Waste markets study: full report

Treatment Options

The capacity modelling shows a capacity gap under both scenarios at the point when the ban comes into effect in 2021. Under scenario 1, this gap will decrease significantly by 2035. Under scenario 2, a significant gap is projected to remain through to 2035.

There are two main options available to address the capacity gap in both scenarios, which can be deployed individually or in combination.

Option 1: Export to England or Europe

Scotland could meet its need for capacity by making use of both the English and European waste markets, whether as a short/medium-term interim solution or as a long-term solution in its own right. The sections below provide commentary on trends within these markets and their capacity to take Scottish waste and how they might be expected to react to the Scottish ban.

English Residual Waste Treatment

The UK's non-landfill residual waste treatment infrastructure sector has seen significant development in the last decade, but the great majority of this has taken place in England. According to a review of the sector undertaken by Eunomia in 2016, treatment capacity more than doubled from 6.3 million tonnes in 2009/10, to 13.5 million tonnes by the end of 2016^[3]. Figure 5^[4] shows that numerous facilities are under construction, and further developments continue to be proposed.

Figure 5: English Treatment Capacity

Alongside this expansion in capacity, the quantity of residual waste suitable for treatment has fallen from an estimated 29.9 million tonnes per annum to 26 million tonnes per annum, mainly due to increased efforts to recycle waste. This downward trend is expected to continue as the UK moves towards its 50% household recycling rate target by 2020. The Resources and Waste Strategy for England^[5] contains policies to enable a 65% recycling target for municipal waste to be met by 2035.

If England is successful in achieving a much higher recycling rate, this could result in treatment capacity exceeding the available quantity of residual waste in the medium term.

In the shorter term, there are already some indications of more thermal treatment capacity being available in the English market. Most facilities in England have been built with the primary aim of meeting the requirements of one or more local authorities, although typically each provides a little spare capacity to be filled with waste from commercial sources. Table 5 shows a slight downwards trend in the capacity of UK incinerators taken up by local authority contracts, with a greater share taken by C&I waste – typically on short-term contracts.

Table 5: Thermal Treatment Inputs by Waste Stream^[6]

Waste Source	Local Authority Collected Waste	C&I Waste
2014/15	85.4%	14.6%
2015/16	85.1%	14.9%
2016/17	83.2%	16.8%

Capacity of this kind would potentially be available for Scottish waste, at least where it is sufficiently close to the border. An analysis of the operational and under construction facilities in North East and North West England, shows a total of 2.15m tonnes per annum of treatment capacity, although the great majority of this is more than an hour's drive from the border. If 15% of this is potentially available, in line with the national estimate, that would offer around 325,000 tonnes of potential capacity per year that could be accessed subject to contract churn and price competitiveness.

English Landfill

England could also offer landfill capacity to receive waste from Scotland. Although this option might not be wholly consistent with the aims of the ban, which seeks to divert waste from landfill, it might be useful as an interim solution.

Landfill infrastructure in Northern England is the most accessible to the Scottish market. Appendix 2 provides an analysis of the capacity of Northern English landfill to accommodate Scottish residual waste. This suggests that:

• In scenario 1 where Scotland meets waste reduction and recycling targets, with the addition of Scottish residual waste, landfill capacity in Northern England will be exhausted in early 2025.
• In scenario 2, capacity will likely be exceeded in late 2025.

Whilst Northern England landfill is unlikely to be a logistically and economically viable solution for all Scottish residual waste, there appears to be capacity for it to provide an interim solution for waste arising relatively close to the border. However, there is unlikely to be long term capacity without further expansion of landfill sites beyond that already permitted.

European Waste Market

The UK's use of RDF exports has grown significantly since it began in 2010. Northern European countries that invested heavily in incineration in the early 1990s and 2000s, such as the Netherlands, Germany and Denmark, have found themselves with spare capacity as increased recycling has cut residual waste generation. In some cases, e.g. Sweden, where incineration is used as part of district heating networks, the increasing demand for heat has driven more capacity to be developed despite a lack of waste. More detailed analysis is presented in Appendix 3.

A combination of competitive gate fees and the impact of the UK's landfill tax escalator led RDF export to become a viable alternative to domestic landfill and treatment, even taking account of the pre-treatment and haulage costs associated with RDF.

Over the last 8 years, as the UK RDF export market has ramped up from zero to c.3.5mt/a, as shown in Figure 6, a number of changes have taken place including:

• As imports have filled continental facilities, the competition between those facilities has reduced and gate fees have risen slightly;
• The supply chain has matured with increased sophistication in logistics and fewer, bigger players involved; and
• Brexit has introduced some concerns about potential interruption of the supply chain, while a fall in the value of Sterling has effectively increased continental gate fees for UK waste producers.

When the market first began to develop, most contracts were 'spot' contracts, with many small brokers doing deals on individual shipments for a small commission. Then, as off-takers started to develop relationships up the supply chain, contracting became the norm with typical contract lengths of 6 to 18 months. Over time there has been an increasing move towards longer contracts, depending on the requirements of the counterparties. Today, contracts of 10-15 years are not unusual; the rise in contract length has reduced churn (renewal) and provided increased security. That having been said, the full spectrum of contract terms remains available in the market, typically with a higher fee for shorter contracts.

