June 2010

WASTE MANAGEMENT: waste not, want not

Two new technologies demonstrate the return that investors could make from the waste market, explains Nick de Mestre of FourWinds Capital Management Historically, the waste sector was typically regarded as a very local, fragmented, low-growth, low-tech industry with very little to recommend it to financial investors beyond investment in large, integrated environmental services players such as Veolia and Suez, and in the UK the likes of Pennon and Severn Trent.

In recent years, however, a number of factors have combined to create a very compelling investment story as the sector has changed direction and evolved incredibly rapidly into a very different kind of industry – one where technology has an increasingly important role to play as we strive to force

the waste industry to address global environmental and carbon reduction goals, resource scarcity, increasing regulatory pressure to reduce landfill waste disposal  and the need for secure, ‘green’ energy.

When sent to landfill, refuse becomes not only a waste of a potentially valuable resource, but also a significant environmental issue as the decay of various waste materials can cause environmental problems – among the more obvious are methane emissions (methane is a far more potent cause of the greenhouse effect that CO2), groundwater contamination and local odour issues.

With waste volumes being driven ever upwards by population growth and increases in wealth, governments across the world have recognised the need to force municipalities, businesses and individuals to deal with their waste in ways other than simple landfill. They have typically done this through incentives at both ends of the waste spectrum – at one end by making the cost of landfill extremely expensive (in the UK the Landfill Tax Accelerator adds an extra £8 [€9.58] per tonne of landfill tax every year) – and at the other end by incentivising the use of waste materials to produce energy and other value-added products.

The initial response of the waste management community was to focus on the most economically efficient option for a combined waste disposal/energy generation process – the euphemistically titled ‘thermal treatment’ of waste through mass burn incineration. Incineration is a fairly simple way of producing energy from black bag – or municipal all-in mixed solid waste (MSW) – but is typically the subject of significant public objection and is also regarded as a less ‘green’ option. Incineration is usually economic on a very large scale, which means waste is transported over some distance to one super-size plant, which adds to carbon emissions. More importantly, the heat, which represents about two-thirds of the produced energy, cannot be used as it is impossible to transport it over long distances (unlike electricity, which represents one-third of the energy produced via incineration), making large-scale incineration very inefficient in a MWh/tons of waste sense.
Distributed energy is a much more carbon efficient approach, and a number of industry players have been working on developing smaller scale and cleaner technologies. In general, much of the energy being produced is from burning plastics, which are simply a product of the hydrocarbon industry, so carbon wise, it is better to recycle than to burn.

Investment opportunities
This combination of government policy and public pressure has recently led to an acceleration in alternative waste treatment methods and it is here that technology-driven options are coming to the fore. There are two key technologies which have recently become popular, and while neither of them is necessarily the silver bullet to the growing waste problem, they each present significant opportunities for investment – typically because they complement each other in some way. However, there is currently a vast mismatch (in some geographies at least) between advanced (based on such new technologies) treatment capacity available and the volume of waste arising – the UK, for example, still landfills over 60% of its waste.

The first of these is an established technology from the wastewater treatment world, which is increasingly being applied to organic solid waste – anaerobic digestion (AD). AD is a fairly simple process in which organic waste is passed through a digester where bacteria eat the waste and produce biogas and compost like digestate. The biogas can then be used to power a biogas engine to produce electricity and heat. AD is particularly attractive to investors for several reasons – organic waste has a high calorific content making it extremely good as a source of energy and is increasingly not allowed to be disposed of in landfill leading to enhanced incentives for energy produced from organic waste and large penalties if waste controllers continue to landfill it (such as EU bio-waste disposal regulation). In addition to the waste diversion and renewable energy benefits, AD also produces cheap and clean compost, which can be used in agriculture or land remediation.

In certain countries, such as Germany, AD has become so prevalent as a means of diverting organic waste from landfill that certain kinds of food waste have stopped being regarded as waste material and have effectively become a valuable commodity. The example of AD in Germany demonstrates that the technology is a highly effective way of treating organic waste and is capable of being rolled out fairly rapidly. From an investment perspective this presents an extremely good opportunity to invest in a technology which is proven and has been widely deployed, but which has until recently only been seen on any commercial scale in a few specific countries allowing for a rapid roll-out across a number of geographies of what is essentially a new technology but which is none the less derisked.

Importantly, AD can be implemented on a much smaller scale than incineration, which enables the reuse of waste heat on a decentralised basis.

Feel the heat
The second technology, gasification, presents a slightly different case for investors to AD – the technology is less proven on a commercial scale, but has significant advantages over many other treatment methods. The process typically involves heating waste materials to a very high temperature in an anaerobic environment which leads to the materials breaking down to form SynGas which can then be burned to produce energy. The process is extremely environmentally sound as it typically produces clean gas and a glass-like char material which can be disposed of safely and without releasing carbon.

The gasification approach to waste treatment is not in competition with AD, but rather is complimentary. AD is only applicable to organic, and mostly ‘wet’ waste. While gasification, similarly to incineration (which it is more of a substitute for than for AD), prefers dry waste with high calorific content (such as waste plastics). Gasification’s main advantage over incineration is that it is cleaner. Most gasification technologies historically targeted large-scale plants, but there are a number of new companies developing smaller scale and lower capex gasification plants that would enable a distributed energy approach and therefore reuse of heat similar to AD.

While the technology is extremely exciting and possibly comes closer to being a total waste solution than almost any other from a green perspective, so far there has been limited evidence that the process works on a feedstock which has variable calorific value and water levels and has typically been proven on single types of waste, usually wood chips. The gasification process is also widely regarded as less proven in efficiency terms as it has usually been used in places where disposal of waste, rather than energy generation, is the focus – for example in the disposal of pharmaceutical, chemical or clinical wastes.

Inevitably, the characteristics of gasification mean an investor would potentially derive their return not from the swift roll-out of a proven technology over a geography where there has been limited uptake so far, but rather through funding the pilot trial needed to get the technology to a commercially proven stage where there is a roll-out via licensing or equipment sales.

These two technologies demonstrate how investors can invest in technology, both new and old, to make enhanced returns linked to the waste market and its evolution from being a manager of a problem to being a next-generation producer of renewable energy and other value-added products from a not-quite-natural resource. However, it is essential to properly understand the risk profile of each technology option and the best way in which to generate an enhanced return from it. It is also essential to understand the market from which the return is to be derived and to make sure that the technology to be applied is one which suits the market as it stands now and as it will be in the medium term.

• Nick de Mestre is an associate at FourWinds Capital Management ©2010 funds europe  

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