Waste not want not

As UK landfill sites reach breaking point, EU legislation is requiring a slash in Britain's volume of biodegradable waste heading to them. New technological solutions must be found and Roy Royer argues insurers should play a lead role in ensuring energy from waste plants can provide the answer

The environment remains an issue at the forefront of both business and governmental thinking around the globe but, in the UK, one of the biggest challenges is literally on the nation's doorstep.

A long-term and sustainable solution to the problem of the disposal of the UK's waste has been sought for many years. Local authorities up and down the country are aware that the current use of landfill sites is an option that will not last forever and, unless an alternative is identified, the costs to the country will be immense.

Under a 1999 European Union directive on waste, the UK must cut the amount of biodegradable waste going to landfill from the 18.1 million tonnes dumped in 2003/04 to 13.7 million tonnes in 2010, 9.2 million in 2013 and just 6.3 million in 2020.

The volume dumped in landfill in England alone was cut by 2.3 million to 12.4 million tonnes between 2003-04 and 2005-06.

Landfill harms the environment not only by polluting soil and land, but also because biodegradable waste - such as food leftovers, garden clippings and paper - does not compost properly when dumped in a tip due to a lack of oxygen. Instead, it breaks down to produce methane, a greenhouse gas 23-times stronger than carbon dioxide. If local authorities fail to meet landfill reduction targets they will face heavy fines from the EU.

To put this into context, the estimate for the people of Merseyside is that, unless an option other than landfill can be found in the next decade, their council tax bills will simply have to double to meet the cost of their domestic household waste disposal.

But this is just the tip of the iceberg as domestic waste accounts for only 8% of the country's refuse. What has become clear is that better ways of waste disposal need to be found and this is an area where the insurance industry can be at its most proactive.

New technology is currently under development, and in some cases already being implemented, which can process waste and convert it into energy. It is a win-win situation that addresses two of society's key obsessions - waste disposal and energy supply. The downside of this technology is that it is still in its infancy and, while some successes have already been notched up, there is nothing scaleable upon which accurate forecasts can be made.

The number one problem faced by companies developing this technology is funding. Energy from waste conversion plants can cost between £20m and £150m, so adequate funding from banks is a prerequisite.

A matter of scale

For their part, the banks look at the investment as a risky one mainly because the processes involved have never before been demonstrated on the scale now required. There is general acceptance that the technology is understood and not new, but the banks' lack of confidence comes from the uncertainty in the consistent supply of the energy that these plants produce. So, a solution to one of the UK's key problems is stalling at the blocks.

Insurers, however, have the potential to play a huge role in breaking the impasse, and act as the enabler in these deals. From the beginning of Lloyd's, the insurance industry has been based on innovation. Insurers need to be constantly at the ready to adapt to cover the ever-evolving risks that technological development presents. This has never been truer than in this current era of frantic change.

So, if the industry has been borne out of innovation, why has it been hitherto unable or unwilling to support the development of these EfW plants?

By viewing the consistent demand and supply of the energy produced from the plants as a long-tail risk, the high and low periods can be smoothed out. There is a clear opportunity to offer a policy that would provide cover for the ability of these plants to meet the targets they have set for their operational standards.

This would not be a fall back to the days of efficacy insurance but a product that would take a longer period of time and that looks at the average performance over that period. It requires a greater degree of partnership than perhaps the insurance industry has yet seen. Insurers would effectively become risk partners with finance providers and the EfW plants.

This would transform the insurance product from reactive to proactive and require the insurer to put in place risk mitigation at the design and build stage; it would see the insurer working closer than ever with their policyholder.

Products such as this enable insurers to leverage their balance sheets and their skill sets to play a pivotal role in the processes of creating these new waste facilities. The challenge has been laid at the doors of insurers to do their bit for the environment - and playing the role of enabler in the roll-out of the EfW technology is just a start.

The world's environmental problems are not going to disappear and novel, carbon-friendly, energy solutions desperately need to be found. These solutions - whether solar, wind-based or something not yet discovered - will require significant support from the insurance industry if they are to have half a chance of succeeding. Insurers must be able to provide risk solutions that are as innovative as the technology itself.

There is a limit to the direct energy savings that can be made internally by insurers, but technology such as EfW presents the potential for the industry to play a key role in the business response to the environmental debate.

The innovative use of insurance capital would provide an elegant solution to a problem affecting the entire country - and one that demands an efficient and urgent solution. One thing is for sure, insurers need to start to see things differently.

- Roy Royer is senior underwriter, asset protection, at QBE.

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