Market Potential and Business Models for Resource Recovery Products

Public Disclosure Authorized Public Disclosure Authorized From Waste to Resource

Public Disclosure Authorized Shifting paradigms for smarter wastewater interventions in Latin America and the Caribbean

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Cover and report design: Alejandro Scaff Herrera. From Waste to Resource

Background Paper VI: Market Potential and Business Models for Resource Recovery Products

The World Bank is working with partners around the facilities—such as energy, reusable water, biosolids, world to ensure that wastewater’s inherent value and nutrients—represent an economic and financial is recognized. Energy, clean water, fertilizers, and benefit that contributes to the sustainability of nutrients can be extracted from wastewater and can water supply and sanitation systems and the water contribute to the achievement of the Sustainable utilities operating them. Reuse and resource Development Goals (SDGs). Wastewater can be recovery (R&RR) could transform sanitation from a treated up to different qualities to satisfy demand costly service to one that is self-sustaining and adds from different sectors, including industry and value to the economy. agriculture. It can be processed in ways that support the environment, and can even be reused This background paper is one of several supporting as drinking water. Wastewater treatment for reuse is materials for the report “From Waste to Resource: one solution to the world’s water scarcity problem, Shifting Paradigms for Smarter Wastewater freeing scarce freshwater resources for other uses, Interventions in Latin America and the Caribbean”, or for preservation. In addition, by-products of a product of the World Banks’ Global Water Practice wastewater treatment are potentially valuable Initiative Wastewater: From Waste to Resource. for agriculture and energy generation, making wastewater treatment plants more environmentally The paper analyzes the market for resource recovery and financially sustainable. Improved wastewater products in Latin America and the Caribbean (LAC), management thus offers a double value proposition as well as business models for the development of if, in addition to the environmental and health waste-to-resource projects. It draws on the findings benefits of wastewater treatment, financial returns of numerous case studies and on consultations with can cover operation and maintenance costs in part stakeholders. or in full. Resources recovered from wastewater

Case Studies Analyzed Case study Circular economy Contract Financial Enabling factors model structure structure 40% government Treated wastewater grant from Institutional: Strong leadership of the reused for industry Build, own, FINFRA funds federal and state water authorities. Cross- (power plant operate, transfer sectoral collaboration with CFE. cooling), agriculture (BOOT); 20 years 36% from (irrigation of 500 Banobras loan; Mexico: San Regulatory: Local water prices at contract hectares), and Revolving 18-year maturity Luis Potosí, signing promoted the use of nonaquifer environmental purchase period Tenorio water. Clarity of payment mechanism and conservation agreement with project risks well defined and allocated. (wetland the Federal 4% equity by risk Electricity capital company improvement) as Technical: Scarcity of water resource, Commission part of a wider multiple quality levels of treated (CFE) Federal sanitation and water wastewater tailored to different uses. reuse plan. government guarantee

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Treated wastewater 49% government Institutional: Strong ownership reused for grant from El of experienced water resources agriculture (irrigation Fondo Nacional management institutions. Strong Valle Mezquital). Design, build, de Infraestructura experience of public funding agency. Mexico: Self-generation of own, operate, (FONADIN) Regulatory: Clear regulations allowed the Atotonilco de energy with biogas transfer 20% equity from reuse of water and biosolids. Tula to cover around 60% (DBOOT); 25 consortium of energy needs. years partner Technical: Multiple quality levels of Biosolids used for treated wastewater tailored to different fertilizers and soil 31% commercial uses, Water Treatment Technology enhancement. finance Program (WTTP) adapted to dry seasons. Purchase of Emission certified emission reduction Regulatory: Project failed to be World Bank reductions (CERs) purchase implemented due to regulatory Bolivia: financing CER from methane gas agreement for limitations in the energy sector. Santa Cruz but withdrew capture. biogas capture. de la Sierra due to change in First of its kind Technical: Methane capture technology legislation Electricity for self- for low-income adapted to anaerobic lagoons. consumption. countries. Egypt: Cairo, Treated water reused First public- 71% public finance Institutional: Strong leadership of central New Cairo for agriculture. private government (creation of a centralized project partnership 21% nonrecourse PPP unit). Biosolids used as (PPP) in Egypt finance fertilizers. Regulatory: The full potential of the Design, build, 8% equity project has not been realized due to finance, operate, ambiguous or no regulatory frameworks. transfer; 20 years Both the sale of carbon credits and the use of electricity generated have been stalled.

Technical: Strong external technical support and advising (Public-Private Infrastructure Advisory Facility, PPIAF). United States: Plant energy 20-year power 4 million Institutional: Strong public support and New Jersey, neutrality through purchase private finance commitment form the municipality. Ridgewood the use of biogas agreement with (Ridgewood generated by the municipal utility Green) Technical: Innovation used to retrofit plant and fat oil and existing infrastructure. greases purchased Renewable to nearby haulers. energy certificates

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Brazil: Output-based No particular Results-based Institutional: Strong support from the PRODES grants tied to strict contracting financing Finance Ministry and the National Water environmental structure is Agency. and managerial promoted performance Regulatory: Strict connection between standards promoting results and financial aid. resource efficiency. Funding eligibility Technical: Strong technical support from tied to river basin ANA during the certifying process. committees promoting a river basin planning approach. South Africa: Treated wastewater 20-year BOOT 47% Development Institutional: Strong coordination Durban sold for industrial contract Bank of Southern mechanisms supported by the local purposes: Modi Africa loan government. (paper industry) and SAPREF (refinery). 20% equity Technical: Closeness of treated wastewater off takers. 33% commercial loan Technological innovations to retrofit existing plant. Chile: Generation and sale Joint Venture + Corporate Strong ownership from stakeholders and Santiago, of biogas to one end Biogas Purchase blended funding financially sound partners. La Farfana user Agreement (6 instruments renewable years) (green bonds/ Technical: Proximity to the Town Gas debt) Plant. Technological innovations to retrofit existing plant.

