New market and risk-based approaches for the regulation of the MSW sector in Portugal

1. New market and risk-based approaches for the regulation of the MSW sector in Portugal António Lorena, PhD Candidate SustainableEnergySystems MIT Portugal antonio.lorena@ist.utl.pt Technology, Management and Policy Graduate Consortium 2014 Meeting

2. Overview • Context • Risks • Outcomes • Middle-out approach to planning • Auction of landfill rights • Taxing as a complementary tool Technology, Management and Policy Graduate Consortium 2014 Meeting

3. Context • Most of the waste legislation is defined at the EU level. By 2020, • Preparation for reuse and recycling of >50% of MSW (Waste Framework Directive) • Reductionoflandfilldepositionofbiodegradable waste to <35% ofbiodegradable MSW produced in 1995 (LandfillDirective) • Portugal has struggled to meet EU targets and requirements. In the near future, this may limit access to specific funding schemes. Technology, Management and Policy Graduate Consortium 2014 Meeting

4. Context • Financial constraints limit the capacity to improve service provision. In some cases, service provision will or has decreased. • The national regulator of waste services (ERSAR) estimates that the MSW is highly dependent of transfers from local and national government (~200 M€ of 600 M€ total costs of municipalities on waste services ). • Also, according to the SWOT analysisoftherecentlyproposedstrategicplan for MSW (PERSU), • Threats… Theconstraintsandlimitationsofthepublic sector (no publicinvestment, limitsonfinancingandindebtness, mandatoryreductionsonsupplies and services  and humanresources) • Thereis a riskofestablishingunachieveble targets. Pastexperience shows thatthese financial constraintshaveblockedtheadoptionorcompliancewithnational targets. In thecurrentenvironment, theserisks are aggravated. source: www.correiodominho.pt source: www.dn.pt source: www.lisboasos.blogspot.pt Technology, Management and Policy Graduate Consortium 2014 Meeting

5. Context • EmpresaGeral do Fomento is a public company that has >51% share in 12 regional companies. These 12 companies represent ~60% of the MSW management. • Privatization of EGF is currently taking place. To guarantee the new company is committed with national planning, concession contracts are being established. • EU target definition is usually for 10-15 years. How to match >20 year concessions with 10-15 planning horizons? • Thereis a riskofnothavingthenecessarytools to enforcenationalplanning to thebottomlineofEGF’snewshareholders. Multimunicipais Intermunicipais Technology, Management and Policy Graduate Consortium 2014 Meeting

6. Context • The economic regulation of waste services is guaranteed by ERSAR. • The previous regulatory framework can be classified as price-cap and sunshine type regulation. However, due to the constitutional principle of autonomy of municipalities, only regional utilities where EGF is a shareholder were subject to regulation. • The new regulatory framework focuses more on efficiency and establishes a revenue cap system. ERSAR still does not regulate regional utilities where EGF is not shareholder, but can verify if these are following the predetermined rules for tariffs. • However, in any case, the regulation is hardly risk-oriented • It does only consider if prices are sufficient for economic sustainability • It does not consider deviations from investment plans Technology, Management and Policy Graduate Consortium 2014 Meeting

7. Risks • R1Portugal has struggled to meet EU targets and requirements. In the near future, this may limit access to funding schemes. • R2 Thereis a riskofestablishingunachieveble targets. Pastexperience shows thatthese financial constraintshaveblockedtheadoptionorcompliancewithnational targets. • R3 Thereis a riskofnothavingthenecessarytools to enforcenationalplanning to thebottomlineofEGF’snewshareholders. • Despitetheseandotherrisks, theexistingregulatoryand management framework does not take intoaccountrisks. Technology, Management and Policy Graduate Consortium 2014 Meeting

8. Outcomes • Non-compliance with national-level policy (ENRRUBDA, PERSU II, etc.) Technology, Management and Policy Graduate Consortium 2014 Meeting

9. Outcomes • Non-compliance with national-level policy (ENRRUBDA, PERSU II, etc.) source: APA, 2012 source: APA, 2010 Technology, Management and Policy Graduate Consortium 2014 Meeting

10. Outcomes • Non-compliance with national-level policy (ENRRUBDA, PERSU II, etc.) • Country at two very different paces (performance and costs) Tariffschargedby regional utilities source: ERSAR, 2013 Technology, Management and Policy Graduate Consortium 2014 Meeting

11. Outcomes • Non-compliance with national-level policy (ENRRUBDA, PERSU II, etc.) • Country at two very different paces (performance and costs) • New approaches / tools are required to reduce these risks! Technology, Management and Policy Graduate Consortium 2014 Meeting

12. Middle-out approach to planning • Middle-out approach: national strategic plans should result from well informed regional level action plans • The role of the national-level institutions are • To define the Vision • To establishing the regulatory framework (economic instruments, emission levels, price, among others) • Advantages of the middle-out approach • Avoids prescriptive measures, i.e. it does not impose technical solutions that may not be feasible or cost-effective. • Takes into account usually the best information available • Reinforces the accountability of regional utilities Technology, Management and Policy Graduate Consortium 2014 Meeting

13. Auctionoflandfillrights • Market-based approaches can guarantee efficient solutions (i.e. at the lowest possible cost) by making use of the best information possible. • A auction system for landfill rights is proposed. • Total amount of allowed landfill deposition is defined at the planning process. • Total amount is divided in parcels, each parcel is auctioned through multiunit sealed-bid system. Technology, Management and Policy Graduate Consortium 2014 Meeting

14. Auctionoflandfillrights • The system is being tested through agent-based modelling. • Each company has its marginal abatement cost function, and knows how much landfill rights have been already sold and how much rights each competitor has. • The bidding price and quantity for each regional utility for each time step is a probability function of urgence, the highest value of the marginal abatement cost and a predetermined lower limit to bid. Highestbidswinuntilthe total amountofthe parcel isattributed Regional Utility #1 bid(p1,q1) … Repeatuntilallparcels are allocated Regional Utility#n bid(pn,qn) Technology, Management and Policy Graduate Consortium 2014 Meeting

15. Auctionoflandfillrights Average global price for landfillrights(Monte Carlos analysis, n=1000) Price (€/ t) Technology, Management and Policy Graduate Consortium 2014 Meeting

16. Auctionoflandfillrights Averageprice for each regional utility(Monte Carlos analysis, n=1000) Technology, Management and Policy Graduate Consortium 2014 Meeting

17. Taxing as a complementary tool • As most EU countries, Portugal has a landfill tax. • By design, the Portuguese Landfill Tax (TGR) aims to • Cover administrative costs to oversee the waste activities (mainly to the national environment agency APA) • Promote the objectives defined in the Waste Framework Directive (e.g waste hierarchy) • By design, it should be transferred to the waste producers (final users) through municipal tariff systems • The TGR should also be used as a collar for the auctioning: establish the upper limit and thus the incentive to keep landfill deposition to the acquired rights. Technology, Management and Policy Graduate Consortium 2014 Meeting

18. Scenarios & Forecasting ImpactAssessmentwith IO analysis Benchmarking models (DEA…) THANK YOU!AcknowledgementsTheauthorwouldlike to acknowledge FCT for the financial supportby Fundação para a Ciência e Tecnologia ( SFRH / BD / 51134 / 2010 ). Technology, Management and Policy Graduate Consortium 2014 Meeting