Analysis

Why it is only going to get tougher for energy from waste plants

The fall in oil prices and lack of government interest will make it tougher for any business based on waste or recycling, says Matthew Farrow

The 1990s and 2000s were years of unprecedented change in the waste and resources industry.  Back in the 1980s, the industry was still primarily a logistics industry.  UK geology and policy meant that landfills were cheap and plentiful, and money was made through efficient operation of truck fleets collecting, transporting and disposing of waste material.  Recycling rates were perhaps 10% until around 2000, and the industry was a patchwork quilt of family-owned medium sized forms who dominated local or regional markets.

A more national approach to regulation and enforcement, along with looming EU environmental regulation, the landfill tax and the impact of globalisation transformed all this.  Money could be made out of diverting waste away from landfill, and the industry became more capital intensive, and technology-orientated.  Clever technology such as optical sorters and plasma arc gasification held out the prospect of more value being extracted from what had previously been landfilled.  Consolidation and internationalisation followed, with a handful of growing UK firms such as Biffa and Cory and continental giants such as Veolia, Sita and FCC absorbing most of the old medium size companies.

These changes went along with an industry whose fortunes and outlook were buoyant.  Recycling became a civic-duty, recycling rates rose rapidly towards 40%, and a combination of PFI deals, legally-binding EU targets and the landfill tax escalator provided a robust framework for investing in large scale waste infrastructure projects.

In the last five years though, this outlook has become more challenging.  This is due to four factors in particular.

First, Defra and the promotion of recycling has been an easy target for the public spending restraint of recent years.  Defra’s own budget has been cut, as has that of WRAP, the agency set up to facilitate the move to a recycling society.  Local authorities have been unwilling to keep funding schemes to promote reuse and recycling when they are having to axe ‘frontline services’.  These cutbacks have happened just as this sort of facilitation and support was most needed – ie as we move from the easily collectable and recyclable materials such as paper and glass to the more difficult ones such as plastic tubs and film.

Second, while ‘waste is a resource’ has become something of a mantra, a resource is only valuable and worth collecting if someone is willing to pay you for it.  The fall in the oil price and in commodities more generally has badly hit the value of material such as plastics recyclate.  Waste management companies almost always have to bear the risk of commodity price fluctuations as their customers (whether business waste producers or local authorities) usually refuse to do so.

Third, there has been less UK government leadership. A decade ago all political parties vied to outdo each other as champions of the ‘circular economy’.  But although the Coalition Government began with ambitious rhetoric on the green agenda Ministers were soon bogged down in the ‘bin wars’, a Judicial Review over their implementation of waste collection regulations and controversy over some large Energy from Waste proposals.  These days I suspect No 10 sees waste policy as something where Ministers should say and do little on the basis it causes more political trouble than its worth.

Lastly, and inevitably, the prospect of Brexit has alarmed an industry whose modern market was created by the Landfill and Waste Framework Directives.  Those Directives could be repealed in the UK post-Brexit and the Commission’s ‘circular economy package’ which is laden with proposals for EU incentives for 70% recycling and more progress on reuse and remanufacturing would become irrelevant.

All of the above lends an air of anxiety to an industry which is a core part of the ‘green economy’.  Investment in waste management projects always carries multiple risks – planning risk, construction risk, technology risk (especially for new methods of sorting and treating waste that was not previously recycled), feedstock risk (ie the risk that people or companies start to throw away different things – even a small change in the proportion of say paper or certain types of plastic in a waste stream can completely undermine a project’s technical and financial assumptions) and commodity price risk.  Some of these risks are not present in other infrastructure sectors and so the sector needs a clear long term policy framework to give investors’ confidence.  Whether it will get this anytime soon is anyone’s guess.

ARTICLE ON WASTE RESOURCES INDUSTRY

The 1990s and 2000s were years of unprecedented change in the waste and resources industry.  Back in the 1980s, the industry was still primarily a logistics industry.  UK geology and policy meant that landfills were cheap and plentiful, and money was made through efficient operation of truck fleets collecting, transporting and disposing of waste material.  Recycling rates were perhaps 10% until around 2000, and the industry was a patchwork quilt of family-owned medium sized forms who dominated local or regional markets.

A more national approach to regulation and enforcement, along with looming EU environmental regulation, the landfill tax and the impact of globalisation transformed all this.  Money could be made out of diverting waste away from landfill, and the industry became more capital intensive, and technology-orientated.  Clever technology such as optical sorters and plasma arc gasification held out the prospect of more value being extracted from what had previously been landfilled.  Consolidation and internationalisation followed, with a handful of growing UK firms such as Biffa and Cory and continental giants such as Veolia, Sita and FCC absorbing most of the old medium size companies.

These changes went along with an industry whose fortunes and outlook were buoyant.  Recycling became a civic-duty, recycling rates rose rapidly towards 40%, and a combination of PFI deals, legally-binding EU targets and the landfill tax escalator provided a robust framework for investing in large scale waste infrastructure projects.

In the last five years though, this outlook has become more challenging.  This is due to four factors in particular.

First, Defra and the promotion of recycling has been an easy target for the public spending restraint of recent years.  Defra’s own budget has been cut, as has that of WRAP, the agency set up to facilitate the move to a recycling society.  Local authorities have been unwilling to keep funding schemes to promote reuse and recycling when they are having to axe ‘frontline services’.  These cutbacks have happened just as this sort of facilitation and support was most needed – ie as we move from the easily collectable and recyclable materials such as paper and glass to the more difficult ones such as plastic tubs and film.

Second, while ‘waste is a resource’ has become something of a mantra, a resource is only valuable and worth collecting if someone is willing to pay you for it.  The fall in the oil price and in commodities more generally has badly hit the value of material such as plastics recyclate.  Waste management companies almost always have to bear the risk of commodity price fluctuations as their customers (whether business waste producers or local authorities) usually refuse to do so.

Third, there has been less UK government leadership. A decade ago all political parties vied to outdo each other as champions of the ‘circular economy’.  But although the Coalition Government began with ambitious rhetoric on the green agenda Ministers were soon bogged down in the ‘bin wars’, a Judicial Review over their implementation of waste collection regulations and controversy over some large Energy from Waste proposals.  These days I suspect No 10 sees waste policy as something where Ministers should say and do little on the basis it causes more political trouble than its worth.

Lastly, and inevitably, the prospect of Brexit has alarmed an industry whose modern market was created by the Landfill and Waste Framework Directives.  Those Directives could be repealed in the UK post-Brexit and the Commission’s ‘circular economy package’ which is laden with proposals for EU incentives for 70% recycling and more progress on reuse and remanufacturing would become irrelevant.

All of the above lends an air of anxiety to an industry which is a core part of the ‘green economy’. 

nvestment in waste management projects always carries multiple risks – planning risk, construction risk, 

technology risk (especially for new methods of sorting and treating waste that was not previously recycled), feedstock risk (ie the risk that people or companies start to throw away different things – even a small change in the proportion of say paper or certain types of plastic in a waste stream can completely undermine a project’s technical and financial assumptions) and commodity price risk.  Some of these risks are not present in other infrastructure sectors and so the sector needs a clear long term policy framework to give investors’ confidence.  Whether it will get this anytime soon is anyone’s guess.

 

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