Burning bridges: what does Covanta’s departure mean?

The last act of Covanta’s ill-fated attempt to enter the UK energy from waste (EfW) market played out this month, as the company settled its case over the award of the Merseyside Recycling & Waste Authority (MRWA) waste disposal contract. Now it only remains for the company to find a buyer or a partner for its UK EfW business.

The withdrawal of a capable, well-resourced multinational should perhaps have generated more surprise in the waste sector than it has. Its failure is extremely instructive about the shortcomings of the UK market for C&I waste infrastructure in recent years, while the decision to pack up and go home is the clearest indicator yet that the EfW boom is ending.

Burn in the USA

New Jersey-based Covanta came to the UK in 2005 with proven technology from its extensive US operations, and access to plenty of capital. Like its competitors, it hasn’t always found obtaining planning permission straightforward. After a three year process of rejections and appeals, Eric Pickles ultimately ruled against its proposed 390,000 tonne facility at Middlewich, Cheshire last July. But Covanta’s record is no worse than most, and it has secured permission and permits for its Rookery site in Bedfordshire and Green Hills in North Lanarkshire. As the company’s website still boasts (at the time of writing):

“Covanta is now in a strong position with projects in the UK and Ireland currently progressing through development and planning stages or entering construction phases. Each of these projects has been located with consideration to transport links and areas which have high levels of commercial and household waste…. Covanta’s proposals represent an investment of around £2 billion into the UK and Ireland’s waste and energy infrastructure market and capacity will be delivered during the next five years.”

So why has its efforts and willingness to invest not paid off? Covanta’s difficulties have been securing feedstock and finance. The company wanted to build its business on merchant waste – but that market comes with no guarantees, and to justify making investments, it needed to obtain the security of a baseload of large, long term contracts like MRWA’s. It was unsuccessful in doing so, and perhaps a little unlucky. In Merseyside, even the benefit of already having planning permission for the nearby Ince site (a joint venture with Peel Environmental Ltd) didn’t translate into a win; SITA’s Teesside plant was further away, but also further advanced.

Low gear

Covanta could have used reserves to fund construction of EfW facilities focused on the C&I spot market. But prudently the company wanted to gear its investments by bringing in other backers.  Since 2008, gearing has been down across the globe as the recession has made access to finance more problematic. In the UK, waste arisings shrank, while competition within the EfW market and from low-cost export options made new plant look a less certain prospect. Investors weren’t forthcoming without the security of reliable incomes from long term contracts.

Covanta wasn’t alone in feeling the squeeze – merchant plant is coming on stream rather more slowly than might have been expected from the portfolio of projects that the big players hold. Given that much of the portfolio is EfW, this may be welcomed by anyone with concerns that over-committing to incineration capacity could hinder progress towards increased recycling. We have already exceeded recycling targets once thought impossible, and still more challenging targets are on the horizon; it seems short-sighted to treat current goals as the limit of what is possible within the lifespan of an EfW plant.

However, there is little sign that the investment climate is any easier for recycling facilities, and the slowdown therefore extends the status quo of export and landfill. If the market is failing to tackle the need for improved, and less costly, waste management options for business, is intervention needed?

Mandarins, merchants and municipalities

Government is already heavily engaged in the waste infrastructure market. When in the early 2000s Defra was confronted with the challenge of meeting the UK’s Landfill Directive targets, it recognised the need for major investment. Understandably, but unfortunately, Defra’s approach in the decade since has been shaped by the investment decisions taken back then.

The targets mandated getting waste out of landfill, without specifying what should happen to it instead. They focused on “municipal waste”: its definition is rather variable across Europe, but in the UK it largely excludes C&I waste. While large incinerator projects often provided more capacity than was required for local municipal waste, little was done to match investment to regions’ likely needs. It was left to local authorities and big business to partner up, propose facilities and find most of the capital, with support from the government’s Private Finance Initiative (PFI).

Spaced out: the peculiar pattern of waste PFI projects. Source: Eunomia

The rules and logic of PFI led Defra to put its infrastructure investment resources into a relatively small number of large-scale projects. The result a decade later is a (slowly shrinking) list of 28 projects at various stages of completion.  They make a strange patchwork:

• there are nine projects in London and the South East;
• Yorkshire receives around a million tonnes of thermal treatment capacity;
• Devon and Cornwall receive a giant incinerator each, just 40 miles apart; yet no other treatment facilities are funded in the South West.

Advice from consultants who proclaimed thermal treatment to be the answer resulted in the majority of projects having a large, expensive EfW plant at the heart. Conveniently, this offered rather more opportunities to sell in consultancy support, legal advice and accountancy than did recycling-led options!

Over 4.3m tonnes of thermal treatment capacity has been commissioned under PFI, even after recent controversial and disputed decisions to axe several projects’ PFI credits. The next largest technology is 2.5m tonnes of MBT, which will yield a little recycling and a lot of fuel for incinerators. This compares with just over half a million tonnes of MRF capacity and rather less for composting and anaerobic digestion. It’s clear that the great majority of the money has been spent near the bottom of the waste hierarchy.

A temporary capacity

The PFI facilities may not be the ideal solutions or ideally situated, but many of them are getting built, meeting the overriding objective of diverting waste from landfill. Because municipal waste tonnages have reduced and recycling has grown more than anticipated, surplus EfW capacity has been available. Most commercial waste contractors I’ve spoken with about collections in Bristol and Bath have extolled their “zero to landfill” offer – which means most residual waste ending up as fuel. This is helping to divert C&I waste from landfill; but it further undermined the business case for Covanta and others to invest in merchant plant.

The merchant waste sector has received no direct government investment or central co-ordination. The result is a plethora of facilities with planning permission, but questionable prospects of ever being funded and built. I can’t see how the patchiness of current C&I waste capacity will be addressed without a dose of unfashionable central planning.

Ricardo-AEA’s recent analysis of the topic for CIWM seems to argue for just this. They call export an “unstable” option, and say that better figures on C&I waste and strong leadership are needed “to enable the waste industry to effectively plan, project and provide for the management of commercial and industrial waste streams.” Their claim is that more EfW and more recycling facilities are needed.

By contrast, Eunomia has been warning for a while that if we build what is planned, there is a risk of overcapacity for residual waste treatment. The company sees reasons to think that low cost EfW options overseas will continue for the foreseeable future, which suggests that the UK’s focus now should be on building recycling infrastructure. It strikes me that the differences in the figures and their interpretation appear to be narrowing, and increasingly the question is – how optimistic should we be about the prospects for further growth in recycling?

A warning from history?

Those with long memories might see parallels between the Covanta’s story and that of another big American firm. Under the name UK Waste, WMI attempted to break in to the British waste market more than twenty years ago. After a decade of struggle they, too, called it quits when one procurement decision too many went the wrong way. The last straw was Avon County Council’s unsuccessful defence of Terry Adams Ltd’s appeal to the High Court, which quashed their one big waste contract.

But the waste data suggests that Covanta’s departure signals something rather more significant. It is not simply an admission of defeat, but an indication that after the massive investment in EfW over the last decade, the need has been met and it’s time to focus attention higher up the waste hierarchy.