One of the by-products of a wealthy society is a surplus of waste. And as more and more people climb the greasy pole towards middle-class consumerism, the volume of waste grows. Unsurprisingly, the amount of waste produced by a society is tied closely to movements in its population, household growth and gross domestic product. The Office for National Statistics predicted last year that the UK population would increase by 5.5 per cent over the next 10 years, reaching 69.2m in mid 2026. This increase will inevitably lead to intense pressure on the country’s landfill and recycling capabilities.
A report from waste management group Biffa (BIFF) estimates that this will lead to a 13m-tonnes-a-year shortfall in energy-from-waste capacity, and that landfill capacity will be exhausted within the next 10 years. If the threat of diminishing capacity is the metaphorical stick to drive change in waste management, then energy from waste is the carrot. As climate change efforts force the UK to reduce its pollution from fossil fuels and landfill taxes increasingly restrict the dumping of waste, the emergence of technologies that can turn harmful by-products into fuel and energy create an opportunity to kill two birds with one stone.
The way waste is dealt with is going through a clear shift. Data from the Environment Agency show a clear increase in waste being treated or transferred, while the amount destined for landfill decreases broadly in line with diminishing capacity.
Looking at the numbers it would be easy to conclude that companies dealing with waste are a surefire hit for investors. However, recent history is littered with examples of high-profile failures on this front. Earlier this year, John Laing (JLG), Pennon (PNN) and Costain (COST) announced they were exiting their £3bn PFI contract with Greater Manchester Waste Authority 17 years early. All parties mutually agreed to end the contract after it transpired that the projected level of savings could not be met, combined with “technical and operational challenges on the contract”. However, Viridor, a subsidiary of Pennon, will continue to operate the Runcorn combined heat and power plant for the full 25 years of the original contract.
In addition to the challenges at Greater Manchester, both Viridor and support services group Interserve (IRV) were hit hard after subcontractor Energos entered administration. Energos specialised in an advanced conversion technology known as gasification, in which materials are heated in low oxygen to create gases that can then be used across multiple applications. Interserve in particular has continued to be hurt by its exit from the energy-from-waste business, with the latest financial provisions reaching £195m. The lesson here is that investors looking for opportunities in waste management and energy from waste must remember that some of the technologies remain commercially difficult and challenges exist from the planning process all the way to the waste being processed.
One man's trash
The shift away from landfill has been driven in large part by the introduction of the Landfill Directive, which restricted what types of waste could be left there. As part of this, the government introduced a duty on waste that went to landfill. This spawned a massive increase in the amount of recycling and development of energy from waste in an effort to minimise taxes.
“We’ve seen waste collection treatment companies change from entities that were collecting the waste to becoming resource managers and managing – on behalf of their clients – a process of directing as much value as possible out of waste streams,” said Nick Churchward, a partner at law firm Burges Salmon.
It also led to the emergence of the so-called waste hierarchy, a strategy for minimising pollution. The hierarchy is made up of five stages: prevention through using less material or keeping products for longer; re-use of whole or parts of items through checking, cleaning and repairing; recycling items so they can be used for a new purpose; other forms of recovery such as entering them into an energy-from-waste process, and finally disposal, where the items are simply sent to landfill.
The application of the hierarchy has had impressive results so far. Around 45 per cent of household waste and roughly 59 per cent of industrial and commercial waste is recycled. The UK is among the best-performing countries in Europe for recycling, although direct comparisons are difficult as many European countries have opted for less stringent methodologies for assessing themselves. However, Biffa’s research indicates rates have plateaued, and predicts policy intervention is needed if the UK is to see further improvement.
Waste not want not
The most common type of energy-from-waste technology is incineration. It’s popularity lies in the fact it is proven, reliable and old. As of 2016, incineration accounted for 57 per cent of the UK’s energy-from-waste capacity. However, construction has typically relied on support from the government, with 77 per cent of the capacity currently under construction being delivered via the help of PFI credits and an underpinning contract. These credits are no longer available, requiring future sites to rely on financial backing from elsewhere. In order for economies of scale to begin to erode the gate fees plants charge on waste feedstock, incineration plants need to be capable of processing 300,000 tonnes a year, according to Biffa.
The need for size makes traditional incineration unsuitable for many locations around the country where potential plants cannot be serviced with large deliveries of waste, said Michael Martella, chief executive of Anergy, an energy-from-waste company working on a new process for producing energy called high-temperature pyrolysis. He added that traditional incineration was often demanded by investors backing new plants.
“The technology they’re trying to deploy is the stuff that was developed 70 years ago,” he said. “The issue is a lack of innovation.”
Advanced conversion technologies such as gasification and pyrolysis – a process similar to gasification carried out in the absence of oxygen – are potentially better suited to small-scale generation, and may provide an alternative where large-scale incineration is impractical. The problem is that innovation has been slow to bear fruit. In recent years new energy technologies have been able to apply for inclusion in the government’s contracts for difference (CFD) auction. This offers to pay low carbon generators the difference between an agreed strike price and the average market price for electricity in the UK. This allows for greater certainty among low-carbon generators. The first CFD allocation round took place in 2014 and included three projects that were based on some form of gasification or pyrolysis process. However, the Biffa report indicates only one has so far gone into construction. The second CFD auction round was announced in September this year and included six projects that use advanced conversion technology.
“Advanced conversion technologies still have a lot of problems getting them to work commercially,” said Mark Ramsay, principal consultant in Ricardo’s (RCDO) Energy and Environment department. This is in part due to the difficulty in ensuring standards in the waste feedstock that is delivered. The presence of toxic material is especially dangerous for anaerobic digestion facilities. These use micro-organisms such as bacteria to break down organic material into gases and fertiliser. If non-organic material, such as the capsules used in coffee machines, makes it into a digester it can damage the micro-oganisms.
