The latest Ofwat update on its sustainable sludge project puts the sewerage companies’ capability to raise significant additional income via its current ‘monopoly position’ with regards to both treatment infrastructure and sewage sludge availability squarely in its sights. The update says that waste sludge is turning into a valuable asset rather than a waste.

The other key question for the industry is whether the water industry regulator is seeking to extend its remit beyond the regulated activities of the water and sewerage companies which it is currently responsible for.

 The project update follows Ofwat's and the Office of Fair Trading's (OFT) joint announcement of a market study looking at investment in advanced treatment processes for organic waste. The regulator asked the OFT to carry out the market study in the light of Government policy to encourage the growth of existing markets for treating, recycling and disposing of organic waste.

 In Ofwat’s view it now needs to consider how the sewerage companies could interact with a wider organic waste market and to understand the role that markets could play in the delivery of sludge treatment, recycling and disposal services. 

In its update Ofwat said:

“There are a number of driving forces and pressures that mean now is the right time for us to rethink whether, and how, we regulate the sewage sludge activities that the companies carry out.” 

These include:

• increasing amounts of sludge from a growing population and improvements to sewage treatment;

• increased opportunity to use sludge as a valuable agricultural product as a result of a decline in its heavy metals content;

• rising costs of sludge treatment, recycling and disposal;

• the need to reduce the amount of waste being incinerated or sent to landfill; and

• the need to generate more renewable energy.

Speaking terms of "allowing" the sewerage companies to play a greater role in the market, the regulator said there would be challenges in ensuring fairness for sewerage customers and competition across the organic waste sector. It cites as an example the ability of the companies to use their infrastructure to treat other forms of organic waste with sewage sludge in anaerobic digestion – which could deliver benefits to customers via more efficient use of assets and to society in general by supporting the increased use of ‘waste-to-energy’ technologies.

The two key issues which Ofwat appears to be primarily concerned with are the extent to which the sewerage companies will be able to further exploit their significant existing anaerobic digestion capability to generate extra income and how this should be addressed in future price reviews. The update states:

“For example, the infrastructure and expertise the sewerage companies have access to, paid for by their customers, could mean they have an unfair advantage in the organic waste market.

Equally there is a question of whether, and how, the costs, risks and profits of sewerage companies operating in this market should be shared with (and between) their customers for monopoly and competitive sewerage services.”

The OFT study is due to end in July 2011. Ofwat will consider and respond to any formal recommendations in autumn 2011, followed by a formal consultation on the implementation of any recommendations that are accepted.

In 2009-10, the sewerage companies in England and Wales recycled or disposed of more than 1.6 million tonnes of sludge (measured as dry weight) and generated almost 600 GWh of renewable electricity from their sludge treatment processes. The Department for Environment, Food and Rural Affairs has estimated that there is more than 100 million tonnes of material available in the UK that could potentially undergo anaerobic digestion each year.

A wider remit for Ofwat?

The OFT study raises some interesting questions for the sector in the light of the development of markets in the water and sewerage sectors in England and Wales - the UK Government is due to publish its initial views in a Water White Paper in the summer. Are we likely to see, for example, caps placed on the amount of organic waste the companies can source from local authorities or a requirement for greater access to their AD facilities by other organisations? An exploration in greater depth of the motivation and reasoning behind Ofwat's decision to initiate the OFT market study in the first place would also be a useful contribution.

With their growing uptake of wind turbines, hydropower schemes and AD energy from waste technologies, the water and sewerage companies are undoubtedly increasingly well-positioned to turn themselves into significant players in renewable energy generation. Whether the market study will also seek to address the extent to which the water industry regulator should broaden its remit to non-regulated activities remains to be seen.