Cost impact of WEEE evidence trading

Project Report for Hewlett Packard by 360 Environmental

  1. Executive summary
  1. The current UK WEEE market works within a system of opaqueness whereby those that pay the price of compliance generally have very little idea of the actual costs, the infrastructure involved and the margins that are extracted by that infrastructure.
  2. This paper has analysed that market based on information supplied by a range of participants, most of who contributed on the basis of commercial confidentiality.
  3. The paper has looked initially at the impact of ‘ransom’ price profiteering in 2007 and then at the cost to producers of the current evidence system.
  4. The key findings are that:
  5. Whilst excessive ‘ransom’ pricing is seen as the primary cost issue, of much greater significance for producers has been the wider disconnect between the market for ‘evidence’ compared to the actual cost of collection, treatment and recycling of household WEEE.
  6. Producers are paying a price for evidence that has remained relatively consistent over the last three years despite increased collection and treatment efficiencies and rising commodity values.
  7. This price now relates primarily to perceived trading values rather than actual costs.
  8. Commodity values and excess treatment capacity have driven down the cost of processing WEEE over the last three years to a point where the net cost of collecting and treating WEEE has become better than cost neutral.
  9. Producer Compliance Schemes (PCS) have increasingly moved towards dependence on the collection point waste management operators to manage household WEEE at a fixed cost.
  10. The benefit of reduced cost by waste management operators has not been passed back to PCSs and producers.
  11. Local Authorities generally now leave it to their DCF waste management operators to manage their PCS contracts.
  12. Current measures by the Environment Agency to tighten contractual trading positions between PCSs are likely to inhibit sharp price increases for evidence, but are also likely to protect the current high costs of evidence.
  1. Glossary
  1. PCS – Producer Compliance Scheme
  2. DCF – Designated Collection Facility – UK infrastructure of free collection points for consumers, usually Local Authority Civic Amenity Sites.
  3. AATF – Approved Authorised Treatment Facility
  4. AE – Approved Exporter
  5. LA – Local Authority
  6. LDA – Large Domestic Appliances
  7. GDL – Gas discharge lamps
  1. Background
  1. The implementation of the WEEE Directive in the UK in 2007 was achieved following extensive debate between Government Departments and industry over the most cost effective way to achieve the key requirements of the Directive:
  2. Adequate infrastructure of free disposal for end users
  3. Collection rate of at least 4kgs per head
  4. Financing of all collected household WEEE by producers
  5. The system that emerged required producers to take responsibility for the financing of collection, treatment and recycling of all household WEEE on a collective basis through a market share approach.
  6. This required producers to join PCSs which would be required to demonstrate that they had evidence of their market share of collection and treatment of WEEE by contracting with Local Authorities for the management of WEEE at DCFs. All household WEEE collected would require evidence of treatment and recycling to be issued by AATFs.
  7. The expectation was that PCSs would look after the interests of their members by taking physical control over the collection of WEEE and driving down cost. However, by requiring all evidence to be purchased and by enabling PCSs to take on more WEEE than they needed for their own obligations, the Government opened up the potential for profiteering.
  8. One scheme in particular, saw the opportunities for over-collection and entered into an agreement with a large waste management operator to gain access to surplus evidence that could then be sold at a price the was significantly above the cost of collection and treatment.
  9. Although robustly challenged by other schemes, the legal requirements of the Regulations forced acceptance of this position which has since led to the market price for evidence dictated by trading values rather than actual cost.
  10. A status quo has emerged that now sees the majority of evidence provided to PCSs though arrangements agreed with the waste management companies that operate the DCFs. The price they will charge for evidence tends to reflect the perception of the market position and the opportunity to create margins rather than the reality of cost.
  11. The UK system relies on last minute trading to balance obligations. The requirement to buy what is available has led to instances of excessive profiteering for these final trades as the holders of ‘spare’ evidence know that someone somewhere has to purchase. An attempt by the UK Environment Agency to control this profiteering through the need for pre-agreed contracts to cover surpluses and shortfalls has helped to limit the ‘ransom’ extremes. But these measures do not apply any controls to general pricing and the differentials between cost and price continue to flourish
  1. Project aim
  1. The purpose of this project was to estimate the cost impact on producers of the UK market share mechanism and project this forward under a potential recast scenario.
  1. UK WEEE evidence costs
  1. The cost of evidence is made up of a number of elements:
  2. Haulage costs from DCFs to AATFs including the costs of containers
  3. AATF gate fees/value
  4. The perceived market price for evidence
  5. The difference between the charge made to producers for evidence and the actual costs in generating it is generally split between a number of participants:
  6. The waste management companies that operate collection facilities
  7. The PCSs
  8. The Local Authorities
  9. The AATFs
  10. There appears to be little sign of a direct relationship between evidence costs and gate fees.
  11. The graph below shows the change in the representative amount charged (or paid) by AATFs for WEEE received over a weighbridge. These are known as the gate fees/values.

