Breaking the Stalemate

How the UK's waste market needs to evolve to meet the challenges of sustainable waste management

Reduce, reuse, recyle - this is the mantra defining the newly evolving UK waste industry. But what will this mean for the industry as it stands today, and how will focusing on the waste industry as a process, rather than a haulage industry, change the face of the UK market?

The UK's obligations under the EU Landfill Directive are changing the face of waste management. At present, approximately 80% of all waste goes to landfill.

However, driven by European targets, the UK government is now regulating both the volume and types of waste material permissible in landfill as well as implementing recycling targets on both local authorities and waste producing industries.

This legislation is fuelling the need for change in waste management practices and in particular processes and technologies which increase recycling, disposal and renewable energy generation.

According to Alexis Rowell, Chair of the Sustainability Task Force at Camden Council, for this change to happen will require a change in the way we look at waste. He said: "We need to stop looking at waste by tonnage.

"This is counterproductive as it prevents alternative waste management solutions being tried." At the moment councils are required to keep recyling tonnage up with no thought for environmental value - judged on the amount that each Local Authority sends for recycling, not how effectively or sustainably waste is dealt with.

Policy is currently about diversion from landfill and, despite increasing focus in the media, environmental issues are not yet really a major consideration However the cost of landfill is set to increase exponentially.

The recent increase of the accelerator tax to £8 from next year has, according to Peter Jones of Biffa, accelerated by two years the need for the major waste players to develop alternatives means of waste management.

He believes the industry is undergoing a fundamental transition to materials sorting, and that many of the larger players will now begin to explore new technologies in energy, recycling, composting and special or hazardous waste management, more fully.

The Industry

Waste is a valuable resource in the UK and the industry has a current turnover of roughly £12 billion.

A recent report from the Institute of Civil Engineers suggests that the next few years will require £10bn investment in facilities for waste management and sorting, with an estimated £6bn needing to be invested in recycling alone for the UK to meet the first Landfill target date in 2010.

Today, the Waste Management industry is dominated by seven big companies, Biffa, Cleanaway and Onyx (both owned by Veolia) , Sita (part of SUEZ), Viridor (part of the Pennon Group), WRG, and Shanks, which account for around three-quarters of industry turnover.

As a group their fixed assets - refuse collection vehicles, materials sorting facilities, storage and distribution facilities, treatment centres etc - stand at approximately £2 billion in value.

This means that the industry would need to quadruple its combined fixed asset base in a very short time frame, in order to meet the targets for 2010.

It is unrealistic to assume that any of these companies would have the budget to embark on a capital expenditure programme of such magnitude, or to believe that the demands of the landfill directive can be met from within this dominant group.

So, who will deliver the required investment and how? Here, the larger ten or eleven independent waste companies, such as Grundon, Augean plc, The Cleaning Services Group and Cory Environmental, with turnovers ranging from £10m-£50m could provide a critical part of the solution.

As a group they have grown steadily, avoiding the expensive debt-financed acquisitions of some of their larger counterparts, and, in some cases, are themselves the subjects of speculation for merger and acquisition activity.

The Technology

Existing waste management technologies, such as incineration and mature waste treatment processes, offer alternative landfill diversion options.

However, with current incineration capacity of 2.7m tonnes p.a. and plans for only another couple of million tonnes p.a. of waste treatment capacity by 2008, coupled with localised opposition to the granting of planning permission for incineration plants and the substantial lead times needed for construction, it seems unlikely that these technologies will be sufficient to meet the 2010 diversion targets.

Large incinerators and larger waste management sites traditionally have a large footprint, with high operating costs, and can be sensitive to the varying properties of feedstock.

Operationally they are reasonably immune to changing input characteristics (they will burn most things) but they may lose energy content if, for example, plastic packaging were to disappear over the long term.

And, their capital costs are so high that they need long terms to achieve payback, which exposes them to more chance of waste stream content changes. And, of course, they are also the most sensitive to local planning opposition.

Many of the new technologies being developed can implemented in smaller modules which can be scaled up as the market matures.

While some new technologies are more sensitive to changes in input, or have a track record built around a consistent waste stream (eg waste output from a particular food process), they remain relatively unproven with the more variable domestic waste stream.

Others, like gasplasma and autoclaving, are fairly robust. All of the alternatives to incineration tend to be smaller scale and less expensive, so don't have such a long payback period, meaning they are less susceptible to long term trends.

With the advent of wider usage of technologies such as gas plasma, MBT, anaerobic digestion, composting and autoclaving, the big questions are scaleability and the cost-effectiveness of the technology.

While some new technologies are being developed using new catalysts and enzymes, especially around improving bioreaction and pyrolysis technologies, some of the technology (such as autoclaving or gasification) is far more mature.

In the end, there are really only three options for processing waste over the next decade: landfill, incineration, or transformation, meaning processing the waste to create streams of material that can be put back into a sustainable resource system.

With the increasing cost of landfill, and public concerns regarding incineration,the really big growth opportunity looks as if it will be in the transformation of waste for energy.

