Water sector view point

Marine Planning process - protecting the waves

2012-02-22T12:24:00.000Z

Photo source: SASThe Marine Planning process has started. The first area opened up for Marine Planning is the East coast between Scarborough to Felixstowe. Currently every conceivable coastal stakeholder is making their claim to the sand.

The Marine Planning organisation who are leading the Marine Planning process have recognised recreational water users as stakeholders they need to include but don’t have the data for. The campaign group Surfers Against Sewage is working to ensure surfers, kite surfers, windsurfers get involved.

Ensuring local waves and surf spots are marked on the Marine Planning map might not immediately sound exciting or important. However when a developer decides to build a new marina they will need to consult these Marine Planning maps. It will open up stronger legislation to protect waves.

The increasing popularity of surfing is leading to significantly more pressure on water companies and the Environment Agency to ensure bathing water quality is improved. Currently the European Commission believes the UK is breaching the Urban Waste Water Directive by allowing CSO’s to discharge sewage too frequently. The outcome of the case being investigated by the European Court of Justice is expected shortly.

Campaign groups like Surfers against Sewage working with the water companies have started a sewage alert service to warm water users when CSO’s are .spilling. All this attention is ramping up the pressure and it’s a reasonable bet that the next periodic review will see increased expenditure on reducing CSO discharges.

Future direction in the water industry

2012-02-10T18:17:00.000Z

Photo: Southern Water's new Brighton treatment works taking shape

Speaking at the British Water House of Lords reception this week, Lord Taylor Parliamentary under Secretary of State for Defra outlined the Government’s view of the priorities in the water sector. Some old favourites came up like the emphasis on innovation and a reminder of the TSB sponsored competition to promote Innovation due to be launched in the Spring.

Catchment management and the need to tackle unsustainable water extraction is a clear focus of Defra attention. It is an area where real progress can be made givern sufficient focus. Defra will also shortly be issuing guidance to Ofwat on how it would like to see regulation develop.

Last week the Government launched a bill to enable it to reduce the cost of water for South West Water’s customers by £50 year – as promised in the last budget. The bill also allows the Government to provide financial support if the cost of the Thames Tunnel escalates.

The Government’s view is that a lot of the proposals outlined in the water white paper do not need legislation, however for those that do a Water Bill will be announced in the Queen’s speech.

Changing ownership of UK water companies

2012-01-23T10:03:00.000Z

Photo: construction underway at Peacehaven, Southern Water

The last few months has seen major changes to the ownership of the UK’s water companies. Cheung Kong Holdings has acquired Northumbrian Water, the Canadian investment fund Capstone has bough Bristol Water and this week came news that a Chinese wealth fund has acquired 8.7% of Thames Water. The later deal may have more to do with Santander selling its stake to raise cash due to the Euro Crisis and the withdrawal by investors of funds from European banks.

However its clear that the UK water sector remains very attractive to investors. This is further underlined by the successful bond issues by several water companies like the £250 million bond issue at 4.875% by Severn Trent. Its not surprising the water sector is attractive, given its totally secure cash flow – its customers wont stop using water! The regulated structure means that their income for the next few years is certain. Better still water prices are linked to the retail price index so are currently increasing by over 5% a year – not many businesses have that luxury.

The 64 000 dollar question is has the regulator got the balance right between a fair charge to customers and an adequate return to reward investors? The appetite to buy UK water companies implies not.

2012-01-02T19:24:00.000Z

The start of a new year is traditionally a time for looking forward. Although much of the news has been about the Euro crisis and current financial problems of most of the world’s major economies. The blog believes it is also a time to be optimistic.

Yes major change is happening, perhaps most importantly there is a huge demographic change underway as the average age in the G20 countries gets older. The post war baby boomers are now reaching their 60’s and this will have a profound impact on demand patterns.

Graph copyright International eChem

29% of the rich Western population are now in the New Old generation of 55+ years. Yet just a century ago, Western life expectancy was only 46 years. It was still only 66 years in 1950. Today, these 272 million people can expect to live until they are 80.

This change in age profile to many more people being ‘retired’ rather than being in their 20’s to 40’s, having families and buying new houses and cars will have a huge impact on demand. People in their 60’s plus don’t need new cars or houses, they have very different demands.

The blog written by my ex ICI Watercare colleague Paul Hodges gives a lot more detail on the changing population demographics and why this will create a New Normal. His blog is well worth reading www.icis.com/blogs/chemicals-and-the-economy/

There is a big paradigm shift underway. But any change like this brings opportunities especially for those first to realise what is happening.

The blog wishes you a successful and happy New Year.

Wessex Water success

2011-12-14T14:16:00.000Z

Wessex Water is continuing it’s remarkably good performance. They continues to be the best performing water company. Wessex Water have topped Ofwat’s new Service Incentive Mechanism (SIM) for all areas of customer service as well as the provision of water and sewerage services. On customer satisfaction 98% of customers who contacted them rated their service as good or very good.

Wessex Water have just released their interim financial results and have continued to perform very strongly out performing their capital and operational allowances by more than any other water company. Wessex Water have also won two environmental performance awards for their work on catchment management and work by GENco on waste reduction and recycling. Wessex Water were the best performing water company in the recently published Carbon Reduction Commitment league tables.

Wessex Water have for most of the time since privatisation been at the top of the league tables. They are very unusual in having had the same Chief Executive, Colin Skellett, since 1988 and several other of their Directors are almost as long serving. It’s the view of this blog that this can not be a coincidence and perhaps something other companies should consider emulating.

Water White Paper

2011-12-08T11:59:00.000Z

Today sees the release of the long awaited Water White Paper. It starts to address what needs to be done to increase the resilience of our water system and tackle the combined effects of climate change and a rising population.

