The UK waste sector has transformed over the past ten years, with the investment landscape evolving at a pace more akin to a technology sector than the classic long-term infrastructure market. Although this scale of transformation can create uncertainty, it is important to recognise the strong opportunities that the current UK market can provide.
The evolution of the sector over the past decade is most clearly demonstrated by local authority management of waste. The transition from landfill to recycling/composting and energy recovery has happened at an impressive rate. In 2004/5, 67% of local authority waste in England was sent to landfill; now that proportion has almost halved. This has largely been driven by focused performance targets and the increasing rate of landfill tax, both of which incentivise alternative waste management options.
2011/12 was the first year that more local authority waste in England was recycled/composted than sent to landfill. However, this landmark raises a key question for investors – how much waste infrastructure is sustainable for the UK? There is clearly a finite amount of UK waste requiring treatment, and some commentators are questioning how much more infrastructure the UK will need.
Although the waste market is changing, we believe that there is still scope for significant investment in new infrastructure and we anticipate a wide range of well-structured projects to be financed in the years ahead.
However the pipeline shows that we are in for another decade of change in what investors can consider a “normal” project. The PFI/PPP, local authority backed projects that characterised the past ten years are now largely behind us as the market reaches maturity. Specialist sub sectors like advanced conversion technologies and anaerobic digestion now form an increasingly significant proportion of the pipeline.
There are also broader changes that investors need to consider, such as the transition from the Renewables Obligation Certificate regime to Contracts for Difference. Changes to the subsidy regime clearly impact the risk and economic profile of projects and investors are only just starting to gain experience in negotiating the commercial realities of the new schemes. Developers also need to consider the European context when calculating the project economics. The export market is growing rapidly with little indication of decline in the short to medium term.
We want to work with investors to help them navigate the opportunities in this dynamic market. As part of GIB’s mission to accelerate investment into the sector, we will therefore continue to tackle any unnecessary perceptions of risk that provide a barrier to well-structured projects becoming a reality.
To further deliver this commitment we are currently undertaking a review of total capacity projections for the UK market and key drivers of pricing in the medium term. This review will help to underpin our investment strategy for 2014/15 (particularly within the merchant waste sector) and we hope to share these findings with the market later this year.
Chris Holmes, managing director of waste and bioenergy, Green Investment Bank