When based on incinerator models, this has proved problematic.Ash residues from incineration can be as high as 25% by volume and can go nowhere but to landfill.

However new technologies, such as gas plasma, can vastly improve on this. Andrew Hamilton, chief executive of gas plasma specialist APP says the technology can provide energy with very little residues.

"Virtually nothing comes out of the process - in terms of residues, less than 1% will go to landfill," he said.

"That's as close to a 'zero waste to landfill' solution as you are going to find."

New processes such as gas-plasma are also far more efficient than incineration. For example, a typical APP plant, handling 50,000 tonnes per annum of waste, would generate 8MW of electricity.

Of this, 3MW would be used to run the plant, with the rest being exported to local grids. With heat recovery, the process is about 60% efficient in terms of the energy content of the waste - roughly twice the efficiency of a combined-cycle gas turbine.

Unlike incinerators, these new technologies can be built on a smaller scale for local need. In the case of APP a single plant would be about the right size to handle waste for a London borough, whereas a whole county might need two or three.

This means they are closer to sources of waste production so cut down on waste transportation. In addition, as they can fit into small industrial sites and do not have large chimney stacks, new technologies such as APPs will not raise the same planning objections associated with incineration.

The Investment

If national targets under the EU Landfill Directive are to be reached by 2010, huge investment will be required to build the capacity to manage ever greater volumes of waste, and in turn, create an even greater sized industry with good returns for more market players.

Many Local Authorities, backed by central Government incentives, have favoured the one-stop-shop solution to waste management provided by large PFI contracts.

But the huge expense of the PFI bidding process and the potential difficulty in raising finance for large capital expenditure makes the PFI market hard to access for all but the big seven players.

Many also believe that PFI will always remain more expensive in the long run, as projects often take back significant sums in interest and risk payments.

Rowell, for example, does not believe that PFI is the solution for the waste industry, but rather wants to see a transformation in the waste industry towards decentralisation.

There is a clear need in waste management to keep transportation impact to a minimum, and decentralisation is one way to achieve this. He is interested in the provision of smaller, modular plants and combined services, such as providing local housing estates with composting and small CHP units. He said: "In Camden we're looking at a number of new technologies such as MBT and gas plasma. For example, APP provides an interesting business model which doesn't require upfront capital costs from the Local Authority."

But if development is to remain outside the PFI system, and focus on smaller more modular systems, where will that investment come from?

According to Nigel Taunt of Impax Asset Management, finding the funds for such rapid development should not be a problem.

In the wind industry, for example, significant sums of money have been invested by private equity, project financiers and hedge funds, eager to invest in relatively low risk projects with predictable cashflow lines - especially ones with a fairly low cost of capital.

Goldman Sachs for example, already an investor in autoclaving company Sterecycle with Impax, is a significant investor in the wind market and could easily invest £1bn in the market by itself.

Nor should there be any issue with the size of smaller, more modular projects either, as the investment market has grown comfortable with the portfolio approach.

Taunt does expect the major players to gear up to fund development, but expects to see that happen by the development of SPV's with financiers and/or local authorities.

The combination of financial expertise and the experience of managing plants should prove appetising to financiers, as "the banks will invest in multiple sites and they've got the expertise to make it work."

Aside from smaller individual plants, he expects to see major companies teaming up with new technology companies, much as TEG did with Viridor in Manchester, or Novera has done with Shanks in the East London MBT facility.

He does suggest that the amount of investment in the sector will be slower than expected, but not for financial reasons. He says, "the biggest hurdle remains planning, which is painfully slow."

However, with major changes predicted for the planning system, this could soon change.


Breaking the Stalemate

The waste industry has not changed much in the last twenty years, and the majority of its experience is in landfill and incineration.

It's a fact that existing large players do not have the capacity, the finance or the technologies to meet all the new waste targets, let alone those likely to be enforced in the next few years. New technologies and new ways of financing necessary facilities exist, with new businesses and project financiers eager to follow the success of the wind market with the waste and waste to energy market.

Challenges abound in the market. According to Peter Jones, part of the problem is the issue of producer responsibility and the fact that, as yet, there seems to be little consensus on how the system should actually function.

Clearly there is only one way to break the stalemate developing in the UK waste industry, and that is by a change in the way that we understand the industry itself. In Europe many small towns have their own waste plants, providing heat and sometimes energy to local schools and businesses, as well as managing waste on a small, local and manageable scale."

Energy and waste policy in this country are not correlated but there is a significant amount of energy stored in our waste and that should be recognised.

Perhaps we need to accept that the waste and energy industries cannot and should not be managed as separate entities. The process of managing our waste, water and energy requirements - the environmental management of our society - must be understood in a unified way. While we wait for the results of the Energy Review and the Waste Review, both due in May 2007, all that remains is to question how far our politicians understand those requirements.

Felicia Jackson, Carbon International.

Felicia.jackson@carboninternational.com

www.carboninternational.com

Carbon International is a specialist investor relations and public relations consultancy focused on the environmental markets sector.

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