Its main proposal is to move towards catchment management to tackle the issue of diffuse pollution and abstraction licensing. It recognises that only a quarter of our rivers and lakes are fully functioning ecosystems.

While the general tenor is to be welcomed its disappointing that the White Paper is more about talk than action. The legislation needed to tackle abstraction licensing is not planned to be introduced until the next Parliament. Given the current issues with water supply can we really wait that long?

Does showering really save water?

2011-11-30T12:01:00.002Z

An interesting study by Unilever that monitored Brit’s showering habits has found that having a shower uses almost as much water as a bath – with power showers using more. It seems that on average we spend 8 minutes at a time in a shower. This would cost the average family of four £416 a year (90% is the energy cost) and 90 000 litres of water.

This may not seem revolutionary but behind the figures are two important learning points. Firstly and surprisingly it seems the Unilver work is the first significant scientific study of showering. The scientists used a shower sensor devise to monitor 2600 showers taken by 100 families. All too often people assume they know what is best, this report challenges the assumption that showering will save significant amounts of water.

Secondly it highlights the importance of thinking holistically. The saving does not come from reducing water consumption – it makes very little financial difference - but from the huge cost of heating the hot water. Perhaps if people want to save money the advice should be to have a bracing cold shower!

Unilever has also published its research into how to bring about behaviour change. The ‘Five Levers for Change’ Unilver identified are:

Make it understood. Sometimes people don’t know about a behaviour and why they should do it. This Lever raises awareness and encourages acceptance.

Make it easy. People are likely to take action if it’s easy, but not if it requires extra effort. This Lever establishes convenience and confidence.

Make it desirable. The new behaviour needs to fit with how people like to think of themselves, and how they like others to think of them. This Lever is about self and society.

Make it rewarding. New behaviours need to articulate the tangible benefits that people care about. This Lever demonstrates the proof and payoff.

Make it a habit. Once consumers have changed, it is important to create a strategy to help hold the behaviour in place over time. This Lever is about reinforcing and reminding.

Water low priority in corporate board rooms

2011-11-28T11:55:00.000Z

Water management trials behind climate change on the board room agenda, despite significant near term risk and opportunities. The Carbon Disclosure Project (CDP) Water global report has found that 57% of the publically listed organisations that took part in the survey report board level oversight of water issues compared with 94% of global 500 companies that address climate change.

Over half (59%) of companies surveyed report exposure to water-related risks such as flooding, scarcity, and reputational damage. The majority of these risks are near term: 64% of risks in direct operations and 66% of risks in the supply chain are identified as occurring between now and 2016. Illustrating the urgency of water risk, more than one-third of responding companies (38%) have already experienced water-related business impacts, such as disruption to operations from severe weather events (e.g., flooding) and water shortages.

Underscoring the opportunities associated with effective water management, 63% of respondents say that water presents commercial opportunities, most of which (79%) are near term. The most commonly identified opportunities are associated with cost reductions from increased water efficiency, revenue from new water-related products or services, and improved brand value.

While its encouraging to see that so many companies recognize that water is both an opportunity as well as a risk, we need to see a lot more companies really taking water issues seriously.

Changing owners in UK water sector

2011-11-17T13:00:00.000Z

It has been all change in the ownership of Northumbrian Water with UK Water acquiring the company for £2.41 billion. UK Water is a consortium of Hong Kong companies ultimately owned by Li Ka-shing, supposedly Hong Kong’s richest man. Cambridge Water has been sold to South Staffordshire Water and a Canadian Infrastructure fund Capstone Infrastructure has bought a 70% stake in Bristol Water with Agbar, the Suez Environment subsidiary retaining 30%.

It is not hard to see why the water sector is proving so attractive. It offers secure long term investment that is almost risk free and an attractive rate of return of somewhere between 6 and 13%. With the 5 year regulatory cycle investors can be certain of the return until the next periodic review and even then with so much investment linked to the existing asset base and of course with zero risk of demand for water reducing investors can be confident that similar returns will continue. There is not many investments in the current climate that are so safe.

The water industry does need investors given the need to finance the massive capital programmes. But the question has to be asked that if investors continue to be willing to value companies at well above the regulated asset value is the returns set by Ofwat too generous and are customers getting a poor deal?

Valuing water

2011-10-17T15:51:00.000+01:00

Water is a precious resource. Its importance is universally recognised. Over recent decades, it has become an increasingly prominent issue. We face a number of new challenges, including a changing and unpredictable climate, population growth in water scarce areas and affordability issues.

“These challenges mean that we have to look carefully at how we use water. We need to value it and manage it responsibly. The problem is that we do not actually have a value for water. The price that customers pay reflects what has been done to get the water to the tap, but not the value of the resource itself. So, we must start valuing water, using a range of tools to reveal that value, including regulation and water trading” This quote from the Ofwat Valuing Water report misses the point. Water only has a value when it is available at the point of use. The water in Lake Windermere has no value. Its only because there is an water main running all the way down to Manchester that it is then valuable to the people of Manchester. It is of precisely no value to people in London as it would be prohibitively expensive to transport it to London from the Lake District. Ofwat need to recognize that the value is not in the water but in the assets used to store, treat and purify the water. The real question is how can these assets be used more effectively?

The other implicit assumption behind the Ofwat report is that competition is a good thing. Ofwat show the electricity and gas markets as ones to aspire to. Yet only today the Energy Secretary has called in the big six energy companies as its clear to everyone that the energy market is not working.

Ofwat should forget about competition and focus instead on ensuring there is a regulatory system that is not biased towards capital solutions and one that encourages and rewards innovation.

Capex bias in the water and sewage sector

2011-10-07T11:17:00.001+01:00

Ofwat’s report on Capex bias is an important contribution to the debate. This is a vital issue for three main reasons.

