Report of the Directors
MAIN TRENDS AND FACTORS LIKELY TO AFFECT THE FUTURE DEVELOPMENT, PERFORMANCE AND POSITION OF THE COMPANY'S BUSINESS
The waste management and renewable energy business is heavily influenced by environmental and climate change considerations and associated Government policies. Viridor's strategy reflects this. Our belief is that being green is good for business, as is demonstrated by the company's financial performance.
Government policies are designed in the first instance to minimise the amount of waste generated, then to maximise reuse and recycling, followed by treatment and energy recovery via EfW facilities and other technologies. This is underpinned by final safe disposal in landfills. The Government is implementing the EU Landfill Directive and reducing the amount of waste to go to landfill. This Directive was a response in part to methane emissions from landfills, although in fact the bulk of this in the UK is now captured for renewable energy generation.
Government targets of diverting municipal waste away from landfill up to 2020 are leading to a decline in the landfill market. However, with only around six or seven years' consented capacity in the UK as a whole (according to Environment Agency estimates) and with new consents difficult to achieve, Viridor's 77 million cubic metres is regarded as a very valuable resource, with 15 years' average capacity available at current rates of fill.
At the same time it is increasingly recognised that waste is a major renewable energy source, accounting for approximately 25% of the current UK's renewable energy or roughly 1.5% of the total UK's electricity production. 1.2% of this comes from landfill gas utilisation, which has grown by 600% over the past 10 years, and 0.3% from energy from waste combustion. As the energy produced from waste is a product of waste treatment, it is effectively low cost. Unlike certain other renewables it provides baseload power which is distributed around the grid typically close to where energy is required.
There is scope for a major increase in the amount of energy recovered from waste in the UK particularly in EfW facilities (especially with CHP) as well as in developing technologies such as Anaerobic Digestion (AD). Viridor estimates that waste could account for 6% of UK electricity production by 2015 if planning barriers could be addressed, and has called upon the UK Government to set this as a target.
The need for councils to avoid steeply increasing landfill tax and to achieve their landfill diversion targets creates attractive opportunities for PFI/PPP and other contracts. Examples include Viridor's contracts with West Sussex, Somerset, Greater Manchester and the South London Waste Partnership, facilities such as the Lakeside EfW plant and the Runcorn EfW CHP plants, recycling operations such as those of Viridor Resource Management and our electrical goods and glass recycling services.
Whilst the long-term trends in favour of Viridor's business are very positive, the weakness of the UK economy is having a significant effect on waste volumes and power generation prices. It is certain that public expenditure will be reduced in the face of the UK's massive budget deficit.
This is likely to put particular pressure on local councils' budgets and may result in their delaying new major waste PPPs/PFIs or in seeking other ways to reduce their waste management costs.