Navigating new territory

The waste industry saw another successful year in 2023, full of mergers and acquisitions (M&A) and increasing infrastructure investments as the waste industry adapts to renewable natural gas (RNG) credits, waste diversion and the changing business model around recycling and the value-building model.

At Waste Today’s Corporate Growth Conference, Nov. 15-16, 2023, in Chicago, in the session Market Impact: Diversion, RNG and Recycling, speaker Michael E. Hoffman offered insight into the waste industry’s changing business model and how a shift toward the circular economy will affect future operations.

“Garbage is good,” said Hoffman, a managing director for Stifel with more than 32 years of experience in the industry, noting the pricing discipline the industry has shown in recent years.

That price discipline underlies “good volume” at landfills and in small container service interval, he said. “Those trends are favorable.”

Regarding industry growth, Hoffman said, “They’re coming off of really good, favorable [growth] in 2021 and ’22 to just a stable level of incremental, favorable [growth]; but they’re not negative.”

Following the money

Both large public and private companies are helping drive the market, Hoffman said, predicting almost $7 billion in recapitalization of waste and recycling infrastructure in 2024.

“If you are in the recycling business, and you have the capital and the wherewithal to be able to put in a $40-to-$50-million MRF [material recovery facility] … you are the savior of recycling in this country because we cannot, in fact, address the demands of—consumer interest aside—the packaging industry [if it] truly … [goes] circular.”

He offered Vermont-based Casella Waste Systems’ MRF in Charlestown, Massachusetts, and Connecticut-based USA Waste & Recycling’s MRF in Berlin, Connecticut, as successful examples of such investments.

The systems, from High Point, North Carolina-based Machinex Technologies, part of Canada-based Machinex, and Norwalk, Connecticut-based Van Dyk Recycling Solutions, respectively, produce “the cleanest mixed-waste paper” Hoffman said he has “ever seen.”

“It’s virtually white; it’s no longer gray,” he said of the facilities’ finished products. “They have 2 percent residuals, and in the front end, it’s like 25 percent contamination. That’s how good that technology is.”

Hoffman said while these investments are favorable in terms of public interest, they’re also beneficial from a business standpoint, lowering processing costs and improving the quality of the product.

He emphasized the role waste management firms play as “aggregators” of material as state and federal agencies target plastic waste and push for alternative fuels.

“You’re the ultimate aggregator, so, as a collection company, you’re the one with the landfill with the renewable natural gas; you control the gas. The infrastructure people show up and [you say], ‘You’re going to have to pay me for that power,’ and that’s what you’re seeing,” he said. “The economics have moved dramatically in favor of the landfill operator, whether you go it alone or you partner.”

However, he did warn that volatility in the renewable fuels market could introduce risk to a firm’s portfolio. Volume obligations for cellulosic biofuel, a D3 renewable identification number (RIN), are subject to change by the U.S. Environmental Protection Agency (EPA).

According to Irvine, California, consulting firm Stillwater Associates, D3 RIN prices showed significant volatility in the eight months before EPA announced the proposed Set Rule for 2023, 2024 and 2025 on Dec. 1, 2022. Prices have since remained steady, with a slight increase toward the end of 2023.

“[EPA] has changed the RVO [renewable volume obligation] several times in the last five years [to] where you have whipped the D3 RIN around a lot,” Hoffman said.

The RVO is a calculated value that represents the cents per gallon cost to an obligated party of complying with the Renewable Fuel Standard.

“Therefore, you expose this income statement to a high degree of volatility that you had moved away from because you went from a high percentage of your recycling commodity exposed to a low percentage and derisked it, and now I’m introducing risk,” he continued.

Hoffman said there’s “hope,” though, explaining that the old Renewable Fuel Standard (RFS) expired at the end of 2022, with new, three-year volume targets finalized in June 2023.

“If they show wisdom and do this in a manner which creates that stable demand, then maybe we create stability in the RIN.”

Challenges on the horizon

In terms of legislation, Hoffman said California’s recently approved Advanced Clean Fleets Regulation could have ramifications for the entire country.

The new rule, approved by the California Air Resources Board (CARB), requires a phased-in transition toward zero-emission medium- and heavy-duty trucks, with waste haulers required to transition to zero-emission vehicles by 2042. Hoffman criticized the ruling, noting that it puts truck manufacturers and fleet operators at odds.

“The truck manufacturers have deadlines that are earlier than the fleet guys’ deadlines, and you [have] to get the fleet guys to buy the trucks that they need to sell because they have to sell a certain percentage that is clean,” he said. “So, you’ve created conflict, but then you’ve also created an issue where … there’s no way the infrastructure supports it.”

While the ambitious rule has been widely condemned by the industry, Hoffman said similar rulings in other states are likely.

“On a national basis, this is coming across the country in some form or fashion because the body, the chassis makers, are not going to make a ‘California vehicle,’ they’re going to make a vehicle,” he said. “You’re going to find yourself in a situation where you’re going to have to deal with this.”

Hoffman cited efforts by Columbus, Indiana-based Cummins to develop a new 15-liter natural gas engine that can run on net-zero carbon RNG as an immediate solution to emissions.

“It’s going to be smaller [and] lighter weight; you’d get some payload back, better performance [and it’s] designed purposely to be CNG [compressed natural gas],” he said.

Another regulatory battle currently affecting the industry is extended producer responsibility (EPR), a recycling model enacted by Maine, Oregon, Colorado and California. He said the legislation as written likely will lead to rising costs for consumers and stagnant recovery rates in the case of preexisting recycling programs.

“You have to have really rigorous recovery requirements. What does that look like? Look at the Canadian [EPR] programs. A consumer packaging company delivers 100 units of a good into the market, [and] the recovery is set at a level of how many of the 100 you have to get back. They’re high; in Ontario, it’s 90 percent [for] PET [polyethylene terephthalate] bottles,” he said.

In the U.S., the recovery rate for PET bottles is around 28 percent, Hoffman said, which largely can be attributed to the loss of material to landfills or incinerators. Of the 268 million tons of waste produced in the U.S., 140 million tons are sent to landfills, the EPA says.

“There’s a whole host of conversations that have to happen, but EPR doesn’t fix that. In my opinion, it just changes the burden to pay and lets you have a much broader conversation about the whole infrastructure,” Hoffman said.

Depending on the producer responsibility organization (PRO) hired to administer the EPR program, Hoffman said the success of the model can vary greatly.

“The biggest thing I worry about is when the states do pass this and the PRO is hired, what’s their attitude? In the state of Colorado, the PRO is taking the view that all of those infrastructure assets around recycling can forcibly be taken away … and they can take control. … That’s the current dialogue,” he said.

Although the state has not yet established a final model, Hoffman said it’s important for the industry to get involved.

“You can’t sit idly by; you’ve got to get engaged. You’ve got to stay in front of this,” he said.

The author is associate editor of Waste Today and can be reached at hrischar@gie.net.