The water industry will continue to need massive investment £22bn over AMP5; the financial structure must ensure that this investment can be funded.
Water bills are continuing to rise and with the squeeze on household incomes it is even more important that everything is done to minimise costs.
Everyone agrees the water sector needs a lot more innovation. It faces some huge challenges from climate change and rising population and if these are to be solved at a cost customers can afford then new innovative solutions will be needed. Capex bias limits the options open and is a major constraint on innovation.

Ofwat’s paper makes clear there is a capex bias as this quote illustrates: “When we consulted on SuDS, a number of (water) companies considered that the existing regulatory framework incentivises capex rather than opex solutions. So, they thought that they have incentives to build sewers, rather than investigate alternative approaches”.

The bias is even more starkly illustrated by the Abington reservoir inquiry. The Inspector concluded that Thames Water had not adequately investigated the alternative solutions such as demand management. Instead it had favored the highest capital cost solution. The current debate over the Thames Tideway Tunnel is raising this issue up the political agenda.

The water companies can not be criticized for working to ensure the best return for their shareholders. It is the regulatory framework that must change. This is an issue that has been around since privatization 25 years ago. It is time to stop talking and take action. The responsibility clearly lies with the Government and Ofwat. Decisive action is needed from the Ofwat “future price limits project” supported by the water white paper when it is published at the end of this year.

Private sewer transfer is completed

2011-10-04T11:00:00.000+01:00

October 1^st marked the transfer of responsibility for private sewers from householders to water companies. It’s a huge shift that may have unforeseen consequences. For the water companies the increase in responsibility is massive, it adds over 200 000 kilometres of sewers to their network and worse the condition and maintenance history of most of these sewers is not known.

It will certainly increase water bills, initial estimate suggest that costs for the water companies could increase by £200 million and it is likely some will apply for an interim determination. It is certain that household insurance bills will not decrease even though insurance companies will no longer be liable for the cost.

There will be a huge increase in the number of calls to water companies. This could have a significant impact on their SIM ranking. The arrangements for handling the increased workload vary with each water company, some are using their tier 1 contractors to mange the process. Certainly the transfer is to be welcomed and once the new arrangements have settled down it should lead to proactive approach to sewer management rather than the wasteful just fix it mentality that previously existed.

ITT spins off water business Xylem

2011-09-30T10:12:00.001+01:00

It is ironic when all the concern is over high levels of debt that ITT is to split out its water business into a new company called Xylem. It then plans to raise $1.2 billion in debt to pay off the parent company. Xylem’s 2010 revenue was $3.2 billion but most of its income comes from pumps (87%), brands like Flygt and Lowara.

This financial engineering may make sense to the money markets but the concern has to be whether it diverts attention from its customers and its core business. The water sector is in for a turbulent few years as it can not escape the ramifications of the Euro crisis and drive by Europe and America to reduce debt. This potentially has a big impact on future water investment as funding from the state for water infrastructure projects is bound to get reduced.

Xylem may be insulated to an extent as much of the market for pumps is of course replacement of worn out assets. The concern has to be whether its really healthy for companies like Xylem to have so much debt or will they suffer the same fate as Southern Cross?

Capex bias in the water sector

2011-09-23T15:15:00.002+01:00

Ofwat’s discussion paper on Capex bias clearly outlines the drivers for Capex bias but is silent on what it intends to do. Water companies in their evidence to Ofwat indicated that earning a return on capital is a key driver of Capex bias. This is compounded by the financial ownership structure with many water company boards having performance targets to increase their Regulated Capital Value and hence return to its shareholders.

This was starkly highlighted by BBC Panorama this week (report on water abstraction). The example quoted was Thames Water’s focus on a new £1bn reservoir at Abington. The Public Enquiry early this year comprehensively rejected Thames Water’s proposals and said it had not adequately examined the alternatives.

This is important as innovation is vital to the water industry if it is to meet the challenges ahead. A financial system that rules out operating cost solutions is not in the best interests of the industry or its customers. Lets hope the forthcoming Water Bill and Ofwat in their “future regulation’ review take ‘decisive action’.

Shrinking rivers

2011-09-19T14:23:00.001+01:00

Photo: Hobson's Conduit

This year has been unusual yet again. While Scotland may have been deluged many parts of England have had some of the driest weather in 100 years. In Cambridge they have had the driest spring in 98 years. A 400 year old historic watercourse – Hobson’s Conduit – is drying up. Is this just normal variation in weather patterns or are rising population, increasing demand for water and concreting over of countryside equally important causes?

About a quarter of rivers are classified by the Environment Agency as being in danger or “over-abstracted”. The Kennet in Wiltshire is among the worst affected yet over 9.6 bn gallons a year of water are being abstracted. It is perhaps not surprising that the forthcoming water bill is likely to propose increasing the cost of abstraction licences and perhaps make them tradable.

The new planning framework so hotly debated at the moment talks about the need for all new development to be sustainable. Does this mean that it will not be possible for there to be any development in Wiltshire given the perilous state of the Kennet which is clearly not sustainable? Unfortunately the new planning framework does not define sustainable leaving the way open for a lawyer’s paradise.

What is clear is that a holistic approach that really values water and the environment is essential. It is no good just reducing extraction – instead its vital to look at the demand side as well, is 20% leakage really the economic level? Will Metering help? Should building regulations be tightened further to reduce water demand from new properties, should development be restricted in water scarce areas?

These are not easy questions but the trend is clear low river water flows are an increasing problem and the current position is not sustainable.

Water bill still on track

2011-09-12T10:11:00.000+01:00

Water Minister Richard Benyon confirmed last week that publication of the Governments’ water bill is still on track for December 2011. MPs debated water legislation and flood management in Parliament last week.