Fig.1 – Average payments or charges made by AATFs for WEEE

  1. Haulage costs have stayed relatively stable over the period with increased fuel costs being offset by increased efficiency.

Fig.2 – Average ‘value’ of WEEE to collectors taking account of AATF and transport charges

  1. The combination of gate fees/value and logistics costs are the net costs/values for those that collect the WEEE at DCFs.
  2. Therefore the cost of evidence should show similar decreases to the increased value/decreased gate fees. Clearly, this has not occurred.
  3. The graph below shows the cost comparison between these prices and the charges for evidence where ‘nv’ is the net value or cost of the material taking into account collection costs and gate fees/values.

Fig.3 – Showing the difference between the cost of generating evidence and the charge made for evidence for each WEEE category/group.

  1. Overall, this produces a £/tonne differential as shown below.

Fig.4 – Value extracted by the disposal/compliance chain taking account of the costs and revenues shown in Fig.3

  1. Cost estimates for 2007
  1. Taking the total tonnage of WEEE collected in 2007 from published EA data, a calculation has been made of the total cost to industry for evidence based on average prices that were being charged by PCSs based on their own costs and the cost of trading, but excluding the extreme costs.
  2. A calculation has then been made applying the extreme costs at the time across the full tonnage.
  3. It is estimated that ’ransom pricing’ might have accounted for 10% of the tonnage in 2007. A calculation has therefore been applied assuming that 10% has been charged to producers at extreme prices.
  4. Appendix 1 shows the table of estimated costs derived from supplied data.
  5. These indicate that for 2007, the following applies:
  6. Average cost for collection and treatment across all categories - £73/tonne
  7. Average cost for evidence at normal market rates - £118/tonne
  8. Average cost for evidence at extreme prices - £182/tonne
  9. Average cost for evidence assuming 10% at extreme prices - £136/tonne
  1. Cost estimates for later years
  1. The impact of extreme pricing was particularly felt in 2007 and 2008. In later years, the general dynamics of the market have changed to the extent that they have less impact.
  2. There is less traded evidence with a higher proportion collected by those that need it.
  3. The requirement for contracted agreements between PCSs, whilst not generally being price specific, has dampened excessive pricing.
  4. Those that initially imposed the extreme prices have been less aggressive in their attitude.
  5. More profit is probably being extracted at market prices for evidence.
  6. However, it is clear that those with the highest surplus do still try and trade at prices approximately 25% higher than the normal market position.The prices below are known trading requests made by one compliance PCS in 2011 for 2010 compliance.

Fig.5 –Comparison of evidence pricing

  1. The prices provided by producers have demonstrated that there has been little change in the amount that PCSs charge their members.
  2. As there is no market indicator mechanism, producers have no means of comparing their prices. This is exacerbated by the different methods of charging - some PCS’s opt for a market share price andothers charge on the basis of EEE placed on the market.The range of prices provided by producers on request indicates a general consistency of average price across the PCSs although with some significant variation each year between the PCSs. The table below shows the range of prices received.

Fig.6 –Range of evidence prices charged by Compliance Schemes from producer survey

  1. Trading between PCSs generally takes place at a perceived market level on the basis that whatever the evidence has cost to produce, a PCS does not want to lose out on potential revenue by trading at a lower price. Evidence hastended to be traded at the following prices across all the years that the WEEE Regulations have been operating:
  2. LDA - £15-20
  3. Cooling - £140-180
  4. Mixed - £100-140
  5. Displays - £220-300
  6. Reuse value has increased as a proportion of the extracted value since the Regulations began. A value for £10/item has been included for cooling, LDA and displays with an overall value of £300/tonne for small WEEE.
  7. For 2010 collected volumes, this would suggest that, assuming the average gates fees/values and transport costs shown in para 5e are applied across the UK – and there is no reason to believe that these should not be the underlying positions – then a net margin of approximately £57m was achieved as the sum of:
  8. Total value of evidence charges made to producers
  9. Total value paid by AATFs for household WEEE received (or gate fee charged)
  10. Total value paid for WEEE sent for reuse
  11. The cost of haulage from collection points to treatment and reuse facilities

Fig.7 – Estimated make up of revenues and costs for 2010 WEEE showing net value extracted

  1. Overall, it shows that in 2010, the combined value of material and reuse was positive with a speculated figure of £8m. This compares with a negative figure – based on the same criteria, but adjusted for average material net values – of £12m, a swing in one year of approximately £20m.