Regulatory: Regulated gas market allows Possibility to sell using biogas for town gas production. renewable energy Water regulation that fosters innovation: certificates It provides a grace period of five years during which utilities can keep the profits obtained from an innovation before they are obliged to pass them through to consumers via tariff reductions. Peru: Treated Wastewater BOOT 29 years 100% financed Institutional: Comprehensive PPP Arequipa reuse for the mining awarded to End by the end user legislation, strong support from local and industry user (private mining federal government company) Technical: Private partner ensured that the best technology was chosen for the local conditions

Water scarcity: the cost of tapping the nearest water source was high. Mexico: Treated wastewater DBOT 100% Municipal Institutional: Strong support from Tlanepantla reuse for industrial bonds municipal authority and from association de Baz users of industries Sovereign guaranty

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India: Treated wastewater 30-year DBOT- 50% Government Water scarcity: the cost of tapping the Nagpur reuse for cooling PPP End User Grant nearest water source was high. purposes in thermal Model power plant 50% Private (sole Institutional: Strong Regional and Federal end user) Government support

Technical: The proximity of the power plant lowered transportation cost

The market for resources recovered connected with their discharges. The cost of from wastewater treatment pollution abatement is estimated at $1.17 per unit of pollution (defined as 1 kg/l of BOD1) (ITAC, 2019). Market volume In the worst-case scenario, the treated wastewater We estimated the size of the potential market for can be given away free to farmers, saving the three recovered resources: treated water, energy, cost of pollution abatement. Treated effluents and biosolids. To express the estimate in monetary still contain some pollutants. The cost avoided terms, we had to assign a value to each of the can be assumed to be 0.03 pollution units, which products based on worst- and best-case scenarios are equivalent to 30 mg/l BOD5, the allowable 2 drawn from the case studies. In the worst-case concentration in the effluent . The cost avoided in 3 scenario no recovered products are sold—that is, this case would be $0.0351 per cubic meter .The there is no revenue. Even in this case, however, it highest market price for the wastewater can be 3 is possible to assign a value to the product based assumed to be $0.75/m , which is the price industry on the savings from avoided costs. For example, pays for wastewater in the San Luis Potosi case wastewater and biosolids can be provided free to (World Bank 2018a). farmers, thus saving on discharge and landfill fees. Electricity produced from recovered products Biosolids. The lowest market price for biosolids can be used by the treatment plant, lowering its would be the cost avoided by the operator if energy bill. The best-case scenario assumes that it were to give away the biosolids it produced. the product is sold, providing additional revenue The lowest market price would therefore be the to the wastewater treatment plant. avoided cost of transporting the biosolids to a landfill. We estimate this as $5/ton.4 Treated wastewater. Using the “polluter pays” The maximum market price is the sale price of principle, one can estimate the potential cost the biosolids, plus the saving on landfill fees. The 5 savings for a wastewater treatment plant. The bulk compost price can be estimated at $20/ton ; “polluter pays” principle dictates that utilities landfill fees can be as high as $80/ton. should pay the cost of residual pollution abatement

1 Biochemical oxygen demand (BOD) is the amount of dissolved oxygen needed (i.e. demanded) by aerobic biological organisms to break down organic material present in a given water sample at certain temperature over a specific time period. The BOD value is most commonly expressed in milligrams of oxygen consumed per liter of sample during 5 days of incubation at 20 °C. 2 Secondary treatment is designed to remove 85% of BOD. The average BOD in the untreated domestic wastewater is 200-220 mg/l. The BOD contained in the WWTP effluent is therefore around 30-33 mg/l. Allowable discharge varies depending upon the water body where it is discharged, the size of population served, etc. In Mexico, Conagua classifies the water bodies according to the pollution. This classification considers water is polluted when BOD is above 30mg/l. The EU directive requires less than 25 mg/l. (ITAC, 2019) 3 0,03 X 1,17$ = 0,0351$. 4 Source: ITAC, 2019. Based on conversations with operators in the Latin America and the Caribbean and in the European Union. 5 Source: ITAC, 2019. Based on conversations with EBMUD (a U.S. operator).

