SCOTTISH Water was forced to shut a multi-million pound composting business that had received a £300,000 grant from the Scottish Government at the cost of at least £5 million, it can be revealed.

Scottish Water Horizons (SWH), the agency's commercial arm, recently took the decision to stop competing with private green waste businesses for multi-million-pound recycling contracts by closing operations at Linwood and Deerdykes at Cumbernauld, affecting 40 to 50 jobs. The Cumbernauld site had received a £300,000 grant from the Scottish Government agency Zero Waste Scotland.

The move coincided with an investigation by the Scottish Environmental Protection Agency (Sepa) at the Cumbernauld site, which also houses a high-tech £8m anaerobic digestion (AD) plant, over issues believed to be related to odour from the outdoor composting following an unusually wet year.

It can now be revealed from internal SWH documents, extracts of which have been seen by the Sunday Herald, that the agency thought that there was a "high risk" of a Sepa enforcement notice if Cumbernauld's composting operation stayed open.

The documents indicate fears of the "closure of [the] AD plant", unless SWH was prepared to spend millions of pounds complying with Sepa requests, understood to have included putting a roof over the entire site. It closed the Cumbernauld composting operation abruptly late last year, while deciding to wind down the Linwood operation over the course of this year.

Having to close Cumbernauld altogether would have compounded the embarrassment to the national water agency, which set up SWH a few years ago to make money from sites it no longer needed by investing in green energy businesses. It only began composting at Cumbernauld in 2005 and Linwood in 2008, before adding the anaerobic digestion plant in 2011. Anaerobic digestion is a means of producing renewable fuels from food waste. It also produces heat, which is used by the nearby AG Barr Irn-Bru factory in Cumbernauld.

SWH has confirmed that it spent £900,000 setting up Linwood and £3.3m setting up composting at Cumbernauld. It calculated that keeping the two operations open for another two years would have cost £2m. In contrast, the decision to close Cumbernauld composting immediately and wind down Linwood will cost about £1.1m.

The businesses additionally appear to have lost money in between, having received what internal documents describe as lower-than-expected waste tonnages from customers at depressed market prices.

Private rivals told the Sunday Herald that they are "glad to see the back" of the agency, claiming that SWH was bidding for contracts at levels that rivals considered to be commercially unviable. One well-placed source said that this had undermined their business model, which was then wrecked by last year's weather.

The SWH documents say that the board took the closure decision partly owing to the "capital required to up-rate the facilities at Deerdykes to the standards that Sepa would require for environmental compliance, and the time it would take to implement improvements".

It added: "It is clear from a review of competitor activity and industry trends that there is a move to covered preparation, greater product segregation through increased manual handling and vertically integrated operation in plant hire/management, remediation and groundworks contracting."

Neither Sepa nor SWH would comment on the exact reasons behind the investigation. SWH refused to make public relevant board minutes or communications with Sepa under freedom of information laws, on the grounds they could "prejudice the course of justice". Sepa was unable to say when the investigation would be complete.

A spokesman for SWH said: "After consideration of future business and market opportunities, it was decided that Horizons would focus on activities which provide the best possible return on investment.

"It was clear from a review of industry trends that there is a move to different processes at composting facilities, which if implemented at the Deerdykes composting facility would have required investment.

"Because of this and market conditions, it was concluded at an early stage that investment in the Deerdykes composting facility was not feasible. It would likely have been substantial investment for little return. As a result, the decision was taken to close the Deerdykes composting facility, concentrating instead on the site's food waste recycling operations."

Asked how it rated the risks of having to close the whole Cumbernauld plant if it continued with composting, SWH added: "The composting and AD activities at Deerdykes are not connected and we continue to manage and operate the AD facility in agreement with Sepa."