The elephant in the room is the rising levels of bad debt in the water industry and increasing concerns over affordability. With the current economic gloom and rising water bills and now the additional cost of transferring private sewers it’s a problem that will only get worse. It is particularly acute in the South West with SWW water having some of the highest water bills but in a relatively poor area.

Changing the structure of the industry and introducing further competition is unlikely to make a significant difference, in deed in the view of this blog restructuring would only make matters worse. Ofwat has just published a report on ‘vertical integration or seperating the companies by discrete function e.g. sales or supply. The conclusion will not come as a surprise to those with long experience in the industry – there is no evidence that either is better.

The water industry needs to focus even more on ensuring it prioritises investment where it will make the biggest difference and delivering schemes as cost effectively as possible. Huge strides have been made on this since privatisation but its clear there is still scope to do better. Just look at the cost penalty British Water has identified that comes from the 5 year regulatory cycle and loss of experienced people at the end of each AMP period. The forthcoming water white paper is the opportunity to take action and address the elephant in the room.

Adapting to climate change in the water sector

2011-09-06T10:20:00.000+01:00

Ofwat’s “adapting to climate change report” is another step forward to ensuring the water industry changes to cope with climate change. It’s a huge challenge for the industry against a backdrop of uncertainty in the science and difficulty in predicting what the impact will be. Will summers really get hotter and dryer as some forecasts suggest – hard to believe given the wet August?

What does seem certain is that there will be more extreme events. The cost implications for the water sector are huge. Just look at the vulnerability of many sewage treatment and water treatment sites to flooding. The big stumbling block is gaining political acceptance for increasing bills to pay for the investment. Certainly in PR09 that was a step too far and now with the more challenging economic climate it is even more difficult.

Ofwat rightly aims to encourage more innovation. Anglian Water’s success so far in meeting its target to half its embodied carbon in the building of new assets shows what can be done when there is a real commitment to act. They are on track to meet the goal and do it within the tight price limits. The passion inherent in the Anglian Water Love Every Drop campaign needs to spread across the industry.

With the dark evenings approaching the books to read are Taleb’s Black Swan (The impact of the highly improbable) and Fooled by Randomness.

Water sector - August a bad month for investors

2011-09-02T09:27:00.000+01:00

August has not been a good month for investors in the water sector. It started with the news that Veolia’s first half results were much worse than expected. Veolia shares are down to about $13.4 from their 2007 peak of $65.65. The London-listed Aqua Resources Fund had to announce its net asset value per share had dropped 8.27% in 6 months.

While no one doubts that demand for water is increasing with the rapid urbanisation of the world, increasing population and threats from climate change. This combined with the rise in environmental regulations and increasing scarcity of water resources will require massive investment. The problem is who pays for the investment?

The current debt crisis means that Western Countries cannot take on ever more debt to fund investment, raising prices is an option for those that charge for water but politically very difficult. But in many of the countries were the need for investment is highest, there is no history of charging for water.

Introducing water charging is extremely difficult as the Government has found in Northern Ireland. Many countries just don’t have the systems to collect tax let alone establishing water charging when the infrastructure is in a state of disrepair or non-existent. Politically its extremely difficult, not only is it highly unpopular but also it tends to hit the poorest in society hardest, the very people who need clean water and wastewater the most.

Until there is confidence that the funding mechanisms for investment are realistic the water sector is likely to remain an sector with great promise and need but with significant risk for investors. The key is to look at the specifics of each country and to understand the regulatory and political environment in that country.

Stopping customers using water - a daft idea

2011-08-30T16:37:00.000+01:00

Photo source: Thames Water

The article by Thames Water suggesting that ladies should not shave their legs in the shower due to the water in wastes is already starting to backfire if the press comment is anything to go by. Typical reactions are “water companies should sort out their leaks before telling ladies how to shave” or “Thames Water wastes more water in 10 weeks that ladies across the whole of the UK use in shaving their legs in the shower”

It is inconceivable that Tesco would suggest to its customers they should stop using its supermarket as it was making the shop too busy. Why do water companies think it is acceptable to suggest to their customers they should stop using their product? Customers want water at an affordable price and in the quantities they need.

When we have just had a very wet August and when water leakage is still running at about 25%, the argument to stop using water will not wash. Water companies keep stressing they are businesses that need to make a return to reward their shareholders, they also need to recognise that businesses are only successful if they satisfy customer needs.

Commission to investigate Thames Tunnel

2011-07-18T10:56:00.000+01:00

Photo source: Hammersmith and Fulham Borough Council Lord Selbourne and Councillors at Commission launch

An independent commission is to study the case for the massive Thames Tunnel. The tunnel is Thames Water’s preferred solution to reduce sewer discharges into the Thames and avoid EU fines. But it is hitting increasing opposition from local residents, councils and MPs.

The commission will be led by Lord Selbourne. He said: ”The key question is whether this multi – billion pound scheme is the best solution for making the Thames cleaner or whether there are sensible alternatives that are cheaper, greener and less disruptive”. Thames Water’s Chief Executive, Martin Baggs, recently revealed that the sewer’s initial £3.6 billion price tag - initially costing customers £65 per year for life – was based on 2008 figures and ‘will inevitably increase’.

The concern has to be that the Water Companies have a strong incentive to favour capital intensive rather than operating cost schemes. One of the reasons for this is that any new capital expenditure increases the Regulated Capital Value of the business and therefore increases returns to shareholders. This is one of the main reasons why investors like Mcquarie bank are able to achieve returns of nearly 12% for their shareholders. Ofwat is looking at the capital cost, operating cost balance and in the view of this blog needs to take action to redress the balance.

