Miljøprojekt, 946 – Fordele og ulemper ved liberalisering af affaldsforbrænding og deponering

Pros and Cons of Liberalisation of Waste Incineration and Landfilling

3 Main conclusions

This chapter presents the main conclusions of the study.

Incineration and landfill disposal have been analysed in relation to two types of liberalisation:

Figure 3.1 Scenarios

Figure 3.1 Scenarios

The types of liberalisation have been specified in the following scenarios for incineration and landfill disposal respectively:

In the tendering scenarios tenders are invited for both operation and maintenance of the facilities, but ownership and the right to decide on treatment method and facility remains with the municipalities.
In the perfect competition scenarios only the right to decide on treatment method remains with the municipalities, while both ownership of the facilities and waste flows are set free. However, the overall responsibility for the municipal waste remains with the municipalities.

Both types of liberalisation are compared with a continuation of the present situation.

The results of the project were obtained by two main methods. First, knowledge and experience was collected from different areas:

Interviews with actors on the market
Experience from the electricity sector
International experience with liberalisation
The theoretical framework

Secondly, a model named Swahili (Simulating Waste Handling In Liberalisation) was developed. Swahili is an economic optimization model for waste treatment in Denmark. It is composed of two sub-models, one for incineration and one for landfill disposal. The model simulates waste flows between the 271 Danish municipalities and Danish waste facilities for the period 2004-2024. The model locates the facilities according to minimization of the total costs, given a number of conditions.

In the following the conclusions of the report are summarised. Conclusions that concern incineration are marked with and conclusions that concern landfill disposal are marked with .

The main conclusions are:

Most likely there will be no economic net benefit from liberalising incineration.
It is very likely that liberalising landfill disposal will yield a net economic benefit.

These conclusions are based on a comparison of the economic benefits and costs of liberalisation, and they are described further on the following pages.

Economic benefits and costs

The largest economic advantages of liberalisation are the possible efficiency gains.

The analyses show that incineration may result in such efficiency gains.
According to the analyses there is especially for landfill disposal a possibility of achieving such efficiency gains.
For incineration the largest economic costs of liberalisation are the increased costs due to the higher risk premium of private investments compared with public investments.
For landfill disposal the risk premium is insignificant. For landfill disposal the largest economic cost of liberalisation is the increase in transportation costs.

In the report these two elements are quantified and compared, and a number of sensitivity analyses are performed to illustrate the robustness of the results. Moreover, a number of other benefits and costs of liberalisation are discussed.

Comparison of the efficiency gains and the risk premium

Due to the technological development within incineration in recent years - for instance automation of many of the processes in the plants - future incineration plants can be built and operated more efficiently than is the case with existing plants. This will be the case for any market. Hence, also by a continuation of the present situation. Operating costs will therefore decrease, and the possibility of increasing the operating efficiency will therefore decrease compared to the present situation. At the same time it is not considered possible to realise the entire structural efficiency gains. The reason is that it is likely that the location of the incineration plants will be decided by the waste producers (the municipalities) and not on the basis of the optimal economic plan. This is also in line with international experience.
Investment costs of incineration plants are large and irreversible, and the waste sector is relatively small and risky. The risks depend on the way the market is regulated, but to cover their risks, private investors will demand an additional risk premium compared to the public actors. The actual costs may in some cases be lower than the risk premium demanded, thus implying a higher profit. In other cases the costs may be higher and entail a loss.
The total costs of the risk premium (which has been fixed at 3%) on incineration plants is therefore substantial, and the analyses, including a number of sensitivity analyses, show that it may very well be larger than the efficiency gain in the year 2024.
Landfill disposal, which is less technologically demanding, the same development is not seen. Increasing requirements for the construction of landfills imply that it will be more expensive to establish landfill disposals in the future. However, at the same time there is a larger efficiency gain at landfills, in relative terms.
For several reasons it has been assessed that only part of the identified efficiency gain can be realised. Nevertheless, in combination with an insignificant risk premium, the analyses show that the economic costs of landfill disposal will most likely decrease in both the analysed situations.

Waste transport

The transport pattern of waste for incineration is inefficient today, because some waste is not treated at the nearest plant, and therefore the transport distance does not change very much in the liberalisation scenarios despite a decreased number of incineration plants.
However, landfills will most likely see a substantial reduction in number and therefore the transport distances will increase somewhat.

Competition

The possibility of creating well-functioning competition and thereby the lowest possible market prices has been analysed on the basis of economic theory and through comparison of international experience.

The incineration market has many characteristics that make it difficult to achieve real competition. In competition on the market (the perfect competition scenario) the most important characteristics are the large entry and exit costs, the economies of scale and the dependence on the demand for district heating. In competition for the market (tendering) the most important characteristics are that the operation of incineration plants is a complex task that demands extensive experience and know-how both from the operator and the authorities. This implies in both cases that the actors may earn a supra-normal profit for waste treatment.
Import and export of incineration waste may - if allowed - help balance supply and demand. Therefore, import and export of waste may to some extent improve competition in the field of waste incineration.
Incineration without energy recovery is unlikely to be able to compete with foreign plants, and therefore the demand for district heating will set a maximum for the quantity of waste that can be imported.
No important barriers will influence the market for landfill disposal, and it will therefore be possible to create real competition - both for the market (tendering) and on the market (perfect competition). That is if the landfill disposals are spread around the country.

Prices

If treatment encounters lack of competition, the actors may demand a supra-normal profit. At the same time - due to the limited possibilities of locating both incineration plants and landfill disposals - the plants might increase prices up till the transportation costs to the nearest plant. This could be limited by appropriate regulation, for instance framework revenue limits, as issued in the electricity sector.

Liberalisation may therefore cause the price of incineration (economic costs + possible extra profit) to increase.
The price of landfill disposal will on the other hand most likely decrease in liberalisation.

It should be noted that because the waste quantities are relatively unaffected by minor changes in prices, increased profit and mark-up will only imply a redistribution among consumers and waste producing companies on the one hand and waste facilities on the other.

Environmental standard

Both for the tendering and perfect competition scenarios it is assessed that it will be possible to maintain present environmental standards. Incentives will, however, change. This might create a need for changing the supervision and control systems.

An important issue in relation to landfill disposal is the responsibility for possible bankruptcy or unexpected contamination from the landfill. This problem could be handled through authorisation, certification, guarantee and/or a compulsory insurance, which will, however, impose increased costs.

Environmental costs due to increased transport caused by an optimal geographical distribution of waste compared to the present situation are negligible.

Environmental effects caused by import and/or export have not been quantified. These costs should be balanced against the corresponding payment of duties.

Security of supplies

There are a number of conditions to be met in order to establish new capacity. The most important ones are sufficiently high prices, and a guarantee that the public sector does not create new capacity. The task of assuring sufficient capacity at any time becomes more difficult if Denmark's capacity has to match the Danish market only. At the same time the waste producers will not be able to export their waste in response to price increases triggered by market power.

Industrial waste can temporarily be disposed of at landfills, so in the short term security of supplies is not a problem for industrial waste. Municipal waste has to be incinerated immediately, and it will therefore most likely be covered by long term contracts handled by e.g. the municipalities. Lack of capacity will lead to rising prices. Security of supply will therefore be a question of pricing.
Today, the incineration capacity is more than sufficient, and therefore there is no need to increase capacity in the short term. In the long run, however, increase of capacity will be necessary if recycling or co-incineration are not increased.

Denmark has sufficient landfill disposal capacity in the short and medium term (20-30 years). In the long run, new landfill sites have to be established, and this could very well cause problems both within the public and the private sector.