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Energy. The cost avoided by not having to store biosolids on-site or in a landfill instead of purchase electricity varies with countries’ energy selling them or giving them away to farmers. profile, power generation structure, demand, and Co-digestion. By implementing co-digestion, the utility’s purchasing power. A reasonable range wastewater treatment plants can increase their for retail electricity costs is $0.04–$0.20/kWh6. production of electricity and biosolids as much as fivefold. The increase consists of fees for accepting The market volume in Latin America can be the organic matter collected and the value of the calculated using these price ranges for treated electricity generated from that organic matter. wastewater, biosolids, and electricity, and extrapolating using the case study of the Market growth Atotonilco (World Bank 2018b) plant’s production, The potential for market growth varies with using as a proxy the population equivalent served geographical, institutional, and socioeconomic by the plant (10.5 million people). The results shown factors. For example, in Mexico, wastewater reuse in the following table are based on very rough is more developed than in other countries because assumptions but still demonstrate the potential of of the country’s water scarcity. Scarcity triggered recovered resources. initiatives to promote wastewater reuse in the most water-scarce areas. Other case studies confirm that Table 1 Potential market volume for wastewater, the potential for market in water reuse depends biosolids, and electricity in Latin America and the heavily on the availability of water resources and Caribbean their extraction costs.

US$ million Low-price High-price Within the LAC region, the market for energy scenario scenario produced from biosolids is most developed in Wastewater 1.980 42.303 Chile, though growth potential and opportunities Biosolid 870 17.409 are present in all LAC countries, since energy can be used for self-consumption or sold provided Electricity 480 2.398 proper regulations are in place. Total US$ million 3.330 62.110

The biosolids and co-digestion markets are mature Source: ITAC 2019 in the United States and Europe, but LAC is still in Note: These are very rough assumptions, since no firm global statistics exist on the selling prices of products of wastewater the development stage, with only few examples in treatment plants. the region. The potential for co-digestion in Latin America is therefore very high. The results illustrate a large market potential. Presently, however, not even the low-price scenario The position of the different business segments in is being reached in the region. Many utilities do not Latin America and the Caribbean are presented in pay the discharge fee even if they fail to comply figure 1. with effluent standards; only a small number of plants self-generate electricity; and many plants

6 Latin America Energy review 2016. Leaving away highly subsidized prices like in Venezuela and high cost island nations like Haiti.

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Figure 1 Current status of four wastewater-related business segments in Latin America and the Caribbean

Sales Growth Development Growth Maturity Decline

Energy Treated Waste Water Co-Digestion Biosolids

Time

Source: ITAC 2019. covering most or all of the plant’s costs of operation and maintenance (O&M). Profitability All four business segments have passed the rises with water scarcity—in other words, where development stage and are in the growth phase water is scarce, water tariffs for industry tend to of the product cycle. Energy generation is the be higher, pushing up prices for treated water. In most developed, though still not widespread, most cases, however, only one industry in the area followed by treated wastewater, as evidenced is in a position to purchase the treated wastewater by experiences in Mexico, Brazil, and elsewhere. produced by the plant. Therefore, seller and buyer Several of the Mexican experiences are profiled must agree on the contract details. Profitability in the case studies. Biosolids and co-digestion are can exceed a 25 percent return on investment—or just emerging from the development stage. even higher if avoided costs are also considered. Furthermore, water reuse projects present Business Models relatively low risks and are typically sustainable. The next section presents models for use in three Stability of supply is thus another advantage for principal business segments: treated wastewater, the industrial counterpart. Supplies of wastewater energy, and biosolids. Co-digestion is treated as a tend to be more stable than supplies from natural hybrid of the last two. reservoirs, from which extractions may periodically be limited (e.g., during droughts).

Market segment #1: Treated wastewater The case studies reveal two major enabling factors for the implementation of wastewater reuse projects: Reuse of treated wastewater in industry: two enabling factors and three models • A strong institutional framework for wastewater reuse The case studies of San Luis Potosí (World Bank • Physical factors, notably water scarcity and the 2018a), Cerro Verde (World Bank 2019a), and distance to industrial customers. Nagpur (World Bank 2019b) establish that the sale We will deal with each in turn. of treated water to industry can be profitable,

