The topic of sludge trading is not one that results in repeat dinner party invitations, but it is an exciting place to be in the water industry just now. As companies look ahead to the next price control period from 2020 – AMP7, a fundamental change is happening in the operation of the bioresources (historically “sludge”) part of the industry.
Sludge is the matter filtered out of the wastewater treatment process along its journey through a works from sewer to river. In recent years, companies have made better use of the methane generated as a by-product of the sludge digestion process, either to fuel combined heat and power (CHP) plants that power an increasing share of the sewage treatment process, or to generate income through gas-to-grid injections of methane. For example, both Thames Water and Severn Trent generate over 200 GWh of CHP power each year – a rapidly increasing figure. This is the equivalent to 50,000 homes’ annual usage each.
In setting the agenda for AMP7, Ofwat has noted the variations in companies’ exploitation of the potential of methane, and the variations in the costs incurred by each company in the movement, treatment, and disposal of sewage sludge. To ensure the greatest value is driven out of this part of the water sector, bioresources will be subject to a separate price control. This is driving some firms to separate the management of their bioresources business from wastewater treatment.
As part of this separate price control, each water and sewerage company (WaSC) must consider whether neighbouring WaSCs, or other waste processors (e.g. Veolia, Biffa), can offer a better price for treating their sludge.
Companies are now calculating their treatment prices, taking into account variation in cost to treat per site, allowable margins, transportation costs and the quality (including screening, biosolids and chemical content) of their neighbour’s sludge. At present, the primary driver of sludge “trades” is short-term support for others’ treatment capacity shortages, but as contracts mature and the economics of trading become clearer, a genuine market should start to form. After all, why invest in a major overhaul of a peripheral sludge treatment facility if a neighbour has available capacity at a more efficient site just across the catchment boundary?
WaSCs should make good use of the window before the start of AMP7 to test sludge trading, which will help drive more business benefits than trading alone, including:
- Use of the data collected to set treatment prices to highlight internal treatment cost variability and target improvement initiatives
- Taking control of demand and capacity management, which require investment in improved monitoring and operational control.
Whereas companies have long focused on capacity management of water supplies, this level of control has not been a priority for waste treatment (as rainfall and sewer flows are largely uncontrollable). Forecasting of sludge volumes is now a critical part of the price control process, and for AMP7 companies must be within 6% of their five-year volume forecast, or face meaningful financial consequences.
Volume forecasting and trading both require a stronger demand and capacity management process. This process will also enable more stable and efficient inter-site tanker plans, reduced reactive work to resolve capacity crunches, and the opportunity to share reliable capacity advertisements to neighbouring WaSCs, increasing the likelihood of maximising revenue from sludge treatment assets.
The water industry is going to find AMP7 a challenging regulatory period in most areas. In bioresources, a collaborative sludge market offers opportunities for every company to reduce operating expenditure, or to increase the value generated from offsetting energy generation, benefiting customers and shareholders.