The latest meeting of Ofwat’s sludge working group has raised a number of complex issues about opening up the market to competition, including concerns expressed by the Environment Agency about the potential for a “race to the cheapest cost option” by companies to the detriment of the environment.

The main focus of the meeting was to look at the environmental regulations surrounding the market which are outside of Ofwat’s control.

Paul Hickey, Deputy Director of Water Quality and Water Resources explained that regulation itself derives from two primary sources, European and domestic legislation which is pre any impact from Brexit.

One of the issues under consideration is whether the water and sewerage companies’ (WaSCs) regulatory dispensation under the Controlled Waste Regulations 2012 will distort the market going forward. According to Paul Hickey, opening up the market is likely to place pressure on the following words used in the Controlled Waste Regulations 2012 ‘…within the curtilage of a sewage treatment works as an integral part of the operation of those work’.

WaSCs have significantly lower regulatory obligations and costs compared to other organic waste companies

The group also heard that under the Industrial Emissions Directive (IED), WaSCs have significantly lower regulatory obligations and costs compared to Other Organic Waste (OOW) companies who would require a permit to treat sludge. No decision has yet been made as to whether this will continue to be the case. WaSCs also have a further exemption, T21, covering the recovery of relevant waste at a waste water treatment works, which also results in them having significantly lower regulatory obligations and costs compared to other operators.

The range of other concerns raised at the meeting include:

• Environmental issues must not be compromised by the opening up of the market or by a loss of confidence in the sector by consumers;
• The EA does not want to see a “race to the cheapest cost option” by companies to the detriment of the environment;
• Currently the EA has good visibility of where sludge comes from and goes to as there are only a small number of players in the market. There is a concern that this could change and reporting become difficult with the opening up of markets; 
• Historical subsidies which may preclude treating sludge or affect local authority claims for recycling targets.
• Possible increase in cost to public if financial burden of applying environmental regulations to sludge treatment and use outweighs commercial gains/costs savings to the water industry.
• Risk if cost pressures in sludge market drive down quality of sludge treatment and final sludge quality going to land.
• Dilution and traceability issues if there is an increase in mixtures passing through treatment facilities and into the landspreading supply chain.
• Legal length of contract for sludge service – too short given uncertainty around costs of Environmental Regulations.
• Placing permit requirements upon treatment activities generally introduces unnecessary additional costs in the form of consultancy fees and application/subsistence charges.
• Lack of an end of waste option for sludge and products derived from or containing sludge acts as a barrier to co-digestion.
• Cost prohibition of co-treatment - the waste industry will not want to take sludge if it precludes EoW for the product.

Other issues covered during in the discussion raised a number of emerging concerns, including the suggestion that some operators are "sweating their assets". This could lead to poor quality outputs, with commercial decisions driving this behaviour  - and the Environment Agency does not want to see this increase.

An EA internal audit project had also found that some wastes which were not suitable for composting were going to other waste treatment sites which could include Anaerobic Digestion which would require further investigation.

Brexit – no reason to change environmental standards but could reduce red tape

In response to the question of whether Brexit would be an opportunity to consolidate waste regulations, the meeting heard that there was no reason to change the environmental standards but it may be an opportunity to revisit the administrative processes and to reduce red tape.

One delegate also commented that Ofwat’s objectives are more short term but it could take a long time for the market to open up and become fully established, suggesting that the regulations could be addressed to meet the likely market opening timescale, i.e. in 5 years’ time.

In response, the group was told that there is no guarantee that government and civil servants could carry out all of the regulatory requirements in the timescales ready for the market opening, and no guarantee of the regulations being high priority in a post-Brexit UK.

According to the note of the meeting, Ofwat’s proposal is intended to address the issues and make it a more level playing field for everyone. However, there was general comment to the effect that “if the water industry was aligned more to the rest of the industry then this could have a significant impact on water customer bills with possibly no additional benefit to the environment.”

The discussion also raised an interesting point over the fact that if food waste is accepted into a sludge treatment site, the exemption is lost and the site needs to comply with full Environmental Permitting Regulations, which would be a commercially based decision. However, it was pointed out that waste already arrives without wastewater treatment sites losing exemptions via households with food waste disposal units that feed into the sewer system.

Water cos do not want to see reversal in ability to produce products for agricultural use as a result of opening up the market

Anglian Water presented a view from a water company’s perspective in relation to both the current and future market. Explaining that 78% of the current UK sludge output goes to agriculture, Simon Black from Anglian said that if this market was to cease to exist the only alternative would be incineration, which is very expensive and would have a considerable impact on customer bills.

He reiterated that biosolids are a valuable resource and must been seen as such, not just waste, generating £2.8 million for Anglian Water alone. It also has a beneficial yield on crop growth and to the soil environment, supporting the view that this is not a waste disposal programme.