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Institutional factors geographical factors can both trigger changes at Successful reuse of treated wastewater usually the institutional level (by increasing water tariffs depends on the existence of a strong institutional for industry) and push the industry to innovate and framework to promote reuse and shape contract find alternative sources of water. For example, in design. San Luis Potosi, the power plant was paying a high price to draw freshwater from the aquifer. Treated Some countries have multisectoral agencies wastewater was a very attractive option because with experience in planning, financing, and it was cheaper than the fresh water the plant had implementing water projects. In Mexico, been using. CONAGUA offers assistance to the weakest party, generally the treatment plant (typically owned by a The most an industry will pay for recycled water is water utility), so as to achieve a financial structure the amount they are currently paying for the right that makes projects bankable while distributing to draw from rivers or other natural resources. If risks and profits in a balanced manner. water is abundant in these natural reservoirs, the Other countries in the region may wish to consider price of water tends to be low, making wastewater replicating the CONAGUA model for planning reuse less viable. In such cases, other incentives and financing wastewater reuse. One advantage may be needed to foster resource recovery of the model is to ensure the maximum amount of projects, and the role of the coordination agency funding from the private sector to leverage limited (or other institutions capable of inducing change) state funds. Mexico’s revolving funds (FONADIN) becomes more important. One option is to raise and trust funds (FINFRA) are also worthy of the withdrawal and discharge fees to reflect full replication. social and environmental costs. Doing so would create an incentive for industry to use treated An important aspect of overarching planning wastewater when available, as in the case of San agencies is their familiarity with the market and Luis Potosi in Mexico. Other, softer measures its participants, including technology providers, might be a combination of actions such as (i) construction companies, financial institutions, performing and disseminating needed studies to and regulators responsible for water, agriculture, demonstrate that investments in reuse of treated industry, the environment, and other sectors. The water can benefit both parties (utility and industry) agencies collaborate with all stakeholders during if designed correctly; (ii) providing public grants to planning, project preparation, tendering, and finance part of the project, thereby lowering risks project implementation. Often, they are able to to investors; and (iii) advising during the process to identify the most suitable technology and provider ensure a sustainable financial structure and a fair for a given project. contract between the relevant parties. Decisions on siting wastewater treatment plants The lack of such agencies is an important barrier should consider the distance to potential industry to the wider implementation of wastewater reuse users. Instead of being located next to waterways projects in the region. to facilitate discharge, plants could be located close to water-intensive industries (power plants, Physical factors: scarcity and distance mines, petrochemical facilities, paper mills, It is no coincidence that industrial use of treated etc.) with which the utility or plant operator wastewater is more prevalent in countries where can conclude long-term purchase agreements, fresh water is a scarce resource. But other increasing profitability and sustainability. physical factors count, too. The location of the Strategic siting can create other synergies, as closest potential client (industry, power plant, well. Treatment plants located near power plants etc.) also matters, since moving water long could provide treated wastewater for cooling at distances may make it unaffordable. Physical or a discounted price. The power plant could use

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cleaned biogas produced in the treatment plant costs of the O&M contract) should be less than any to produce electricity. The electricity could then other alternative source of water; otherwise, the be sold to the treatment plant at a discount. The business model is unlikely to be attractive, unless power plant could also send residual or waste the alternative sources are very unpredictable. heat from generation to the treatment plant to heat digesters and dry biosolids. Dried biosolids Model #2: The utility treats the wastewater and could be burned in the power plant to produce sells it to end users additional electricity. The model—usually involving a BOT agreement with a private operator—commits the water utility With these institutional and physical parameters in to supply set amounts of wastewater to end mind, the case studies can be grouped into several users at a specified level of quality. The end user business models. commits to purchase the product for an agreed price over an agreed period. Since the cost of Model #1: The industrial end user finances, builds, alternative sources of fresh water will depend and operates the wastewater treatment plant heavily on abstraction fees established by the As in the cases of Cerro Verde in Peru and Nagpur government, this type of project can be promoted in India, this business model may apply when by institutions responsible for water resource no other viable water source is available to the management. Long-term contracts are typically industry, and the cheapest option is to build a necessary to ensure project sustainability and plant to treat wastewater from a nearby urban bankability. In the case of San Luis Potosi, Mexico, area. The end user receives untreated or partially the state water commission (CEA in Spanish) treated wastewater, treats it to the desired quality signed two contracts: (i) a build-own-operate- and reuses it in its operations. The end user would transfer (BOOT) contract with a private company usually hire a technology provider to build and (ARTE) to build the wastewater treatment plant operate the treatment plant to bring wastewater and to maintain it for 20 years (2 years during up to the standard required for its processes. construction and 18 years after completion); and (ii) an agreement with a power plant (CFE) Such build-operate-transfer (BOT) agreements are to purchase the treated wastewater. The power typically made for a period of 20 to 30 years. The plant’s guaranteed demand for treated wastewater end user provides risk capital (equity), mixed with enabled CEA to undertake the investment loans from commercial institutions, to build the risks. CEA and CFE agreed that the fee for the infrastructure, assuming most or all of the risk. The wastewater would be 67 percent of the state’s price infrastructure includes the treatment plant, the for groundwater to be used for industrial purposes. means required to convey the treated water to its Because the cost of water for industrial uses in San installations, and the facilities needed to dispose Luis Potosí is among the most expensive in Mexico, of used water in compliance with applicable the agreement benefited both parties, reducing environmental regulations. The design risk lies with operational costs both for the power plant and the the end user, which must make a detailed study wastewater treatment plant while also protecting of its water demand and the available technology the aquifer. options. The end user has an interest in assuring efficient operation and adequate maintenance Model #3: The utility outsources treatment to a of the treatment facility in order to ensure third party that then sells treated wastewater to uninterrupted delivery of water for its own use, industrial users mitigating any residual supply risks by installing This model is used in Durban, South Africa (World storage facilities or securing alternative sources of Bank 2018c). In order to be able to supply recycled supply. Once the investment is made, the cost of water to two industrial users, the municipal water water supply (capital costs, financing costs, and the utility (Ethekwini Water Services) had to upgrade