Ofwat review backs slimmer regulation

2011-07-15T09:55:00.000+01:00

Photo source: Thames Water - Beckton, Europe's largest treatment works

Defra has published David Gray’s review of Ofwat. The main conclusion is that the regulatory review process has worked well and that there is no need for major change. It does suggest that a lighter, less prescriptive approach is needed back by much clearer guidance from Government on the objectives.

The review has recognised the highly negative impact on the industry of the current 5 year roller coaster of investment and all the unnecessary costs this imposes on the supply chain. The reviews recommendation to reduce the burden of reporting is to be welcomed.

The concern is that the current regulatory process encourages capital intensive, end of pipe solutions and does not adequately address the need for the industry to become more sustainable and adapt to the challenges of climate change and population growth. Gray does recognize that currently there is an incentive for water companies to increase their regulatory capital valve and hence return to shareholders and suggests that there needs to be a review by Ofwat of the current rewards and penalties and framework of incentives. There is increasing concern in the industry that some current shareholders are only there for the short term gains – as evidenced by the bid for Northumbrian Water and that some water companies are selling key assets like buildings and then leasing them back – the model that ultimately led to the downfall of Southern Cross.

The industry has some massive challenges – especially the unprecedented growth in population and the uncertainty of climate change. Innovation and sustainable solutions like reuse of water and management of catchments must become the norm – it is disappointing that Gray has not taken this on board. Lets hope that Richard Benyon in the forthcoming water white paper rises to the challenge.

Private sewer transfer goes ahead

2011-07-01T13:45:00.000+01:00

Changes being introduced today (1^st July) by Defra mean that from October responsibility for private sewers will transfer to the water companies. This change has been a long time happening and will remove the uncertainty and risk from householders. For water companies it means a doubling in the length of sewers for which they are responsible and also a massive increase in workload.

The change may have unexpected consequences for the water companies. The condition and repair history of the sewers being transferred is not known. Currently repair work has been done on a short term fix basis with no incentive to solve the underlying long term issues. This is where the real benefit to society lies. Hopefully wasteful repeat visits to repair reoccurring blockages will become a thing of the past. Finding and justifying long term solutions wont be easy given the complete lack of knowledge of the private sewer system and the lack of historic records. There may be significant opportunity for the water companies to reduce repair costs but until a repair history is established this may be hard to justify.

There will certainly be a huge increase the number of calls with customers. Managing this well will be crucial if water companies are not to see their Service Incentive ratings plummet. As yet no one knows what the cost of all this will be. it is likely that some water companies will push for an interim determination and that may bring fresh problems.

Failed Italian water privatisation

2011-06-28T09:16:00.000+01:00

Picture source: Thames Water - long term investment in 1920's

The news that Italians had rejected in a referendum a new law that would have required cost recovery pricing across the Italian water sector and allow privatisation of water operating companies was not a surprise. Turkeys don’t wont for Christmas! But it only puts off a problem that wont go away. Greece is already suffering from a lack of investment in its water infrastructure. Water shortages are becoming more common. They may get a temporary reprieve if as seems likely their economy collapses and demand for water falls. But this only postpones the inevitable need for investment.

This political stalemate over water pricing is common across the world. Close to home it’s the key issue facing Northern Ireland Water as the winter water supply failure starkly highlighted. It means that if long term solutions are so unpalatable to the politicians then crisis management will become the order of the day. Water tankers, and bowsers will become a regular feature. It will create market opportunities for quick fixes like portable desal plants and may drive up the cost of water. But it will only lead to a more unstable world. Putting off important decisions on water investment will mean that the options open to solve the problem will be more limited and expensive and make the economic situation for Governments worse.

UK water sector drought - opportunity or threat?

2011-06-13T08:57:00.001+01:00

The news this week that parts of the UK were suffering from drought came as no surprise to those living in the south west or east and it was closely followed by the wettest day for months! But one wet day does not change the seriousness of the long run of exceptionally dry weather.

One strand of Thames Water’s strategy to answer water shortages was to construct its £270m desalination at Beckton. In its first year the controversial Thames Water desalination plant ran for only three days – proving trials only - as there was insufficient demand to justify running this very expensive way of producing water. This must make the water produced some of the most expensive in the world!

It does sharply question whether having highly capital intensive and expensive desalination plant on standby is really the best way to tackle the growing water shortages. Water leakage in London is still around 25% and in some areas much higher still. Investment in replacing the 100 plus year old water network has increased but still the rate of replacement assumes much of the existing old pipework will last another 100 years. Other European countries have shown that achieving leakage rates of 5% is feasible albeit it would require massive investment. Would it not be better to increase investment in pipe replacement if we are to have a sustainable solution?

Water White paper delayed further

2011-06-06T15:23:00.000+01:00

It is disappointing to report that Defra have announced the water white paper has been delayed further. As this blog reported it was delayed to the autumn and has now gone back to December. Having raised expectations for water customers in the South West that their bills would be reduced it is not surprisingly proving difficult to find a resolution to how to have a more equitable charging system.

Black Swans in the water sector

2011-06-06T15:16:00.000+01:00

Ever since Nassim Taleb wrote his book, “The Black Swan” the world has been aware of the need to consider low probability but high impact events. This has proved true yet again in the nuclear industry with the Fukushima disaster – a supposedly extremely low probability event and as is now becoming clear with very serious consequences.

The water industry also needs to think carefully about low probability, high impact events. The lessons from Fukushima and the Gulf of Mexico BP oil disaster are clear – it is vital to prepare for the worst. In both cases much could have been done to alleviate the impact if thought had been given in advance about what to do if these low probability events occur. Now belatedly BP and the oil industry are investing in emergency devices to cap a blow out.

