Chesapeake Bay Nutrient Trading: Succeeding Through the Volatility

Posted by Heath Edelman on Monday, October 21, 2019

If your facility has been relying on the purchase of nutrient credits each year to meet your Chesapeake Bay permit limits, it may be time to re-evaluate that strategy, or if your facility produces credits that you’re not trading, you can be leaving real dollars on the table.

The Nutrient Trading Program is an initiative to assist facilities in complying with the Chesapeake Bay Program's Total Maximum Daily Load (TMDL) requirements. Wastewater facilities that reduce their nutrient discharges (nitrogen and phosphorus) more than what is required in their permit are able to generate nutrient credits. These credits can then be sold to other facilities who have exceeded their nutrient allocation and need credits to meet compliance.

Soaring Prices: Supply & Demand – A Double Hit

Prior to 2018, the demand for nutrient credits was relatively low, supply was ample, and therefore credit prices were relatively low. However, with the extremely wet weather of 2018 causing excessive flows, flooding, and inflow and infiltration (I&I) issues, some Wastewater Treatment Plants (WWTPs) struggled to generate credits, while other WWTPs that typically needed credits required more than usual. Economics 101 tells us that with supply down and demand up, prices rise. It’s an unfortunate reality of the nutrient credit trading market in wet years. There weren’t enough credits available for Water Year 2018 (October 1, 2017 – September 30, 2018), and the sharp increase in demand caused prices to soar.

The Credit Supply Outlook

If you typically need to purchase credits, particularly nitrogen, know that the supply is not going to increase. In fact, facilities continually need to reduce the levels of nitrogen and phosphorus in plant effluent as they begin to reach their maximum design flows, the basis for which nutrient allocations were allotted. In addition, new Pennsylvania Department of Environmental Protection (PADEP) guidelines as part of the Phase II Watershed Implementation Plan (WIP) (effective October 1, 2015) for nutrient credits, make them more difficult to generate. These rule changes effectively eliminated capacity credits (a.k.a. – phantom credits) by establishing baseline concentrations for nitrogen and phosphorous. Prior to these changes, the credit supply kept up with credit demand, with credit generators certifying and verifying credits when demand was apparent. Starting in Water Year 2016, however, a significant amount of credit generating capacity was eliminated. In 2018, those Phase II WIP changes became painfully apparent for several purchasers who fell short and did not meet permit requirements due to a lack of nutrient credit supply (see graph). Supply will remain limited, demand will remain volatile, and prices will likely be unpredictable.

Continue to Buy Credits or to Upgrade?

Should you continue to purchase credits each year without a guarantee of availability or price or should you pay once for new brick and mortar that will bring your plant into compliance? How does the annual cost of purchasing credits compare to the annual cost of financing a facility upgrade? Can your facility or community weather the storm of nutrient credit price volatility?
We have continued to see a good deal of rain in 2019, and because the Water Year starts on October 1 each year, many facilities are already finding themselves behind where they should be year-to-date. This may be a good time to upgrade and move away from dependence on purchasing credits. Consider what steps you can take to mitigate your need for outside credits, and do it now. Many facilities on both sides of the nutrient credit trading fence are finding that I&I rehabilitation projects make more financial sense than ever before – reduce the flow to the plant, and thus reduce the effluent (and nutrients) discharged.

Sell Your Credits!

If you have credits to sell, this may be the year to get serious about it, and begin to lay the groundwork to maximize your opportunities. We have a clear understanding of the Nutrient Credit Trading process and we can help you navigate through the PADEP’s certification/verification/registration process. The legal contracting portion is well established and no longer cumbersome or expensive.

In the End

Now is the time to act, whether you are a buyer or supplier of credits. Get informed, evaluate your options, and position your facility and community for the immediate future and for years to come.

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Categories: Municipal Infrastructure

Tagged: Wastewater  |  Environmental  |  Regulations