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the existing activated sludge process, build a new distances, resulting in a high energy price. As in the tertiary wastewater treatment plant, refurbish the industrial case, the closer the treatment plant is to high-level storage tank, and install a reclaimed agricultural centers, the better the business case. water reticulation system. One complexity of the project was that one of the potential clients In this same market, we can include the use of required high-quality water to produce fine treated wastewater for recreational and ecological paper. Given the technical complexity, cost, and purposes, such as refilling aquifers. For all these risk of the project, the municipal utility opted to end uses, as for agricultural uses, it is challenging implement the project under a public-private to generate revenue streams for the plant. The cost partnership (PPP). After international bidding, of making the treated wastewater available to the Durban Water Recycling (DWR), a consortium of end user usually exceeds the discharge fee saved by firms, was chosen to finance, design, construct, the utility. One exception may be the use of treated and operate the tertiary wastewater treatment wastewater to water golf courses, which, depending plant under a 20-year concession contract. The on local conditions, could be considered either a municipal utility remains responsible for primary recreational use or an industrial use. wastewater treatment, and the effluent from the primary settling tank is sent to DWR’s plant to be Most often, however, this type of business must be treated and then sold to users. The private sector subsidized by the public sector. The subsidy can provided all of the funding needed for the project. come in form of capital investment or included in The guaranteed demand for treated wastewater the water tariff. With subsidies, the business can be from the two industrial users made the project viable. Ideally, a strong agency or institution would economically attractive and allowed DWR to help design a financial structure that guarantees assume the investment risks. DWR also agreed to bankability and a balanced distribution of risk. The meet the water quality requirements of the two main players are the utility and, usually, farmers’ industrial users. The municipal utility incurred no cooperatives. taxpayer-funded capital cost. When all benefits and externalities are considered Reuse of treated wastewater in agriculture in the analysis, the benefits typically exceed the The uses of treated wastewater in agriculture call treatment costs, especially in water-scarce areas for a business model different from those that and areas threatened by new natural phenomena apply in industry. The treatment cost is usually induced by climate change. Another benefit that lower than for industry, as only primary treatment should be considered is the power of wastewater and disinfection are needed. However, given the treatment to lower human exposure to pathogens. intended end use, and in order to avoid health risks, it is important to continuously monitor the Common financial structures and instruments treated effluent. used in wastewater reuse projects Most of the industrial and agricultural cases The chief difference from the industrial case is discussed above follow a BOT or BOOT model that profitability is more difficult to achieve. As financed through various instruments. in industry, farmers are unwilling to pay more for treated wastewater than they must pay for fresh The financial structure of San Luis de Potosi, which water, which in most cases is very low. Moreover, uses a BOOT model, consists of 40 percent public sometimes farmers are reluctant to use treated funds (from FINFRA), 36 percent commercial wastewater because they believe it will reduce their bank loans and 24 percent operator’s equity. yields, as seen in the case of Atotonilco, Mexico. The clear contract binding all stakeholders and On the other hand, the use of treated wastewater ensuring the sale of the treated wastewater made can be viable if farmers must pump water over long the investment attractive for the operator. The

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Atotonilco plant, a BOT, is financed at 49 percent consumer. Several cases illustrate the potential of by a government grant, 31 percent through energy as a by-product of wastewater treatment. commercial bank loans, and 20 percent operator’s La Farfana (World Bank 2019c) sells its biogas to equity. The Durban recycling project, which is also a gas company under a long-term agreement. a BOOT, is financed totally by the project operator Atotonilco and Cañaveralejo (World Bank 2016b) use (20 percent equity and 80 percent loans). Cerro their biogas to help power the plants. Ridgewood’s Verde is an unusual BOT in which Minas de Cerro produces 100 percent of the energy required by the Verde, the industry partner and user of the treated plant (Wolrd Bank 2018d). wastewater, finances the capital investment and operating expenses of the entire wastewater The energy business can be very profitable since treatment plant, not only the tertiary treatment the capital costs are relatively small compared to plant. Nagpur is also an unusual BOT where the the costs of the plant. Operating expenses for the power utility, MAHAGENCO, is also the recycling gas cleaning plant and the power plant are also project operator. The municipal water utility low—less than 5 percent of the capital expenses. contributes with a government grant to finance Because the biogas is essentially free fuel for part of the capital costs. the plant once the capital investment is made, electricity can be generated much more cheaply Tlalnepantla de Baz (World Bank 2016a) uses a than in a power plant that must purchase gas. Thus, different financial structure. The utility implemented the treatment plant either earns revenue from the business without a private partner. The the gas or electricity it sells or saves on electricity municipality and the municipal operator decided to costs if it uses its gas for self-consumption. In carry out and finance the project using their own addition, the utility can also obtain carbon credits means. Municipal bonds are guaranteed by pledges by burning the biogas and transforming CH4 to of future revenues from sales of recycled water and CO2. Some countries include biogas generation from other municipal taxes. The scheme employs a in their renewable-energy incentives schemes; in trust fund, similar to the federal trust fund (FINFRA) such cases, assuming the right regulations are in found in Mexico, but at a municipal level, which is place, operators may derive extra income by selling quite innovative. The fund is also backed partially by power at the privileged price. a multilateral guarantee. Profitability is evident in cases like la Farfana, where Governments could also sponsor the development the plant invested $2.7 million and now earns a of water reuse trust funds to finance wastewater yearly net profit of $1 million from biogas activities, projects destined for agriculture and other low- a 40 percent return rate that enabled it to recover 7 revenue uses. The trust funds could also be used its investment in a little over two years. Demand by water utilities and investors as leverage to risk is low, since there is a well-structured contract guarantee financing of wastewater reuse projects and just one end user. The main risk in this case is aimed at industrial users. related to the sale price, which is indexed to the price of oil. In case of interruption of demand, the Market segment #2: Energy gas would be automatically flared off, though the maintenance costs of the pipeline would remain Biogas produced in wastewater treatment plants the same. To mitigate this risk, Aguas Andinas is can be used to generate heat and electricity needed developing the means to generate electricity for to operate the plants. Depending on market prices, self-consumption. But Aguas Andinas is ahead of the gas may also be sold to the gas utility or, after the curve—partnerships between the water and conversion to electricity, to the grid or an industrial energy sectors in LAC remain rare.