With events like cryptosporidium contamination the water industry has already given much though to its emergency plans. But as a report by UKWIR has made clear much more needs to be done. Not only will this make the water industry safer it will also reduce costs as investment and effort is targeted where it makes a difference.

Innovation priorities in the water sector

2011-05-25T17:20:00.000+01:00

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

2011-05-23T11:25:00.000+01:00

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

2011-05-20T14:02:00.000+01:00

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

2011-05-09T15:35:00.000+01:00

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

2011-05-04T14:20:00.000+01:00

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.

Water wars

2011-04-27T10:18:00.000+01:00

The blog has just returned from visiting South Africa – what an amazing country but with huge challenges and a startling divide between the rich and poor. Water is a big issue. Still about 20% of the population struggles to obtain clean water despite some parts of the country being extremely affluent.

Elections are forthcoming and in riots over water supplies to a township, one protestor was shot dead by the police. This was an isolated incident but is indicative of the huge social problems lack of water and sanitation cause.

Water charging based on volume is established but a majority of the population struggle to afford the cost. It was clear insufficient investment is occurring and progress in improving water supply and sanitation appears to have stalled.

Public subsidy to cut water bills

2011-03-23T15:50:00.000Z

The blog was delighted to hear in today’s budget that the Chancellor announced help for South West Water customers. SWW customers pay for the upkeep of 30% of England’s coastline, even though they account for only 3% of the population. They have some of the highest water bills in the country and were due to face a 5.1% increase in April.

The announcement by the Government will help to reduce the inequality and is welcomed. But an announcement like this may have unintended consequences, it will certainly increase the focus on water bills.

Information revolution will drive up water quality

2011-03-21T18:58:00.000Z

The advent of so many computers and intelligence built into the systems that make our modern world work like cars, appliances, mobile phones and water networks is making available a vast source of data that could transform how we run our cities and built environment. IBM has recognized this in its Smarter Planet’s initiative.

Imaginative new Apps are being developed by IBM like Creek Watch. This is a simple application on an iphone that enables anyone to quickly and easily take a photograph and send a simple report on the water quality in their local stream, river or brook. It means that rather than having to send inspectors out the Environment Agency or water company can get site specific data on the quality of local water courses and identify pollution incidents much quicker.

The Environment Agency is taking this a step further by a new scheme its about to launch that will require water companies to text surfers whenever sewage is about to be pumped into the sea. The Environment Agency will also announce on Thursday that it is publishing profiles on all designated bathing spots. All this information and the power it brings to people to understand what is going on at their local bathing spot will undoubtedly increase pressure on the water companies to take further action to improve water quality.

It will ensure that we have a much better understanding of where the real pollution hotspots are ensuring investment is targeted where it will make a real difference, That is in everyone’s interest, water companies, water bill payers and bathing water users.

Push, pull, nudge to save water

2011-03-15T19:33:00.000Z

Photo source: Ofwat

Ofwat’s new focus report on reducing water consumption is to be welcomed if it promotes debate. It suggests various ideas to reduce the consumption of water. While the environmental case to reduce water usage is clear the financial case from the viewpoint of the customer is not.

Water suffers from two main problems, its too cheap and most of the costs are fixed not variable. Ofwat proposes that there should be much greater use of metering but is this really going to change behavior? In most cases water meters are installed in the pavement outside the property boundary so it is impossible for the customer to read them even if they wanted to.

Smart meters may help but so far it is far from certain these will influence consumption and the cost is currently excessive.

What about nudging behaviour and persuading customers to buy appliances that use less water. Here again the low cost of water is the issue. Typically a dishwasher that uses less water costs considerably more, perhaps £100 yet the annual water saving is at best £5, hardly a compelling financial investment case. Instead the trend of consumers to install power showers is continuing unabated. There needs to be some realism in the debate and a recognition that most customers lives are far too busy to want to worry about water consumption. Other solutions need to be found such as improving social housing by installing showers in houses that only have baths.

Resilience, clarity and reassurance in the water sector

2011-03-07T16:57:00.000Z

Photo source: South West Water

Increasing resilience is one of several challenges facing the water industry highlighted by Caroline Spelman in her recent keynote speech to Water UK’s annual city conference. It is clear the recent water shortages in Northern Ireland and the floods in Cornwall last autumn have raised awareness of the issues.

Underlying this is the more difficult issue of how to ensure affordability. Here there is no easy answer. Public disquiet over the cost of water is increasing especially in the South West where water bills are highest. Increasing resilience and improving sustainability is expensive. The answer has to be innovation, thinking outside of the traditional boundaries to find new solutions.

One of the keys is to think about root causes and the old but still very valid adage “prevention rather than cure”. Here the pioneering work of Philip Crosby in his book “Quality is Free” and the philosophy behind Total Quality Management (TQM) can still offer much to the water industry.

A good example of this thinking being applied is the pioneering work done by several water companies on abstraction and catchment management for example, South West Water’s Upstream project. Stopping pollutants getting into our rivers, perhaps by working with farmers to avoid the use of fertilizers close to river banks or restoring dried out peat so that it acts as a sponge to absorb pollutants can be a lot cheaper than massive downstream investment to remove the pollutants from our rivers. A lot more thinking like this is needed in the water industry to find affordable solutions to the twin challenges of rising demand and increasing variability in our climate.

Water retail competition is a distraction

2011-02-11T11:22:00.001Z

One of the subjects in the forthcoming water White Paper expected this summer is bound to be competition, especially after retail competition was proposed by both Ofwat and the independent Cave Review. This week Deloitte published a new report on retail competition. This confirmed what many of those in the industry already thought, that introducing competition is an expensive process and that the benefits are very limited so it fails the cost benefit test.

Competition may have worked in other industries like energy and telecoms but water is a very different market. It does not have a national network that allows physical transfer, secondly it would need major consolidation from the twentyone current businesses into about six if benefits are to be achieved.

