Questions raised over Ofwat’s decision to split off bioresources
Published 17 June 2024
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In PR19 Ofwat saw the opening of the bioresources market as the route to better efficiencies for customers, but with the market struggling to provide solutions, is it still the right way forwards? Utility Week asks the experts.
Ofwat believes third parties could potentially treat and dispose of wastewater sludge in a more commercial and efficient manner than the incumbent wastewater companies.
It therefore split out the regulation of bioresources at the start of PR19 to increase transparency of the sector and has incentivised water companies to engage with the competitive market.
However, five years on little has changed, with two water companies failing to find any viable commercial propositions from the market for their plan to share new treatment capacity.
The reasons for the lack of progress are well understood, but with the concept failing to get off the ground experts are questioning whether hiving off bioresources from the rest of water company operations is still in the best interest of customers.
They argue that long-term bioresource contracts could limit the ability of water companies to innovate and exploit opportunities for resource recovery within their wastewater treatment operations in the future, while leaving them with all the risk from regulatory uncertainty.
Why it’s failed to take flight
Wastewater companies already outsource many parts of their bioresources operations, including using third parties to dispose of sludge to agriculture and in portions of the logistics operations, says Richard Lancaster, technical director biosolids, AtkinsRealis.
But one of the main opportunities for third party engagement that was being missed, according to Ofwat, is when wastewater companies anticipate making a large investment in new treatment capacity.
Lancaster says water companies have sporadically tested the market for sufficient interest or capability since the policy was put in place, with mixed results. While biomethane stands out as an area offering the greatest opportunities for outsourcing, the policy has so far failed to bring on any new third-party capacity.
In 2022 a market challenge run by Wessex Water and Severn Trent to provide new joint capacity failed to find any viable solutions.
“All bids were reviewed for process improvement, commercial feasibility, and resilience to see how they could better the existing methods of operation. On all counts, no clear step change from how the incumbent WaSCs [Water and Sewerage Companies] operate could be discerned,” says Wessex in its PR24 business plan.
This has been one of the main findings of wastewater companies, says Lancaster. “They believe they can do it more efficiently and effectively themselves, having tested the market.”
He points to the regulatory uncertainty in the bioresources market as a result of potential rule changes around nutrient limits and forever chemicals as seriously dampening the appetite amongst third party companies to enter the space and come up with innovative new solutions. “The regulatory uncertainty is adding huge complexities. It will potentially diminish the market interest or the desired efficiency.”
While third parties are not inclined to take on the enormous risk that losing agriculture as the main disposal route would bring, neither do water companies want to be left holding the baby, he says. Although its operations can be given to a third party, a water company cannot outsource its duty of care to dispose of its waste safely and sustainably.
Although some water companies have been prepared to take the risk of losing agriculture as an outlet, Wessex has not found the concept palatable. “Many of the offers sought to replicate some of the most cost beneficial/profitable areas of our existing process while passing back the risk for delivery to the incumbent.”
It also found that many of the technologies being put forward were not at the necessary technology readiness stage. “There is a lot of interest in exploring new technologies that could come into the market, but the confidence in those technologies is not at a point where a water company is going to sign a 20-year contract,” says Lancaster.
“It’s very easy to hit water companies and say they haven’t tried hard enough, they should be trying harder to stimulate market interest, but its very difficult to do that with so much uncertainty.”
Although Ofwat’s strategic vision of greater competition in bioresources was decided upon before the sector started to face increasing uncertainty over its disposal routes, Lancaster questions whether the policy was flawed from the start.
He says that Ofwat has a perception that there is the opportunity for greater efficiencies in the process and that the market will be able to deliver those efficiencies, but it is not clear if that perception is true or not, or how deliverable that is.
He believes Ofwat did not gauge how much interest existed in the market before embarking on its plan. “Did we go to the market and say if we packaged biosolids up like this in the UK would there be interest, what do you think would be the best way to package that up to bring the interest, to bring the efficiency, the investment and innovation that we want, how is that best achieved and what is the market’s view on how that is best achieved?” he says.
“It doesn’t strike me that that question had been asked. If there is limited market interest you are not going to get a particularly competitive market.”
Such a piece of work would have been particularly vital given Ofwat’s strategy of separating out the activities is unusual globally. “I see very few places where biosolids are separated out from wastewater. It’s not unique but they tend to be together.”
Lancaster says there are obvious benefits to doing so, such as economies of scale on resources and power. He says it seems “a bit odd” that Ofwat decided on a model to separate them out, especially as this is the opposite of what is happening in Scotland.
A private finance initiative has been operating both the wastewater treatment and biosolids operation at a site for Scottish Water, but this is due to be taken back in house to be run by the water company itself.
“It seems a bit odd that they are doing the polar opposite of what Ofwat is trying to drive the English water companies to do. It wasn’t really explored fully when the Ofwat documentation was completed.”
Lancaster also questions if the policy has been set up in a sustainable manner for the long term, both from a regulatory standpoint and with an eye to future innovation opportunities.
Entering into fixed 20-year contracts to supply sludge to an agreed quality would limit the ability of water companies to take advantage of resource recovery opportunities that present themselves in the future.
While recycling to agriculture allows nutrients such as nitrogen and phosphorus to be recovered from sewage sludge, the real opportunities for resource recovery lie further upstream in wastewater, says Stephen Smith, professor of bioresource systems at Imperial College London.
“Agriculture is cost-effective but a low grade method of resource recovery. The phosphate recycling that it offers is fairly low level and low value while other resources would potentially be much higher value.”
These include recovering bio-enzymes and biopolymers. “These present a great opportunity but taking them out of wastewater would affect the resulting sludge. If water companies take a big chunk out, clearly that is going to present a problem.”
Smith concludes that far from encouraging greater efficiencies and the potential for resource recovery, the strategy to separate will hamper a shift to a more circular economy.
“I really don’t see why it’s necessary. Why can’t we have a flexible integrated approach? Just as we were getting to a much more integrated system the axe has come down and separated them, but the two are very much dependent.”
Lancaster agrees, saying that as well as limiting the recovery opportunities available from the section of the process that will be left with water companies to manage, it may also see water companies locked into unfavourable situations long-term by the policy.
One such example is the development of sustainable aviation fuel from biosolids, which water companies may not see any benefits from. “If value can be gained from biosolids then how do we ensure the customer realises the benefits?” asks Lancaster.
“The policy was made with the best intentions but it has unintended consequences and it lacks flexibility for these opportunities which are literally waiting on the sidelines,” says Smith.
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