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The value of going round in circles

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Castle Andrew
Andrew Castle

Consultant

London

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08 September 2014

The last 10 years have seen a revolution in the way in which the UK handles municipal waste with volumes of waste sent to landfill dropping by 70% and recycling rates rising from 18% to 44%.

However with recent cuts in government support for local authority waste projects the next steps on the road to a circular economy are marked with uncertainty, argues Andrew Castle.
 
The appeal of circular economy approaches to dealing with municipal waste are clear to see and the UK has made huge strides already in delivering the vision through improvements in recycling rates and delivery of energy from waste projects.
 
However the waste sector is now at a watershed. There are mixed messages from government – on the one hand the government owned Green Investment Bank has pointed to a potential £5bn gap in waste treatment capacity in the UK by 2020. On the other hand the withdrawal by DEFRA of waste infrastructure credits for local authority projects points to a “job done” and funding priorities elsewhere. Against this background it is far from clear how the UK will make the next big steps towards the vision of a circular economy.
 
The perennial issues are finance and technology, and they are closely linked.
 
In terms of technology although there are many new and exciting waste management technologies, potential investors are wary as there have been too many cases of waste facilities utilising new technologies just not “doing what they say on the tin” with financial and reputational consequences.
 
The second issue is attracting financing, particularly from commercial banks. Whilst there has been strong commercial bank appetite for local authority sponsored waste projects with long term local authority backed waste supply commitments matching long term debt, these projects are now mostly procured and the next round of projects will largely cater for industrial and commercial waste volumes. This ‘new wave’ of projects present commercial banks with a much more difficult financing proposition.
 
Firstly they do not have long term waste supply commitments from local authorities so funders have to take a more “merchant” view on availability of waste. Secondly, there is greater technology risk as developers seek to enhance economics by utilising advanced technologies that benefit from green power incentives such as ROCs but don’t have the operational track record of more conventional technologies.
 
With technology and waste supply risks combining with power market risks, heavy environmental regulation and perennial problems around planning it is easy to see why waste management projects are at the more challenging end of the spectrum of renewables financings. While the UK’s Green Investment Bank is taking a robust view on risk and seeking to catalyse the market, it is but one player and can only do so much on its own. Ultimate success will depend on whether commercial banks can be attracted.
 
In the meantime, the projects most likely to succeed are those that are supported by larger corporations, either directly or indirectly through offtake or waste supply commitments. Waste management companies such as SITA and Veolia are clearly at the forefront of developments and have a large role to play as investor and/or waste supplier, but they are not alone. British Airways partnership with Solena Fuels to build a plant in London to create an estimated 50,000 tonnes of biojet fuel from waste a year is an exciting example.
 
For a market that has grown used to the certainties of the UK PPP waste programme, the nascent market for merchant energy from waste presents a new and exciting challenge. Whilst waste management in the UK has made huge strides towards the vision of a circular economy it is important to remember that this is a long term project and progress may not always be as fast as people hope or expect.