What is far more important to the sector is securing low cost finance for the massive investment needed. Here any move to retail competition could cause debt and equity investors to lose confidence. Any resultant increase in finance costs would dwarf savings from retail competition. Secondly the new Service Incentive Mechanism puts a heavy premium on customer complaints and handling. The experience in the energy sector shows that competition is far from universally popular and certainly wont decrease the number of complaints. Rather than worrying over competition it would be much better to focus on innovation and finding ways to delivery the capital programme more cost effectively.

Water regulatory cycle likely to be extended

2011-02-09T14:15:00.000Z

“Thoughtful change” and “we need to be careful not to spook investors” as well as “we need to get it right” were key messages from the Minister for Natural Environment Richard Benyon’s keynote speech last night at the British Water House of Lords reception. Roughly translated this means that we should not expect significant new policies in the water and environment White Papers due this summer.

It does seem at last that the message on how much harm the five year regulatory cycle inflicts on the water sector is getting through. Water company Chief Executives alongside key suppliers all lined up together to make this message very clear. The Minister did promise action on this. But it is equally clear that there is firm support for having an independent regulator. All the positive lobbying by British Water backed up by hard quantification of the cost and some imaginative ideas on possible solutions have had the desired effect. It is equally clear that there is firm support for having an independent regulator.

The climate has changed. Consultation is now key in Government and there is real opportunity to shape the future direction of the water industry. But is does require a real commitment to engaging with Government and senior civil servants. and actively working to shape the forthcoming white paper. The water sector can learn a lot from how effectively other sectors have managed this.

Water process safety: you don’t improve what you don’t measure

2011-02-04T11:53:00.000Z

Photo source: Anglian Water

Virtually every Water Company has safety as its top priority. The water industry has made significant steps forward since the days of the Camelford incident reducing the likelihood of such incidents happening in the future.

But as the Prime Minister recently said: “Good health and safety is vitally important. But all too often good, straightforward legislation designed to protect people from major hazards has been extended inappropriately to cover every walk of life, no matter how low risk”.

One of the keys to improving safety is measurement. Here the water industry can learn from the chemical industry – an industry that has been at the forefront of developing process safety management. Many organizations that want to improve process safety struggle with defining the right metrics. All too often the emphasis is on lagging indications like accident rates. The chemical industry has lead the way in recognizing that to be pro active on safety its essential to also have some leading indicators.

From a number of discussions with experts in this field, it is clear that there are sometimes differing views on exactly what should be measured and there is acceptance that, in some cases, the measures need to be site and process specific. One thing which is universally agreed, however, is that leading indicators are highly valuable to give an early warning that things could go wrong.

For those new to this subject, the guide from Center for Chemical Process Safety, 'Process Safety - You Don't Improve What You Don't Measure' , is an excellent starting point. Click here for link

Water meters to become compulsory?

2011-02-01T09:31:00.000Z

Yet again metering water metering is becoming a significant issue. The papers were full over the weekend of stories about Defra accepting the case for basing all water charges on metering as well as the potential for water shortages in the South West after the exceptionally low rainfall in 2010.

The coalition has promised to review water charges and in particular tackle the anomaly of customers in the South West paying the highest water bills in the country. Annual bills are £723 compared with £367 nationally.

But installing meters is expensive, at about £200 a time and there are big issues over how to install meters in buildings that have been turned into flats, an increasing trend in most major cities. It can be very difficult and consequently costs can be excessive.

The debts of the water companies due to unpaid water bills are increasing fast up 20% last year. In London water bills will have to increase significantly to pay for the Thames Tideway tunnel. Further increases on top to reduce bills in the South West and pay for metering will be very unpopular and difficult to sell.

So although installing water meters may sound like a sensible idea to reduce water consumption and ensure people pay for what they use. The prospect of a significant increase in bills will not be an easy message for the politicians to sell. Defra were due to launch a consultation shortly but the debacle over the forest sell off is likely to delay any decisions on water meters. Expect much talking but little action.

Davos: the energy, food, water nexus

2011-01-28T11:52:00.000Z

The Davos World economic forum has as one of its major themes the nexus between energy, food and water. 70% of water is used for irrigation while energy is, of course, essential for water distribution. So increasing food production to cope with rising population and demand has huge consequences for water supply. Food and energy prices are on their way up and that is driving investment in new production but what about water?

There is still no real recognition of the value of water in too many parts of the world and that unless it is given a value there will not be investment. The problem is that water is still seen often as a right and that where there is no history of charging for water it is politically very difficult to introduce charging.

Just look at how difficult it is in Northern Ireland, where the inevitable effect of free water and consequent lack of investment came home with the water shortages that made the headlines over Christmas. Davos has suggested that one of the key levers for action is to introduce: “market led natural resource planning” which roughly translated means being prepared to pay for water.

Until politicians are prepared to grasp this issue – the problems of water scarcity will continue.

OFT and Ofwat investigate market for organic waste and anaerobic digestion

2011-01-24T09:53:00.000Z

At first sight the decision by the Office of Fair Trading to investigate the market for organic waste sounds surprising. The investigation was triggered by a request from Ofwat, not because it had competition concerns but because it was concerned that the appropriate incentives may not be in place to encourage anaerobic treatment of organic waste from food scraps from household waste and waste products from the food and farming industry.

Heather Clayton, OFT Senior Director of Infrastructure, said:'Advanced organic waste treatment techniques like anaerobic digestion offer tremendous opportunities to produce clean energy and reduce unnecessary waste. 'We need to make sure that the conditions are right to maximize the potential for these technologies to benefit the UK.'

