ANALYSIS: AD sector forecast to flatline as competition bites
Despite strong government support, the anaerobic digestion (AD) industry's momentum appears to be on the wane. Issues around feedstock security and digestate markets are hampering progress and many now forecast the sector to flatline from 2012 onwards.
A strong sentiment, and one which came out of a panel debate held at the Anaerobic Digestion & Biogas Association's (ADBA) annual conference in London yesterday (December 14). Although there is consensus that the AD industry has lots of potential for growth, it is also operating in a highly competitive, price-driven market.
BiogenGreenfinch is one of the leading AD operators in the field. Its CEO Richard Barker has a strong head for economics and his company has studied the maths. He says that while there's been a "significant explosion" in the number of facilities coming on-stream to treat food waste, this will start to level off.
"Most of these plants being built are merchant-style facilities ... people are still digesting the technology, asking 'is it commercially viable?', 'is the investment return good?'. Operators need to wait and see. We are in a bit of a transitional phase - entering a period of consolidation and reflection," he maintains.
According to Barker, AD plants to treat food waste carry more of a perceived risk than farm-based facilities, and so the returns need to be higher - up to 17% in some cases - to attract investment. These risks, perceived or otherwise, centre around the biological stability of feedstock - whether it can yield enough gas, as well as security of supply and end-markets for the digestate.
It is the digestate in particular that could become one of the biggest stumbling blocks. While Barker calls it the "unspoken challenge", Lee Marshall, who sits on the Local Authority Recycling Advisory Committee (LARAC), prefers the term "elephant in the room". Marshall would love to see a market build up for the digestate as it would lower gate fees for local authorities.
Philipp Lukas heads up Future Biogas, who specialises in crop-based AD operations. He argues that there are a lot of myths surrounding the use of digestate - that it might taint the flavour of whisky for one - that need busting.
These myths stem from the composting industry, where compost was long considered a waste, not a product, until PAS 100 was introduced. While the classification of digestate remains an issue under the environmental waste controls, the advent of PAS 110 should go some way to help address these concerns.
Meanwhile, smaller-scale AD plants, such as those co-located by prisons or civic amenity sites, offer great closed loop potential for renewable energy. But not many are being built. According to Burdens Energy director Will Kirkman there is interest out there, but many potential clients are still unsure how AD can fit into their business operations.
"There are concerns around the complexity of operating the plant, then there are regulatory issues. The costs and range of compliance is a barrier. What would help are mechanisms to allow feedstock flexibility and increased feed-in tariffs for small plants - rebates even for beneficial behaviour," he says.
Kirkman adds that location - where you site these plants - is crucial and his company are now looking to build modular systems which are more attractive to investors. "It's tough out there and we may be heading towards some flatlining, but where I see growth is around community, local and farm-based digesters - I can see a handsome market there for all of us."
However Sainbury's head of waste, Dave Timson, argues that from a customer perspective, AD operators aren't doing enough. He cites the limited opening hours of some facilities as being out of touch with the world of commerce where companies such as his operate 24/7.
"For AD to gain momentum, it must consider the needs of the customer. Nine to five weekday opening times are totally unacceptable. Facilities must have good road access with pit stops as logistics are key to selecting a plant. It's also unrealistic to expect customers to sign up to long-term contracts -they need to be more flexible," he argues.
Sobering words indeed for a sector that shows a lot of promise, but still has some tricky potholes to negotiate. While markets need to be urgently developed for digestate, some point out that this will happen naturally as fertiliser prices rise and carbon impacts come into play.
In the absence of a landfill ban on food waste, much of the industry will be reliant on the amount of food waste that can be diverted and fed through the AD route, but there is a fair degree of optimism on that front from some of the major players.
A key issue has been, and remains, investor confidence - but that's not insurmountable. One of Barclays Corporate's directors Ashish Anand was quick to reassure delegates that bankers "do like" AD projects, but are asking for more security given the financial climate: "There is genuine appetite to finance AD, but on the right conditions and scale."