Innovation priorities in the water sector

Photo: Rainwater harvesting in Botswanna

The innovation working group set up by Defra has published its views on the key areas where innovation is needed in the water sector. The top three are:

• Reducing leakage
•  Adapting infrastructure to climate change
•  Economic regulatory reform to incentivise markets and innovation

It will not come as any surprise that leakage is still one of the biggest challenges the industry faces, especially as more plastic pipework is used in the network. In the view of the blog the biggest issue is actually changing the culture so that innovation is accepted and welcomed.

Tesco, market leaders in a totally different field have a traffic light system for assessing innovation. Within three weeks of an idea being first mooted, it is tried out at the store level, reviewed at area level and if promising it is escalated straight up the line see if it should be rolled out nationally. Contrast this with the one month needed in the water industry just for an idea to be submitted and typically at least 6 months to be assessed.

The water industry needs to learn from other sectors. Rapid assessment and feedback on new ideas is vital and just as importantly suppliers need to have confidence they will be properly rewarded – otherwise they will turn to more attractive business sectors like oil and gas.  

Adapting to climate change in the water industry

Photograph source: Thames Water

The government has today published the water company’s plans to adapt to climate change. These set out how water companies are approaching the climate change issue and what impact they expect it to have on their business.

The biggest issue is the uncertainty. Trying to predict the impact of climate change is inherently uncertain and this poses huge dilemmas’ for everyone and creates several barriers hindering progress. Customers are not sure what impact climate change will have and consequently and in many cases unwilling to accept yet higher bills. Support from Ofwat for the cost of adaptation was sadly lacking from PR09 – again they did not want to see step increases in customer’s bills when the likely impact of climate change is so uncertain. The other big issue is the lack of any national design standards again because no one is willing to say for certain what impact climate change will have.

But this uncertainty must not be an excuse for doing nothing. There is no doubt that we are getting greater extremes in our weather – what ever the cause. This combined with population growth particularly in the water stressed South East means that our industry is being seriously affected. Add in the possible impact of climate change and its clear that its absolutely essential that action is taken.

Just look at the current concerns over water shortages in the south of England. Government needs to provide clearer guidance and It is vital that work continues to mitigate the impact. While at the same time more research is needed into the likely effects of climate change. 

New innovation fund for the water sector

A new innovation fund for the water sector will be announced shortly. The fund will have about three million pounds to award by means of a competition. The best ideas will get 50% funding.

There is now broad acceptance of the importance of innovation but the industry is still very risk adverse. This is a step in the right direction and should encourage new ideas to be developed through to successful implementation.   

Water White paper delayed till autumn

It is disappointing to hear that the promised Water White Paper has been delayed till the autumn according to Environment Minister Richard Benyon. The reason cited is the need to develop the policy on affordability of water following the announcement in the budget that action would be taken to tackle the very high water bills in the South West. This is likely to prove a very difficult area to tackle especially now that expectations have been raised.

Yet again this year is proving one of climate extremes with the very dry and warm April. In the blog's area, Somerset, rainfall last year was one of the lowest in 100 years, with December the driest month on record.  Water supplies is just one of the key areas that the Water White paper will address. Given the very long lead time to develop new water resources this guidance is urgently needed. 

Privately owned water utilities achieve highest returns

Increases in the Regulated Capital Value (RCV) are good news for shareholders, who see increasing returns on their investment but bad news for customers who only see rises in their water bills.

 

Ofwat has just released the latest RCV updates. These show that the three water companies achieving the highest increases in RCV are Thames Water (9.16%), Southern Water (4.32%) and Yorkshire Water (3.51%). These water companies are all now owned by institutional investors. By contrast the water utilities with the lowest increase are all in public ownership, Severn Trent Water (0.44%), South West Water (0.96%) and not for profit company Welsh Water (1.16%). This does imply that privately owned companies have a more aggressive approach to driving up the regulated capital value.

It also helps to explain why water utilities are so attractive to long term investors like pension companies. With returns on investment above 10% for the best performing plus a risk free investment its no wonder pension companies have been flocking to buy into water companies.