LAs considering using the European market to meet their future needs could simply wait until they have a requirement for capacity before seeking to procure it, safe in the knowledge that there will always be some churn in RDF contracts. However, that would expose those LAs to the market conditions prevailing at that time. Over the next few years it is expected that those market conditions will be relatively challenging for service buyers, with demand for treatment at times outstripping supply. The landfill ban could be expected to worsen market conditions as demand absorbs capacity in England and leads to fresh competition for access to continental facilities.

There is still some uncertainty regarding the impact of Brexit on the European waste export market. It is unlikely that new non-tariff controls would be introduced by the EU after Brexit: the system is already closely regulated, and much the same system of notifications and documentation are required under the OECD and UN agreements already in place, and to which both the UK and receiving countries are signatories. Even if the UK leaves the single market, it appears that the framework for exports should remain much as it is today, although contracts and notifications may need to be renewed so that they refer to the correct legal framework.^[7]

Figure 6: RDF Exports from England and Wales^[8]

Option 2: Build Additional Treatment Capacity

The principal alternative to exporting waste is to build additional capacity in Scotland. Due to the lead in time associated with the development of additional treatment infrastructure, it is highly unlikely that any additional thermal treatment will be on-line and operational in advance of the ban in 2021. If Option 2 is pursued, it is likely that an interim solution will be required to treat or dispose of waste until new facilities come on stream.

The scale at which additional treatment infrastructure will be required will largely be determined by the scenario, with considerably less capacity needed in scenario 1 than in scenario 2. It would be wise to limit development of new thermal treatment capacity to that required once any targets have been met to avoid creating overcapacity as recycling increases.

Counterparty Risk Associated with Options

Local authorities have a range of different types of residual waste contract in place. The landfill ban will create significant disruption in the market, and could create problems for some contracts. The reliability of the residual waste contracts that local authorities have with counter-parties depends on many factors. It is difficult to foresee at this point which contracts may prove to be unsustainable. However, some useful observations can be made based on knowledge of the market.

Assuming contracts are drafted and executed so as to be fit for purpose, the types of risk that LAs may be exposed to in different contract types are set out below.

• Long-Term Public Private Investment (PPI) Contracts: Some local authorities have entered into 20 year+ PPP contracts, under which dedicated new facilities have been built. The counterparties in such arrangements will typically be established UK waste management companies that have a track record of delivering and maintaining residual treatment facilities. The risks to authorities in such contracts are generally small but may include:
  • Technology / market failure – there are examples of long-term PPI contracts failing where a combination of technology performance and changing market conditions impact the financial viability of the project. For example, MBT-based contracts premised on high values being obtained for fuel and recyclate outputs have struggled in recent years as the markets for such outputs has faltered. Examples include Lancashire and Dumfries and Galloway. Where the outputs from MBT are currently landfilled, the risks of contract failure will be increased by the landfill ban, as the contractor may face difficulties in securing an outlet for the waste. There are also examples of failed contracts based on thermal treatment facilities, such as Greater Manchester, although that contract included a variety of facility types including MBT. Contracts based on Advanced Conversion Technologies are fewer and further between, but such contracts are considered to carry a higher risk of failure due to reliance on less proven technology. Such failures have, to date, all involved a negotiated exit, but leave the council re-exposed to the market sooner than intended. Generally, where the technology is moving grate mass-burn incineration, the technology / market risk of contract failure can be considered negligible.
• Medium Term RDF Contracts: Some authorities have medium-term (c. 10 years) contracts with counterparties that have an equivalent term agreement for RDF export. The counterparties in such arrangements may be established UK waste companies or perhaps smaller regional operators. There are few, if any, UK examples of councils contracting directly with RDF off-takers (i.e. the operators of continental EfW facilities). The risks to authorities may include:
  • The immediate counterparty, especially if not an established UK operator, may have limited ability to ride market changes even where they are not directly related to the contractual arrangement with the council. For example, if a regional operator with a long-term RDF contract also has landfill interests, the impact of the landfill ban on those landfill interests may affect the overall viability of the operator.
  • The robustness of medium-term RDF contracts (bearing in mind local authorities will typically be once removed from the off-taker via an intermediary operator and/or trader) has not to date been tested. Currently, the RDF off-take market is effectively full with increasing pressure on the capacity available to the UK as overseas domestic inputs increase. Local authorities relying on such agreements may have quite limited penalty, contingency, bond and / or guarantee benefits in the event of contract default with perhaps 6 to 12 months of 'cover' being in place. It is very unlikely indeed that authorities will be able to rely upon any form of 'step-in' rights to give them continued access to off-taker facilities in the event of contractual default. Even if counterparties do not tactically avoid contractual commitments due to improved commercial opportunities elsewhere, any stress on these medium-term contractual supply chains could rapidly place operational risk with authorities.
• Short Term Contracts: Some councils have contracts with operators for 2-3 years for either landfill or RDF export. The risks to authorities are:
  • Short-term RDF export contracts will, by definition, be subject to renewal against market conditions. Currently, and for the immediately foreseeable future, export capacity is constrained with contract renewal most likely to result in upwards pressure on price – assuming a contract can be secured.
  • Short-term landfill contracts will be vulnerable to the direct effects of the landfill ban. Even if there are 'change of law' provisions in such contracts, the likelihood is that such provisions will place the risk on the authority. In any event, it is hard to envisage how a council would be able to require an operator to honour its obligations under a short-term landfill contract once the landfill ban is in place.