Sewerage is an asset, not the solution to a problem

Since privatisation, the logic of an integrated clean and dirty water enterprise structure has dominated in the water sector. This was underpinned by the logic of scale economies, so necessary to utilities originating in a public service ethos. Is that about to change? In the "dustbin" solid waste economy, disposal taxes will have increased the upper price ceiling of waste disposal from £7 per tonne in 1997 to £100 in 2013, powering a veritable explosion of new entrants offering alternatives to landfill. Unsurprisingly, this is creating a loop back to technology innovation embracing new bio, thermo, chemical and mechanical applications able to prosper at these higher rates of reward. The stimulus is not just fiscal, however.

In the BRIC nations (Brazil, Russia, India and China), the middle classes are expanding by an estimated 300 million people each year. Their demand for consumer goods, packaging, heat, power, cooling and protein is closing the gap between virgin prices and recovered material costs. Waste is becoming a resource – as recyclate product, electricity, combined heat and power (CHP), cooling of transport fuels – in short, waste is becoming a renewable asset.

How does this affect water? Sewerage systems now need to be viewed as an asset, not the solution to a problem. The burgeoning UK waste-to-resources transition is land hungry, with the companies that provide old solutions under pressure from others seeking value from waste. The latter includes generators, domestic fuel producers, industrial gas manufacturers and established packaging producers. All are eyeing the need to expand renewable and low-carbon feedstock supply chains. But where to locate these usurpers of landfill?

Pioneering work in the West Midlands in 2008 emphasised five simple parameters for locational choice: proximity of feedstock; proximity to exit markets for output; qualities of the site; communications and access; and public acceptability. A working scorecard model was evolved and granted first prize in the Infrastructure category of the Royal Institute of Town Planning Awards 2010. Sewerage plants score highly: they have a ready supply of feedstock; technology innovation in sludge treatment has created large areas of space close to cities or within them; they are seen as a social necessity by their neighbours; consenting issues for new enclosed resource recovery operations are less problematic than greenfield; they are often linked to the gas and power distribution networks for the movement of energy surpluses; and communications are often good via road and rail.

These attractions face barriers, however. One of these is regulation. Waste as a resource is the basis of an entire new industry that has tripled turnover from £4 billion to £12 billion in the past 15 years. Sewerage processing assets belong more readily to a competitive – resource transition – regulatory regime, rather than one focused on regulated returns from a compliance-driven asset investment cost in a monopolistic market structure. Ofwat has no place in that.

Economically, however, there is the chance to unlock shareholder value. Auctioning dirty water processing sites to large and hungry resource recoverers looking for 20-30 hectare integrated processing sites could yield up to £5 billion over current balance sheet valuations based on my estimates (with up to 150 prime sites) – 11 per cent of current turnover of the UK water sector (reported as £46-50 billion in their balance sheets). Potential bidders arrive with strong balance sheets in the waste, energy, packaging, industrial gases and property pension fund sectors. To a cash-strapped Treasury, the windfall benefits from consented new-generation resource recovery estates are a further possibility. As a bonus, the stimulus to a market-led raw material recovery industry replete with jobs, investment and reduced dependency on imports of everything from energy to rare earth metals must surely be worth a second look?

Peter Jones, director,Policy Connect

This article first appeared in Utility Week’s print edition of 30th November 2012.