How well is the anaerobic digestion (AD) market developing in the UK? It’s a question that should concern not just investors and developers, but also policymakers and anyone who wants to see more food waste treated higher up the waste hierarchy.

When Eunomia published its ‘Anaerobic Digestion Market Outlook’ report in 2011, it highlighted how project developers found it difficult to secure food waste feedstock contracts of the nature required to satisfy lenders and equity investors. Whilst we’ve seen modest growth in the number of AD facilities since then, our recent work for a number of major AD developers has found that it remains difficult to access the vast quantity of food waste which remains in the residual stream.

We’ve been exploring these issues afresh for a new ‘AD Market Update’ published at the end of June. The report contains a thorough survey of the key policy and practical issues affecting the development of AD, but also quantifies the food waste potentially available for anaerobic digestion from sectors including food processors, other businesses and households, and sets this alongside an estimate of the capacity of current and likely forthcoming AD facilities.

This modelling indicates that we are now reaching a tipping point where the AD capacity available in the UK exceeds the tonnage of food waste being separately collected. If this trend continues, competition for feedstock could significantly change the behaviour of the market, pushing down gate fees and perhaps inhibiting investment until more separate collection can be implemented.

A large proportion of available material is generated by the commercial and industrial (C&I) sector, particularly businesses outside the food manufacturing industry. But there are several barriers to developing collections to tap into this large potential supply.

Chicken, but still no eggs

In our aforementioned 2011 report, we described a ‘chicken and egg’ situation whereby the roll-out of food waste collection services by many contractors was unlikely to happen without a local AD plant in place, and vice-versa. During the last three years, this position has shifted somewhat. Our new ‘AD Market Update’ suggests that there now is sufficient AD capacity available, but those organisations that are in a position to provide wide roll-out of commercially-attractive food waste collections (to the businesses producing food waste) are not responding in such a way as to effect change.

Weight and see

The traditional approach to pricing commercial waste and recycling collection services, using a volume rather than a weight basis, creates a major barrier to introducing food waste collections. Companies pay for waste collection based on bin size and collection frequency. Food waste is a high-density, low-volume material, so removing it for separate collection frees up little bin space. Few businesses will be able to drop a bin size or reduce collection frequency, but they could incur additional costs for a separate food collection service.

There are a few indications that the high cost of disposal (charged by weight) may be spurring a move away from pricing by volume. Collectors are enforcing weight limits increasingly strictly, and applying additional costs for overweight bins (or turning away the business). AD is cheaper, on a tonnage basis, than disposal through landfill or energy from waste. Passing the real cost of disposing of food waste back to the customer promotes separate collection and recycling. Assuming the same contractor operates both the residual and food waste parts of the service, opportunities exist to increase revenues, and to more effectively charge for food wastes.

Whilst such charging mechanisms are in their infancy in the SME waste and recycling collection market, we expect that charging mechanisms will continue to become more sophisticated, thus increasing opportunities for capturing food wastes for AD.

A problem shared

Traditionally, businesses have procured their waste collection services independently. Since few spend
much time choosing a provider and service quality is difficult to assess, cost is often the key factor. If a separate food waste collection incurs additional costs, it’s unlikely to be chosen.

However, both barriers described above are being tackled through collaborative procurement. When companies group together to buy services from a single supplier, the higher density of customers results in efficiency savings for the waste collector, which can be passed on to the customer. This brings down the price of collections, particularly of less commonly chosen services such as food waste. In combination with bin weight limits, it can make the business case for separate food waste collections stronger, even for small producers. Under collaborative procurement, the businesses’ combined buying power makes adopting a more rigorous selection process worthwhile, resulting in more convenient collection times, a wider range of services, and greater reliability of service.

The big challenge is finding someone able to co-ordinate collaborative procurement and make up-front investment in the selection process: here, business improvement districts (BIDs) are taking the lead. BIDs are business-led and business-funded bodies formed to improve a defined commercial area. Over 150 BIDs have been created across the UK, and early success stories are leading more to see waste collection as an area for savings.

Food waste services, which currently are selected by relatively few customers and so may involve more travel between collections, offer one of the biggest opportunities to save. Lower prices make it more likely that businesses will opt for separate food waste collections, and concentrate the waste in the hands of a single collector. The existence of collectors with substantial C&I food waste portfolios that can divert waste to a new facility will help to unblock the AD investment market.

Legal digest

The single most dramatic change that could take place in the market would be regulatory. From 1 January this year, non-rural Scottish businesses that produce more than 50 kilogrammes (kg) of food waste per week have been required to set it out for separate collection; from 2016, that goes down to 5kg. The Welsh Government’s Environment Bill White Paper proposed giving ministers the power to require businesses to separate food waste for collection. In England, legislation may seem much further away, but government has clearly indicated support for AD, and the AD sector and independent think tanks have called for restrictions on the disposal of food waste to landfill.

However, it would be unwise for the industry to place all of its eggs in the legislative basket when government’s core concern is removing measures it considers burdensome to businesses. AD developers must engage with both collection contractors and their customers to demonstrate the opportunities for, and advantages of, separate food waste collections, even within the current market. While we’re confident of AD’s long-term future, we’re not counting our chickens. Without this kind of engagement, we wouldn’t be surprised to see a number of distressed AD assets appearing on the market in the short term, ripe for the plucking by the more savvy private equity funds or project developers.

This article is a version of one originally published on the Isonomia website: www.isonomia.co.uk. Another entry about the difficulties of setting up C&I food waste collections can be found at:
www.isonomia.co.uk/?p=450