7 Aguas Andinas (2017). Aguas de Maipu, a nonregulated subsidiary of Aguas Andinas that develops and operates gas and electricity projects, produced a net result of about $1 million in 2016.

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Before entering the energy market on a large range from $2 to $6 million for a plant serving scale, water utilities will have to address several 150,000 to 1,000,000 equivalent habitants. challenges. First, they must begin to see themselves as potential energy producers. As shown in the Common financial structures and instruments case studies, investing in energy generation used in energy projects can yield additional revenue streams that can One interesting financial structure might be a PPP reduce the O&M costs of the water business. for the energy business only, as in the Ridgewood Water utilities may choose to focus on their core case. The most advisable form of PPP would be business, outsourcing the energy business to a BOT, wherein the operator contributes the specialized companies in the sector through PPPs, financial and technical resources needed to build subcontracting, or other arrangements. the digesters and the power plant. The utility might allow the operator to keep all of the revenues from Secondly, economies of scale prevent the wide sale of the gas or electricity—or it could agree on implementation of partnerships with the energy a price for the electricity that is slightly lower than sector. For a small wastewater treatment plant, the what the utility is currently paying (such as in the investment needed to produce energy may not case of Ridgewood). be profitable. The minimum profitable size for a power plant is about 200 kW, which would require In the Atotonilco case, the utility included the treatment plant to produce 50–75,000 cubic construction of the power plant (for self- meters of biogas per day. Although other factors consumption) as part of the BOT contract for are at play in the sale of gas (notably distance to construction of the wastewater treatment plant. the consumer), the minimum efficient plant size is This allowed the contractor to include energy similar. To solve the challenge of economy of scale, efficiency measures in the design, enabling the one solution (if the utility has several plants) is to utility to minimize its tariff increase, which had consolidate all sludge at the largest plant. This been the main concern of the utility in devising the is the solution pursued by Aguas Andinas, which criteria for selection of the contractor. collects sludge from all its plants in the Santiago region and sends them to La Farfana for digestion Besides PPPs, energy projects can be financed and biogas production. with the debt obtained to build the wastewater treatment plant, as in Cañaveralejo, or with Lastly, and most importantly, most countries in create a special bonds created for the energy the region lack clear regulations and institutional project, as in the Tlalnepantla case. La Farfana is frameworks for the sale of gas or electricity by a case in which the private operator finances its wastewater treatment plants—or even for self- infrastructure developments with corporate bonds consumption, as in the case of Santa Cruz de la sold to domestic investors and, where applicable, Sierra (World Bank 2018e). This lack prevents plant with green bonds. operators and utilities from entering the energy business or partnering with the energy sector. Other partnerships might involve international technology providers or small specialized companies Yet, as shown by the case of Aguas Andinas, the similar to the energy services companies (ESCOs) potential is great. The investment required to that exist in the power sector, which can help select develop a biogas business is small compared the technology most suitable for each case. with the total investment requirements of the treatment plant. The cost of the digesters, gas Market segment #3: Biosolids cleaning equipment, and generators ranges from 8 to 12 percent of the total plant cost. The biogas As with energy production, businesses based on investment requirement, including digesters, can biosolids are relatively undeveloped as spinoffs of

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wastewater treatment in the LAC region. Most of tariffs to finance and promote the development in the biosolids generated by treatment plants in the the region of projects similar to the SEDACUSCO region are deposited in the vicinity of the plant or example. in landfills (at a cost to the utility). As in the case of the reuse of treated wastewater in agriculture, As in the energy segment, the absence of clear the main obstacle to the biosolids business is the regulations in the region is a key obstacle to absence of a clear price for the final product, the beneficial use of biosolids produced in the since, usually, the potential customer is not yet course of wastewater treatment. Many of the ready to pay for it. Farmers may be willing to take region’s environmental agencies lack the resources biosolids from the wastewater treatment plant at required to guarantee the quality of biosolids; as no cost. Similarly, biosolids can be used for forest a precaution, therefore, they do not allow their and land restoration, but it is difficult to convince use in agriculture. The more common form of public authorities to pay for them. Until this state reuse is for land remediation and soil restoration, of affairs changes, wastewater treatment plants which have little revenue potential. Further, are unlikely to receive any revenue for the biosolids regulation of biosolids is usually not done at the they produce. However, finding takers may still be national level; instead, departments, provinces, beneficial for the plant operator, as it may save on and municipalities maintain different, and in some transport and landfill fees. cases, contradictory, regulations.

