Ofgem has recently decided to cut payments to embedded generators – but this could have unintended negative consequences for the whole waste management sector.
Currently, and consistently for the past seven years, the UK has been producing around 27 million tonnes of municipal waste each year after recycling, as well as similar levels of commercial and industrial waste. Even if successful waste minimisation and recycling policies decrease waste generation per capita in the future, forecasts still predict an increase in overall waste produced by 2030 due to expected population growth.
Moreover, high-quality recycling is not always possible for several reasons, including the over-contamination of waste, the impossibility of recycling materials infinitely, and the need to dispose of remaining residues after recycling.
Hence, if we are serious about transitioning to a more circular economy, we need to acknowledge the reality of residual waste and adopt appropriate solutions to process it in the most sustainable way.
In line with the waste hierarchy, the preferred option for treating non-recyclable waste is energy recovery.
It is widely known that the waste and resource management industry has enabled the UK to increase its recycling rate from near zero to 45% today, by operating hundreds of energy intensive material recovery facilities (MRFs) and transfer stations around the country.
However, the industry also generates 13.874 GWh per year of electricity through energy from waste (EfW), landfill gas to energy, and anaerobic digestion (AD), providing 9% of the UK‘s renewable electricity. By recovering energy from material that would otherwise be wasted, these technologies play an important role in driving the UK towards a more circular economy.
The low-carbon electricity and heat that they recover also contributes to reduce GHGs emissions, as every tonne of waste diverted from landfill saves 200kg of CO2, and could support more low-carbon local heat networks recommended within the Clean Growth Strategy. Progressively, the UK is moving towards a sustainable circular economy model similar to Scandinavia’s, where recycling is maximised and low-carbon energy recovery technology is used to recover electricity and heat from non-recyclable wastes.
Unfortunately, Ofgem’s Targeted Charging Review (TCR), published on 21 November 2019, risks undermining the business case for waste-fuelled energy generation.
In the final decision, the government’s regulator for the gas and electricity markets in Great Britain announces plans to remove so-called “embedded benefits”. While larger electricity generators are directly connected to the national electricity transmission network, distributed generators and electricity storage which include EfW, landfill gas, and AD connect to the electricity system using distribution networks. To put this more clearly, the transmission network represents the equivalent of the motorway, while distribution networks are the local A and B roads of the electricity network system.
Because distributed generators are located close to demand, they cost consumers less in network infrastructure and are rewarded for this through embedded benefits. These are credits against various nationwide charges that those exporting onto the distribution network can earn in return for reducing these costs. Over time, the size of these payments has increased, and so Ofgem has targeted them for review in 2017, and has now decided to remove them from April 2021.
While we do appreciate that the charging regime needed to be reviewed in order to become more cost-reflective and fair for end users, Ofgem’s decision penalises small, decentralised energy generation, despite it providing significant advantages to the system, in favour of larger generators.
In the case of the waste and resources sector, this decision penalises the sector for problems it has not created since it largely produces baseload power that does not create cost or distortions in the network.
In doing so Ofgem is penalising the environmental solutions that this sector provides. Waste-fuelled energy generation not only generates low-carbon electricity that will help the UK to meet the 2050 net zero target, but it also provides an essential sanitary service which safeguards public health. These infrastructures are not located according to where they can connect to the national electricity system for a cheaper price, and in that sense they do not influence charges. Instead, they are necessarily located close to waste generation, which means they simply have to accept the price of connection as determined by the charging regime.
Ofgem’s TCR decision risks affecting the commercial viability of waste-fuelled generation and potentially waste management contracts with local authorities too. This could impede much-needed investment to deliver new waste and resources infrastructure and modify existing facilities, as well as undermine the UK’s long-term ambition to transition to a more circular economy.
Defra’s Resources and Waste Strategy, which aims to make the most out of the nation’s residual waste by diverting more residual waste from landfill to EfW, collecting and sending more food waste to AD, and by continuing to generate electricity from landfill, might well be impeded by Ofgem’s decision.
The additional costs to the waste and resources industry will have important consequences for waste management, and could lead to a waste treatment capacity crisis by undermining current and future investment.
This comes at a time when the resources and waste industry is already facing a number of challenges. The business cases for AD are already marginal. On top of this, billions of pounds of private investment are urgently needed to avoid a 3-6Mt shortfall of residual waste treatment capacity.
In reaching this position, Ofgem seems to have largely ignored small generators’ interests for the benefit of a few large energy producers. The decision risks not only undermining the government’s recycling ambitions, but even reversing the progress we have made in recent years. In the long-term it may mean disconnecting from the grid, or that recycling and EfW plants have to co-locate, but this will take time, money, and will not be possible in all circumstances.
In a context of environmental and climate emergency, undermining the business cases for distributed generators which provide low-carbon electricity infrastructure as well as essential sanitary services seems like a rather questionable decision.
