Businesses forking out to comply with their obligations under the packaging regulations are unwittingly set to pay around £15 million this year to incinerator operators - with little prospect of the funds being used to increase energy recovery capacity. The unexpected windfall is a perverse result of the market mechanism used to demonstrate compliance with the regulations.
Energy recovery is a legitimate means of meeting the target to recover 50% of packaging waste by 2001 set by the 1994 EC Directive on packaging. Considerable investment in the UK's recovery and recycling infrastructure will be required to meet these targets.
But the revenue now pouring into the packaging recovery system is going towards the purchase of PRNs sold by "reprocessors" as proof that materials have been recovered.
In the case of municipal waste incinerators, the Environment Agency has ruled that 19% of mixed refuse can be considered to be combustible packaging. For every 100,000 tonnes of waste burned in an incinerator, the operator can sell PRNs for 19,000 tonnes. Anticipated scarcity means that the market price for energy recovery PRNs is around £35 per tonne.
The UK has some 2.5 million tonnes of incineration capacity. Under the Agency's formula, this equates to 475,000 tonnes of combustible packaging waste.
If PRNs are issued for all this capacity, as seems likely, the incineration industry will earn around £15 million this year. ENDS calculates that this equates to around £6.50 per tonne of municipal refuse burned - a handsome windfall compared with gate fees of around £30 per tonne.
Yet it is extremely unlikely that PRN revenue paid for burning mixed household refuse will stimulate investment in new recovery capacity. Instead, obligated packaging businesses are simply paying incinerator operators for a job they are already doing - and for which they are already being paid by their local authority clients through long-term contracts.
Incinerators cannot normally be expanded without winning long-term contracts - and building new plants is notoriously difficult because of planning and tendering obstacles. If packaging firms or compliance schemes wanted to stimulate investment in incineration, they would need to sign long-term contracts rather than agreeing to purchase PRNs for one year. But uncertainties over the future operation of the packaging regime and the PRN market preclude such long-term plans.
Valpak, the biggest compliance scheme by far, recently signed PRN contracts channelling tens of millions of pounds to paper mills, incinerators and other businesses which reprocess packaging waste. Incineration contracts include deals with subsidiaries of Northumbrian Water and Yorkshire Water. Incinerators in Coventry, north London and south-east London have also gained Agency accreditation as reprocessors.
Valpak insists that the confidential contracts will ensure that the funds will achieve the required increases in recovery. But it could not explain how this would work in the case of incineration.
An Agency spokesman noted that uncertainties caused by the current Government review of the packaging regime are making it difficult for reprocessors to make investment decisions. But he insisted that this year's PRN revenue, and the prospect of possible future income, would offer "a greater incentive" for incineration firms to invest in new capacity.