The cases of SEDACUSCO and Ridgewood Common financial structures and instruments exemplify this approach. SEDACUSCO is saving used in biosolids projects on landfill fees and transport costs. Ridgewood If the biosolids business is to be developed on-site, is going one step further, collecting disposal fees the wastewater treatment plant must finance the from other industries for organic matter that it uses needed infrastructure, as in the case of Ridgewood for co-digestion at its plant. or Cañaveralejo. If a separate composting plant is used, as in the SEDACUSCO case, the plant does Beneficial uses of biosolids can generate not need to finance additional infrastructure. important economic and environmental benefits. SEDACUSCO is using biosolids for soil restoration If the composting is done within the treatment (to remedy non-source-pollution) and to help plant using the plant’s sludge alone, the conserve soil moisture. In the Ridgewood case, composting plant will be relatively small and, the amount of organic matter going to landfills accordingly, have low capital and operating costs. is significantly reduced, reducing emissions of This is very similar to the circumstances of the greenhouse gases. energy segment, and the same financial solutions may apply: A short-term PPP in the form of a BOT Governments would be well advised to account for will allow the operator to recover its investment such environmental benefits and create incentives while giving the utility time to learn to manage the for the use of recovered biosolids. Regulations biosolids business. could incentivize beneficial activities by prohibiting disposal of untreated sludge at plant sites, But if the plant operator intends to build a dumpsites, and landfills and of biodegradable composting facility large enough to accommodate organic matter in landfills without composting. organic matter from external customers, the Fees imposed on soil-eroding and -depleting biosolids business becomes a co-digestion industries like wood, mining, and farming could business. As described in the next section, co- finance soil restoration and the development of soil digestion can potentially be a large and diversified restoration projects using biosolids from treatment business with several sources of income and a plants. Such green fees might be included in water higher investment requirement. Such business can

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still be financed with a BOT scheme as in the case to invest in co-digestion, bringing sustainable of Ridgewood, but more sophisticated financial revenue streams to the operator, albeit at a instruments may be necessary. high risk of volatility owing to rapidly changing market conditions. As with the biosolids business, Market segment #4: Co-digestion regulations that increase tipping fees tend to limit the deposit of organic matter in landfills, Co-digestion is a hybrid of the energy and incentivizing the development of co-digestion. biosolids businesses. It comprises elements Common financial structures and instruments used of both in a way that can make it attractive to in co-digestion projects private investors. In co-digestion, sludge from the wastewater treatment plant is only a part of the The investments needed to implement co- digesters’ feedstock. The digesters also receive digestion in wastewater treatment plants (digester other organic matter from residential, commercial, capacity, gas cleaning and power generation, agricultural, and industrial sources. Depending on feedstock storage, and so on) can be financed the feedstock, there may be separate digesters in several ways. Large utilities can finance their for different feedstocks, or all may be bundled projects by issuing debt in the form of green bonds together in a large digester. After digestion, the or building equity in the form of green shares. remaining biosolids can be composted. For smaller utilities, it may be safer to start the business through a PPP with experienced partners The energy output of wastewater treatment plants or technology providers, in combination with trust engaged in co-digestion will be greater than funds or grants. The same is true of utilities that are that of plants without co-digestion, potentially not creditworthy enough to finance a co-digestion exceeding the energy needs of the plant. Excess project on their own. electricity can be sold to the grid at the going rate. In the co-digestion model, tipping fees earned The case of Ridgewood shows how a well-designed by collecting other organic waste become an PPP between the Village of Ridgewood’s water additional source of income for the plant. The utility and an engineering company (Ridgewood utility in the Ridgewood case study, understanding Green) can lead to a successful co-digestion project. the potential of co-digestion, invested in Ridgewood Green made the up-front capital expanding their digesters and their power investment needed to retrofit the treatment plant, generation capacity. It accompanied these steps which implied zero investment costs and minimum with a strong marketing campaign to obtain risk for the Village of Ridgewood. In return, the additional feedstock for digestion, enabling it village purchases the electricity generated by to produce significant amounts of biogas and Ridgewood Green at a price of 12 cents per kilowatt electricity. hour (kWh) (lower than the 15 cents per kWh market price). The power purchase agreement included a Because co-digestion is a relatively new business, fixed rate increase of 3 percent per year for inflation, its regulation is undeveloped in many countries. establishing the village’s price and Ridgewood The United States was one of the first countries to Green’s revenue for the duration of the contract, implement co-digestion in wastewater treatment benefitting both parties. plants. But co-digestion is considered a different business and, as such, falls outside the wastewater Ridgewood Green owns and operates the co- regulation. One effect of this distinction is that digestion equipment; the Village of Ridgewood the profits the plant derives from co-digestion are owns and operates the wastewater treatment not necessarily passed to consumers in the form plant with technical support from Ridgewood of lower water and wastewater tariffs. This has Green. Ridgewood Green expects to recover become an incentive for many treatment plants its full investment and a reasonable return on

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investment through an innovative revenue model Specialized operators have vital experience with that leverages several revenue streams: (i) sales of waste-to-resource projects and are often sources electricity to the Village of Ridgewood; (b) sales of necessary technology. They can also bring of renewable energy certificates to 3Degrees, investment resources to a project. But if they are to a leader in the renewable energy marketplace, participate, they require the prospect of reasonable under a multi-year agreement; and (c) tipping fees profitability and, to the extent possible, mitigation collected from entities providing organic matter of political, regulatory, and financial risks. Reducing for the anaerobic digesters. these risks usually requires the government to participate with grants or guarantees to shorten Risk management the period of return on investment.

