Guest blog: Steve Bungay shares his thoughts on the opening up of the sludge market

Steve Bungay, Technical Director at Helix Environmental Consultancy Ltd

Wastewater Matters originally reported on Ofwat’s plans for deregulation of the sludge market as part of the Water 2020 programme, back in our Newsletter of May 2016. Sixteen months later deregulation is still being actively pursued, although it now looks like opening up of the sludge market will fail in its original intention of offering savings to water company customers.

In reviewing the regulatory framework for sludge, Ofwat are promoting free markets between the water companies and commercial sector treating biowaste, and they have identified that sewage sludge, is a resource with substantial scope for market development. However, in trying to open the sludge market, are Ofwat over stepping the mark and trying to implement a programme that is potentially much broader their economic regulatory remit? The water industry is highly regulated with different bodies having responsibility for its economic and environmental regulation.

In the UK independent regulators for water in England and Wales, Scotland, and Northern Ireland, oversee water supply. These regulators ensure that water companies consider the needs and interests of consumers in their work, whilst maintaining efficient and economically sustainable practice. The economic regulators for the UK water sector are Ofwat in England and Wales; the Utility Regulator in Northern Ireland; and the Water Industry Commission Scotland (WICS) in Scotland. These regulators are responsible for settling limits on pricing and protecting customers interests, encouraging competition and investment within the industry, and administering the licensing regime for water and sewerage companies as set out in the Water Services Act (1991). Although these regulators are responsible for “encouraging competition”, importantly, Ofwat are not the UK Economic Regulator, they only have jurisdiction in England and Wales. In addition to this, Ofwat have no environmental regulatory powers.

The water companies in the UK are committed to protecting our environment. The UK water sector works closely with the regulators to ensure the continued delivery of environmental benefits. The environmental regulators that the water sector works with are DEFRA and the Environment Agency in England, the Department for Agriculture Environment and Rural Affairs (DAERA) in Northern Ireland, the Scottish Environment Protection Agency in Scotland, and Natural Resources Wales in Wales. The regulators in the UK are committed to supporting our environment by regulating water quality and protecting public health, whilst working with the water sector to help support the industry.

Environmental regulations specific the water quality date back to the Lee Conservancy Act (1868). However, the first national environmental regulations followed a few years later with the Rivers Pollution Prevention Act (1876); Part 1 - Law as to Solid Matter - Prohibition as to putting solid matters into streams; Part 2 - Law as to Sewage Pollution - Prohibition as to drainage into streams of sewers. There have been environmental regulations relating to sludge for over 140 years. The current environmental regulations for sludge are: the Sludge Use in Agriculture Regulations (1989), and the Environmental Permitting Regulations (2010). These are both UK Statutory Instruments.

In addition to these environmental regulations, there are a whole raft of good practice and assurance schemes relating to sludge. Broadly, the commercial sector operates under the Environmental Permitting Regulations, the Anaerobic Digestion Protocol, and PAS110, to produce a product approved under the Biofertiliser Certification Scheme. With the water companies operating under the Sludge Use in Agriculture Regulations, the Safe Sludge Matrix, and the Biosolids Assurance Scheme (BAS). So there are two parallel systems catering for the two sectors. Ofwat are proposing to deregulate the sludge part of the overall water company treatment operation. They are making no recommendations, or have no jurisdiction over the commercial sector.

Opening up of the sludge market breaks down into three areas: Cross Boundary Trading, Separated Sludge Business, and Cross Sector Trading. Currently, the water companies often apply simple end-to-end logic across the wastewater and sludge treatment works. However, this is rapidly changing with the water companies optimising the utilisation of their assets. Water companies are starting to consider the assets as an “ecosystem” or “model”, where sewage is effectively an input into a network, and sludge is one of the outputs from the same network. Sludge thickening sites (STS) and sludge treatment centres (STC) are components within this network. The sludge characteristics such as dry solids, pH, and volatile fatty acids (VFAs) are process biases, and then there are a number of optimisation loops such as vehicle routing, volatile solids destruction, biogas yield, liquor returns and treatment. Once a network is optimized, bringing in sludge from another water company via Cross Boundary Trading is simply an additional input into the system, and should be easy to optimize. The figure below shows the number of water company digestion sites by region, compared with the number of commercial digestion sites.

This systems approach is not dissimilar to Ofwat’s high-level thinking, where they consider “Townsville WwTW, Water company X” as part of a system. However, it is the granularity that is critical. Ofwat do not appear to have considered sludge as part of a network, but have considered it in isolation outside of the overall operation of wastewater treatment. Having a Separated Sludge Business will have the effect of breaking the network; the opportunity to optimise the network is lost. Two discrete systems will not be as efficient as a single optimised network. Optimisation through competition will never be as efficient as a single optimised network. You need to step back and understand the system. If you break the system, the financial modelling collapses. In addition to this, any financial savings made will not go back to the water company customer. Any savings that do arise will be transferred from a regulated business, away from the customer, to a non-regulated business.

So finally, does opening up the market between the water companies and the commercial sector offer any benefits? Can Cross Sector Trading be successful? Considering the environmental regulations and assurance schemes; the water companies operate under the Sludge Use in Agriculture Regulations, the Safe Sludge Matrix, and the Biosolids Assurance Scheme; whereas, the commercial sector operates under: the Environmental Permitting Regulations, the Anaerobic Digestion Quality Protocol, and PAS110. The water companies also benefit from a number of exemptions from the Sludge Use in Agriculture Regulations, including: S3 - Storing Sludge, T21 - Recover waste at a waste water treatment works, and U10 - Spreading waste to benefit agricultural land. Annex U10 will always give the water companies a competitive advantage over the commercial operators.

Therefore, the disparate environmental regulations actually disincentivise the engagement from the commercial sector, and will hinder Cross Sector Trading. Given the number of commercial plants, the amount of electricity produced, and the amount of biomethane already produced by the commercial sector, the question has to be asked: “Does the commercial sector need the water companies?”  There has been a cross over in the critical mass of the two sectors. In 2015, the number of commercial plants, the amount of electricity produced, and the amount of biomethane produced by the commercial sector was significantly higher than the water companies.

Opening up the sludge market presents both economic and environmental challenges. Economic deregulation of sludge requires regulatory change to promote free markets between the water companies and commercial sector treating biowaste. There could an opportunity to consolidate and simplify the existing regulatory framework. Whatever the outcome of opening up the sludge market, it is critical that economic deregulation does not undo the environmental improvements that have been implemented since the 1950’s. Cross Boundary Trading offers the possibility of local efficiencies and optimisation. However a Separated Sludge Business will reduce the efficiency of the overall treatment process, prevent economic savings from the optimisation of the overall treatment process, and facilitate the transfer of “customer savings” to the non-regulated business. Finally, regarding Cross Sector Trading, due to the disparity in the cost of complying with environmental regulations, there is no incentive for the commercial sector to enter the water company sector. Overall the opportunities are limited. Cross Boundary Trading is the only real opportunity that could offer savings to customers.

Click here to see this article within the 'Foundation for Water Research' newsletter, including maps showing a 'Comparison of the number of Sewage Sludge and Commercial AD plants by Water Company Region'.

Posted in: Policy updates

Tags: anaerobic digestion, biogas, sludge, Ofwat