Fig.8 – Treatment facility gate fees/values and collection costs used to calculate overall revenues

  1. Margin
  1. As discussed in 5. above, the management of WEEE under the Regulations has lprovides different margin opportunities for each sector.s.
  2. AATFs
  3. The AATF sector has significant over-capacity in the UK and is therefore being tightly squeezed. Suppliers are well aware of commodity fluctuations and expect to benefit from any increase in values.
  4. Some AATFs are therefore seeking alternative ways to gain additional margin and there is evidence that there are some working with waste management companies to manage a Local Authority’s WEEE for that company and then to split the additional value they get by selling the evidence.
  5. For example, in one authority, the AATF was selling cooling evidence to the PCS that had the arrangement with the Local Authority at £160/tonne where it only cost £80/tonne to collect and treat the material. The £80 margin was then split with the waste management company contracted by the LA to manage their CA sites.
  6. Local Authorities
  7. Pre-WEEE, local authority CA site contracts included a charge for cooling and display equipment while their contractors kept the value of the scrap metal. Many local authorities were – and some still are – required to compensate their waste management contractor for the lost revenue related to LDA and it is known that some PCSs allow the LA to keep the net value of the LDA, effectively getting their LDA evidence at zero cost. It is not known what proportion of the WEEE ‘margin’ goes to LA’s, but it is safe to assume that most of it goes to the waste management contractors. Those LAs contacted indicated that as far as they were concerned, there was no additional revenue or cost of WEEE.
  8. Waste management contractors
  9. This is the sector that appears to be benefitting the most from WEEE revenues. In most cases, local authorities devolve the contractual arrangements for WEEE to the WM companywhich then contracts with the PCSs. In some cases, the PCSs do manage the collection arrangements, either paying the WM company for haulage and the AATF, the gate fee. But in increasingly, the WM company will agree a price for the evidence with their contracted PCS and manage all the costs – and revenues. Discussions with CA site operators indicated that there are now no additional site costs associated with the management of WEEE.
  10. Waste management contracts are also still receiving other revenue, in some cases from LAs. As an example, one Local Authority has a contract negotiated with their waste management company in 2007 that includes a handling fee per item of LDA, cooling and Display, ranging between £2.07 - £2.50 and for mixed WEEE, £25-£51.65/tonne. The LA receives no value for the WEEE and the annual charge made by the WM company takes no account of this. The WM Company then have a contract with a PCS who pay them an agreed amount per tonne of evidence.
  11. PCSs
  • There are three basic types of PCS:
  • Not for profit. These will work on a cost plus basis for their members, but generally have the highest overheads. They also manage most of the non-WM PCS sites.
  • Waste management/larger company owned PCSs who will look to optimise profits either through member fees or through evidence charges where they manage CA sites
  • Others – generally PCSs that rely on purchasing evidence from other PCSs.
  • Therefore, the PCSs take up a large proportion of the remaining margin either through high overheads or through additional profit.
  1. Calculating the proportion that goes to each is impossible, but it could be estimated using the following assumptions:
  2. 70% of DCFs collections and treatment are managed by waste management companies.
  3. 30% are run by Compliance PCSs. Net material revenue tends to be retained by whoever runs the sites although some may be shared with Local authorities as part of the overall contract price. An assumption is the WMCs keep 95% whilst LAs get 5%.
  4. Where WMCs control collection and disposal, 70% of the evidence value goes to them, 20% is added by the PCSs and 10% is shared by WMCs with AATF operators.
  5. Where PCSs control collection and disposal, it is assumed that they retain 100% of the value of evidence.
  6. Using the total net revenues from para 7i, it is therefore estimated that the split would be as follows where:
  • LA is local Authorities
  • AATF is treatment facilities
  • CS – other is PCSs that do not run collection and treatment
  • CS – DCF is PCSs that do run collection and treatment
  • WMC is waste management companies

Fig.9 – Estimated of how the net margin has been split between sectors

  1. Cost impact based on growth models
  1. To consider the potential impact of the various cost scenarios on the amount of WEEE required to meet the likely targets, the tonnage required to meet the targets and the likely costs of collecting and treating that WEEE must be calculated.
  2. The following has been assumed:
  3. That a 65%target on EEE placed on the market is the most likely scenario for the recast.
  4. That these percentages will be applied to each category group ie LDA, Cooling, Displays, Mixed and GDL.
  5. GDL has been excluded from the totals as the majority of these costs are picked up through the lighting industry levy system.
  6. That the level of EEE placed onto the market will stay at 2010 levels. It is recognised that this is unlikely, but it is impossible to speculate on the likely changes.
  7. That the % proportion of B2B and B2C will remain at 2010 levels.
  8. The growth in costs must be considered against two factors:
  9. The actual cost of collection
  10. The costs charged to producers for collection
  11. To model the potential growth requirements, the targets have therefore been applied to each category group on a linear basis to 2016.
  12. However, given that displays are currently declining from figures over 100%, it has been assumed that the percentage rate will continue to fall.
  13. To simplify the process, 2010 EEE levels have been used as the basis for the targets going though to 2020. The graph below shows the figures for 2008-2010, but there will be a number of factors that will make this difficult to predict.
  14. Economic conditions
  15. Technology developments
  16. Human nature