Anaerobic Digestion accounts for 73% of all treatment methods, which has been rising over the past few years. The process produces a high quality product for agricultural use, something that the water companies do not want to see reversed in the future as a result of opening up the market.

He went on to explain that the Biosolids Assurance Scheme (BAS), is a transparent standard to provide reassurance and confidence to the food chain and its consumers. All biosolids products water companies produce will meet the standard by the end of next year and will be subject to audit by a third party accreditation body. The standard sets the minimum / benchmark requirements and does not preclude co treatment. BAS is run through a not-for-profit organisation established by the water companies.

Light touch regulation should not be removed for co-digestion 

Anglian Water then presented its view on whether the environmental legislation was a trading barrier for the market - which the utility does not see as a barrier for WaSCs trading as this is covered by the Sludge Use in Agriculture Regulations. However, the water company does not want to see light touch regulations removed. If co-treatment  of two materials appropriate for light touch regulation on their own moves to a complex and costly regulatory approach if combined, the impact could be significant on water customer bills.

Anglian cited one water company which quoted c£100 million of capital expenditure would be required for their implementation of the Industrial Emissions Directive (IED), and across the sector this would be considerably more. Similarly if OOW operators wanted to treat sludge it would take them into a different more costly regulatory regime which would not be appealing for them.

No UK evidence to say co-digestion of food waste and sludge would be beneficial

From the waste Industries’ perspective, Alexander Maddan from Agrivert said that at present, there is no UK evidence to say that co-digestion of food waste and sludge would be beneficial in the UK. It is used elsewhere in Europe but it is very expensive. One of the main practical challenges is de-packaging of food waste which can account for up to 40% of the costs.

Retention time is also a factor requiring a minimum of 60 days, with up to 100 days required to extract gas, which is significantly different to sludge treatment. He also explained that de-watering of food waste digestate cannot be done economically, although this may be possible if mixed with sewage sludge. Large seasonal variations in food waste composition would also need to be taken into account.

Financing third party sludge processing and recycling at WaSC sites a key issue

Alexander Maddan also raised what is likely to be a key issue for the market to consider, namely, the fact that very few WaSCs have third party sludge processing and recycling at WaSC sites due mainly to accounting treatment (capex / opex) and ownership of the solution and risk.

A project by Agrivert with Northumbrian Water which ran for 10 years, required £1.6 million of capital investment from Agrivert, minimal input from NWL and returned a good margin over the 10 year period. At the end of the project the plant was refurbished and re-sold back to NWL. The project did not continue in Agrivert’s view due to the fact that despite being Anaerobic Digestion suppliers, they were not framework contractors - and although their solution had a lower cost they did not succeed in their bid.

In their opinion, in order for this market to develop, contracts need to be long term and large volume to enable costs to be spread, and the contractors need to be able to take on the complete totex risk.

The meeting then went on to explore drivers for change in order to derive a programme of work that can run alongside the working group to develop new ideas and proposals in this area.

Constraints flagged up included:

• Possible increase in cost to public if financial burden of applying environmental regulations to sludge treatment and use outweighs commercial gains/costs savings to the water industry.
• Risk if cost pressures in sludge market drive down quality of sludge treatment and final sludge quality going to land.
• Dilution and traceability issues if there is an increase in mixtures passing through treatment facilities and into the landspreading supply chain.
• Legal length of contract for sludge service – too short given uncertainty around costs of Environmental Regulations.
• Uncertainty about which operating model will emerge in the developing market i.e. co-digestion, co-location, trading within WaSCs etc. The constraints will be different for each scenario.
• Placing permit requirements upon treatment activities generally introduces unnecessary additional costs in the form of consultancy fees and application/subsistence charges.
• Lack of an end of waste option for sludge and products derived from or containing sludge acts as a barrier to co-digestion.
• Cost prohibition of co-treatment; waste industry will not want to take sludge if it precludes EoW for the product.

Opportunities identified included:

• Raising the ‘bar’ on water company performance by using the same level of control as in the waste industry.
• Opening up the sludge markets creates more transparency in sludge use and sludge quality.
• ‘Polluter pay principle’ applied to use of sludge which creates an income stream to fund regulator compliance activities.
• Creation of earned recognition principle through use of the Biosolids Assurance scheme.
• New treatment and use opportunities created in the water industry through access to civil engineering and waste management experiences/facilities e.g. road sweeping treatment technology transfer to grit and screening treatment.
• Liquor treatment (and other sludge management related material streams) could also enter opened up sludge market.
• Involvement of downstream stakeholders in wider sludge market e.g. British Retail Consortium.

The next meeting of the group will take place on 8th September 2016.