Wastewater treatment plants designed to exploit Demand risk the downstream products of treatment present Variability in demand is probably the most critical various risks that must be mitigated. obstacle to private participation in resource- recovery projects. This risk refers to uncertainty Financial risks about the actual volume of by-products that will Private investors are usually reluctant to invest in eventually be used. If the demand for by-products water infrastructure, owing to the long pay-off (treated water, energy, biosolids) is lower than period, lumpy investments, and the sunk nature expected, then the revenue may fall below the level of the investment. Risks are usually managed required to meet O&M expenses and service debt. through ring-fencing activities in the design- and-build contracts (transferring technology and Of course, projects developed by the end user, construction risks to specialized contractors) and as in the case of Cerro Verde, completely remove through O&M components that transfer some demand risk and allow the water utility to have its performance and maintenance risks to contractors. wastewater treated with little or no investment, Water projects funded only by a cash flow provided thus reducing the public sector’s risk. by water users (i.e., tariffs paid by customers of water utilities) require strong guarantees from But when the end user is not the project developer, a creditworthy institution. Even sound financial as in many of the cases analyzed, a way must be statements from water utilities may not be enough found to mitigate demand risk. The case studies to encourage private investors to enter into a suggest several options, the most critical of concession agreement. Resource recovery by which is proper contract design. The project’s wastewater treatment plants offers the potential financial structure will require a long-term to reduce risk by supplementing tariffs with new purchase agreement that must provide security revenue streams. to the participating financial institutions. The terms of the agreement will vary depending on Operational risks the requirements of the parties involved and the Many utilities lack experience with the waste-to- funding institutions. Of the cases analyzed, some of resource business. In order to mitigate operational the most successful had only one or two major end risks, many choose to outsource the business users (San Luis Potosi, Durban, Ridgewood) and to specialized operators, usually through a PPP, thus were able to structure the contract in a way as seen in most of the case studies. A PPP can to mitigate demand risk. Take-or-pay clauses and also help to finance the project when the utility fixed payments are common features of long-term lacks the necessary resources. Depending on the infrastructure contracts and can be equally useful arrangement, the PPP can mitigate most or all risks in waste-to-resource projects. The risk of variable for the utility. demand rises with the number of end users, which may discourage private investors.

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Legislation and targeted regulatory frameworks the risks of cost overruns, as specified in design- may be helpful in providing assistance to public and-build and turnkey contracts. utilities during the negotiation and contract-design phases of projects. Any number of political, regulatory, and economic changes may occur during the project period. The Other risks contract must include clauses ensuring stability Other risks include supply risks related to variability and guarantees to mitigate significant changes in the volume and quality of sewage flows. As in in prices, costs, or volumes. Political actors any other infrastructure project, there is the risk of may alter agreements and force the operator construction delays. Such risks are typically shared to pass benefits or profits on to consumers between the municipal authority and the project in the form of lower tariffs, thus affecting the developer. Public utilities may need more time operator’s expected return on investment. than expected to acquire land and permits (as in Strong institutional and regulatory frameworks Nagpur), raising the costs of construction. Once will key enabling factors in countries where such lands are cleared, the project developer assumes interference is possible.

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References

Aguas Andinas. 2017. “Memoria Anual 2017.” https://www.aguasandinas inversionistas.cl/~/media/Files/A/ Aguas-IR-v2/aguas-andinas-memoria -anual-2017.pdf

ITAC Consulting 2019. “From Waste to Resource – Why and How Should we Plan and Invest in Wastewater?” Unpublished technical background paper prepared for the World Bank.

World Bank. 2016. Case Studies in Blended Finance for Water and Sanitation: Municipal Bond Issue by the Municipality of Tlalnepantla de Baz (Mexico). http://documents.worldbank.org/curated/ en/156721472042044468/pdf/107978-Mexico.pdf

---. 2016b. Latin America & Caribbean Energy Management. Cañaveralejo Wastewater Treatment Plant, EMCALI, Cali, Colombia, World Bank, Washington, DC. http://www.werf.org/c/KnowledgeAreas/ Energy/Products_and_Tools/2017/World_Bank_Fact_Sheets/World_Bank_Colombia.aspx

———. 2018a. “Wastewater: From Waste to Resource—The Case of San Luis Potosi, Mexico.” World Bank, Washington, DC.

———. 2018b. “Wastewater: From Waste to Resource—The Case of Atotonilco, Mexico.” World Bank, Washington, DC.

———. 2018c. “Wastewater: From Waste to Resource—The Case of Durban, South Africa.” World Bank, Washington, DC.

———. 2018d. “Wastewater: From Waste to Resource—The Case of Ridgewood, USA.” World Bank, Washington, DC.

———. 2018e. “Wastewater: From Waste to Resource—The Case of Santa Cruz de la Sierra, Bolivia.” World Bank, Washington, DC.

———.2019a. “Wastewater: From Waste to Resource—The Case of Cerro Verde, Peru.” World Bank, Washington, DC.

———. 2019b. “Wastewater: From Waste to Resource—The Case of Nagpur, India.” World Bank, Washington, DC.

———. 2019c. “Wastewater: From Waste to Resource—The Case of Santiago, Chile.” World Bank, Washington, DC.