rp Tipping fee from gov. RDF sales price - RDF processing - RDF buying RDF purchase price - Kiln - Wt. E The benefits for both parties must be shared on a fair basis in any cooperation. In order for this Project to be viable and successful, both parties must benefit from this partnership.

RDF Plant Project in Indonesia RDF Plant - Cilacap Project RDF Plant - Nambo Project 28

Project Structure RDF Plant in Cilacap Regency Source : Cilacap Regency Gov, 2016 groundbreaking ceremony for the ESP 3 pilot projects in the offices of Central Java province Regional Development Planning Agency (BAPPEDA) on 23 October 2017. On 24 th July 2017 the Project has been ground breaking attended by Governor of Central Java, Ambassador of Denmark and Director General of Ciptakarya, Ministry of Public Work and

Cooperation Scheme Source : Cilacap Regency Gov, 2016

Role of Each Party in Cilacap Project Source : Danida, 2016

Business and Financial Concept n n n The capital cost of the RDF Plant is currently estimated to cost approximately USD 5 million. The RDF Plant will be a partnership between the Cilacap Regency Government and Holcim. Ministry of Public Work contribute 50% of the capital cost of the Plant, while the remaining 50% will be contributed by DANIDA through its ESP 3 programme. Capital cost of RDF plant USD 5. 2 M (exclude land aqcuisition), RDF selling price USD 11. 15/ton, tipping fee USD 7. 69/ton MSW; The assets purchased by DANIDA will eventually be transferred to Cilacap Regency Government through the Central Government. These assets will eventually be used at the RDF Plant. Once the RDF Plant is operational, the Cilacap Regency Government will provide a contribution for operations and maintenance cost (“Contribution for O&M Costs” or “Contribution”) of the RDF Plant. Holcim will operate and maintain the RDF Plant, and will use the RDF as partial replacement of the coal used in Cilacap Plant kiln. The kiln has TSR of 3. 89 % in 2016 which consists of industrial waste and biomass as coal subtitution, and considered RDF Plant will be operated in 2019, the TSR is the targetted to be 9. 24 %.

Content RDF Plant - Cilacap Project RDF Plant - Nambo Project 33

Project Structure of Nambo Project Source : West Java Gov, 2016

Project Contractual Framework 1) 2) 3) 4) 5) 6) Cooperation Agreement between West Java Provincial Government with Bogor Regency, Bogor City and Depok City; Build Own Operate Transfer Agreement between West Java Provincial Government and Impelementing Enterprise; Sharholder Agreement or Joint Venture Agreement (including capital) between the Business Entity/Consortium of the winning bidder with the Regional Owned Company of West Java Province; Agreement on the Sale and Purchase of RDF Products between the Executing Enterprise with RDF Buyers Agreement between the Executing Entity and the Financial Institution; and Agreement between the Implementing Enterprise with the EPC Contractor and the O & P

Project Progress n The Busines Entity which is win of the tender process of the Nambo Project is a consortium company. The consortium stands by adding West Java Regional Owned Enterprise to establish new SPV. n In early 2017, the establishment of the new SPV under the name of PT Jabar Bersih Lestari has been registered by the Ministry of Justice and Human Rights. n Signing of cooperation contract between Governor of West Java and PT Jabar Bersih Lestari has been held on June 21, 2017. Ground breaking of Nambo Plant was in July 2017.

Role of Each Party in RDF Project of Nambo Project Ministry of Public Work West Java Gov JBL JBL JBL West Java Gov JBL Cement Plant

Financial Concept for Nambo Project n Capital cost of RDF plant USD 26. 9 M (exclude land aqcuisition), n RDF selling price USD 23. 08/ton, tipping fee USD 4. 77/ton MSW;

Capex of RDF Plant

Opex of RDF Plant

Tipping Fee of RDF Plant

Lesson Learned n The project has potentially high replicability. There is little of the process that is technologically advanced or prohibitively expensive. Compared to other waste processing options, e. g. incineration, RDF is quite achievable by a provincial or regency/city-level government. n This project highlighted the primacy of location in considering future project sites, to minimize the transport of either fresh waste to the plant, or the transport of RDF to markets. It does not seem likely that such conditions will be easily found in other locations, and local governments should be aware of this before developing project ideas. n Ready market for the RDF (if coal prices remain higher than RDF production costs). Holcim’s nearby cement factory provides a guaranteed off take for the RDF from Cilacap Project; and Indocement & Holcim from Nambo Project. It is not likely that transporting RDF long distances to markets will be cost effective

Leasson Learned There are some factors that will limit replicability, however. n Financing model. The model available to Cilacap i. e. capital costs covered by DANIDA and Mo. PW, will not be available to other local governments. There will be capital costs to be considered. n There is a very strong need to support governments, at all levels, to understand the realistic economics of Wt. E and other SWM actions. The benefits for both parties must be shared on a fair basis in any cooperation. In order for this Project to be viable and successful, both parties must benefit from this partnership.

RDF Project Share Value for Project Stakeholders Local Gov Sustainable solution for waste problem Restore environment condition in city, Improve quality and social condition of community around landfill Potential government budget saving for long term Cement Plant Mo. E PUPe. Ra Regional Gov Business Entity Building sustainable solution to restore environment especially in Bogor Regency Project of alternative solution which innovatively nationwide for waste process into energy by cooperating with government institutions, financial insitution and private enterprise Project of alternative solution which innovatively process waste into energy by cooperating with government institutions, financial institution by hoping to change the usual mindset into susttainable processing waste economic transformation Saving potential of fuel cost for long term Building sustainable solution to restore waste process quality 44

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