Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) scheme

At Budget 2011, the Coalition Government caused consternation in the Anaerobic Digestion (AD) industry by announcing that, in order to ensure that the EIS and VCT schemes were "better targeted at genuine risk capital investments", with effect from April 2012 these tax-efficient venture capital schemes would exclude investments in companies whose business consists wholly, or as to a substantial part, of the generation of electricity which attracts Feed-in Tariffs (FITs). Since, on the face of it, this would have included most biogas combustion facilities, AD projects would have been denied equity investment via EIS and VCTs, in a financing environment in which many of them are already experiencing significant difficulties in raising bank finance or project equity.    

Fortunately, the draft legislation included in HM Treasury's Venture Capital Consultation (which finished on 28 September) now makes it clear that this exclusion will not apply to hydroelectricity or AD.  For these purposes, AD is defined as "the bacterial fermentation of organic material in the absence of free oxygen (excluding anaerobic digestion of sewage or material in a landfill)".

So although, as the Treasury notes, the draft legislation excluding investment in FITs-subsidised trades will mean less financial support for technologies including solar PV and wind turbines going forward, food waste AD projects will continue to be eligible to benefit from EIS and VCT investment, even after the new legislation comes into effect in April 2012.

WRAP's Anaerobic Digestion Loan Fund (ADLF)

We reported in July on WRAP's £10 million ADLF, to be made available to developers of Anaerobic Digestion in England. Applications for the first round of funding were open until 31 October 2011.

Since then, we have had a helpful dialogue with WRAP on the ADLF, particularly in relation to the potential EU State Aid issues with the receipt of Government support under the ADLF by businesses also benefiting from FITs or Renewable Heat Incentives (RHI) that we flagged up in July.

We can now clarify that:

  • Although WRAP also retains the discretion to make "soft" loans under its European Commission-approved Capital Grants and Lease Guarantee Fund Scheme, it has chosen to operate the ADLF as a commercial loan scheme, so that it is not considered to be a form of Government grant for EU State Aid purposes;
  • WRAP's rationale for putting ADLF on a commercial basis is to ensure that a project in receipt of an ADLF loan can also receive FITs or RHI payments (as the case may be), without being limited to the EU State Aid de minimis threshold for total benefits conferred by the Government in the form of (i) capital grants or soft interest on loans and (ii) FITs or RHI payments (which is €200,000 over three fiscal years, other than for "undertakings active in the primary production of agricultural products", for which it is the significantly smaller sum of €7,500 over three years); and
  • WRAP will therefore be fulfilling the role of "lender of last resort" for AD projects, but only where those projects are judged to be commercially viable, including having the ability to pay a commercial interest rate to WRAP - based in each case on the level of risk taken by WRAP. WRAP will set that interest rate in accordance with the European Commission's financial strength-based interest rate calculations. In practice, it is expected that ADLF loans will therefore be priced on a mezzanine basis, rather than on a senior debt basis.

Water and Sewerage Companies (WaSCs)

On 22 September 2011, the Office of Fair Trading (OFT) issued recommendations designed to encourage increased competition and greater efficiency in the treatment of organic waste (both sewage sludge and "other organic waste", including food waste).

Crucially, the OFT has provisionally decided that a market investigation reference to the Competition Commission would not be appropriate at this time, and it has limited itself to making recommendations to Ofwat and other government departments to address the regulatory barriers and distortions to competition identified in the "Organic waste" OFT market study dated September 2011.

However, the study makes some interesting findings in relation to:

  • The current system of economic regulation of WaSCs, which in the OFT's view "can provide a disincentive for WaSCs to outsource the treatment of sewage sludge and also appears to hinder treatment by waste companies";
  • Corporate culture factors relating to "apparent risk avoidance and (over)-reliance on guidance in the water sector", inhibiting both outsourcing of sewage sludge treatment to waste companies and treatment of other organic waste by WaSCs;
  • Planning issues experienced by waste companies in obtaining planning permission for suitable treatment sites, unless these are co-located with existing water and sewerage facilities; and
  • Environmental issues in relation to co-treatment of sewage sludge and other organic waste, which currently requires compliance with two different regulatory regimes. The study recommends greater harmonisation of these regimes, and notes that "Given that co-treatment may not only increase the scope for competition [between WaSCs and waste companies] but also, in some cases, generate more energy from the waste and/or utilise spare capacity that may not otherwise have been used, barriers preventing this form of competition can have a particularly adverse effect."   

In theory, the OFT market study moves the organic waste market closer to an integrated market in which there is active competition between WaSCs and waste companies in the WaSCs' traditional domain of sewage sludge AD, as well as in the AD of other organic waste. However, attention will now turn to the detail of the regulatory reforms put forward by Ofwat, and the Water White Paper expected from Defra later this year.