There is a concern over competition as the water companies may have a regional monopoly and with the dominant impact of transport costs may be able to exploit an unfair market advantage. But perhaps more importantly if the market for organic waste is to develop it needs a more commercial attitude to developing new sources of supply than the water companies have so far shown. This is where Ofwat and the OFT may have a role to stimulate activity.

Can the UK afford continued water investment?

2011-01-17T12:33:00.000Z

The recent extreme weather events in Australia have served to highlight the challenges the water industry faces. Severn Trent Water estimates that another £96 billion of investment will be needed over the next 20 years. This is in addition to the £85 billion invested since privatisation.

Is this sustainable, especially with customer debts spiralling out of control?

Energy usage for example has spiralled by a staggering 113 per cent since 1989. Understandably the industry has been wedded to capital schemes and the transport of water to fewer centralised water treatment and wastewater plants with the consequent massive investment in the necessary water mains.

Is there a better way? Certainly the proponents of Sustainable Urban Drainage think so with the focus on local treatment at source. If we are to limit the increase in water bills and generate a truly sustainable water industry there needs to be a radical rethink about whether bulk water supply and largescale sewage treatment is really the best way forward. Should not individual households be encouraged to do much more to supply their own grey water? Certainly with new homes, rain water harvesting should become standard, as it already is in some European countries.

2011 brings the opportunity to drive forward change. A Water White Paper and related Natural Environment White Paper, a review of Ofwat, all promise change. Its important to take this oportunity to deliver a sustainable approach for the water industry, its customers , its investors and the envronment for the benefit of future generations.

Northern Ireland Water - biting the bullet

2011-01-04T16:52:00.001Z

The recent water supply problems in Northern Ireland were undoubtably inevitable given the chronic under investment in Northern Ireland’s water infrastructure. Even NIW on their website admit there has been chronic underinvestment and there is a big gap in performance compared to water companies on the mainland.

Water is a very long term businesses (with water mains on average over a 100 years old). But although politicians can delay expenditure, eventually, as the events of the last week have shown the inevitable consequences will result.

With the ‘blame game’ now starting, this may distract from the real issue of whether the politicians (and the voters who put them there) are prepared to take the tough decision and sanction massive investment in improving the infrastructure. With the public sector spending cut backs, the only realistic way to pay for the investment is to start charging for water. Water is still ‘free’ in Northern Ireland and while the politicians refuse to take the tough decisions on charging its certain that water supply problems will reoccur and politicians (and voters) only have themselves to blame.

Management can't escape blame either, they know the problems that under investment will cause. Its their duty to make sure the risks being taken are explicitly clear. The key to good management is to plan ahead and act early. NIW may not be able to stop problems occurring but that does not excuse poor communication compounded by inadequate emergency planning.

Water sector - staying ahead

2010-12-17T11:06:00.000Z

In being successful its vital to know what the strategies of your customers are and what the competition is doing.

What are the aims and objectives of your customers?
How do they define success?
How well placed are your competitors to deal with the ‘New Normal’?

I know from my own exoperience its very easy to become internally focussed, particularly during difficult times – but its precisely at these times that an even stronger external perspective is absolutely vital. It provides vital intelligence and understanding of changes ahead, a useful sense check and challenges what you are doing.

Do you know what your customers are doing to meet the demands of the “New Normal’?

There’s a lot of information available but even more importantly its vital to be talking directly with your key customers and others in the industry. As you would probably expect me to say, you can always enlist the help of cosultants to give you that external perspective.

Building a succesful future

2010-12-16T18:08:00.001Z

We have already discussed the new normal and its consequences and short and long term successes. What I propose is a set of challenges designed to assess just how ready your organisation is to deal with what ever the future holds.

Firstly let’s consider management

1 Do you managers undestand the potential implications of the new normal?

By this I mean do they have a good understanding of the main drivers in the water market, do they really understand what are the critical objectives for customers and are they clear about how value can be added and how the service/ product offering can be clearly differentiated from the competition?

2 Have your managers identified the critical success factors to adapt to the changing market and economics?

This means having a highly capable and flexible team, having everyone focussed on how they can help customers achieve their goals as well as being strongly focussed on cost effectiveness and constantly striving to improve.

The key is smart management. This means:

Really knowing your customers and their requirements
Being able to identfy where value can be added and having the flexibility to develop the products required
Being clear on who the customer’s key decision makers are and building excellent relationships

Success in the water industry

2010-12-16T17:40:00.000Z

In the previous post I referred to the ‘New Normal’ and what it might mean for water industry suppliers. Today I cover the question of what success will mean in the new normal.

The new normal prediction means that we are very unlikely to return to a repeat of the boom years of profitability.

So what success will mean is:

Firstly being ahead of the competition – across a balanced scorecard of key benchmark indices as as well as less tangible factors such as innovation and people development
Being profitable and having the funds to selectively invest in winner projects as well as organic growth
Achieving sustainable improvements that leave you well positioned for the future e.g. innovation, training, organisation and process improvements

So having defined success the question is how do we achieve it?

Water industry strategies for the new normal

2010-12-14T09:26:00.000Z

At this time of year it is customary to review the last year and think forward to 2011. A phrase we hear endlessly in the press after every event is “learn the lessons”. The water industry may be highly regulated but this last year was a salutary lesson that it is not immune to the wider economy. So what is the ‘New Normal’ for the water industry?

The term ‘New Normal’ was coined backing March 2009 by Bill Gross, founder of PIMCO, the California based investment solutions provider. PIMCO was one of the few organizations that warned of the risks associated with the sub-prime housing bubble that drove the American economic boom years.

In terms of the economic recovery, PIMCO discredited the idea of a sharp rebound from recession and a rapid return to the activity of the boom years. Instead they referred to a “New Normal’ which would bring lowered living standards, higher unemployment, stagnant company profits and disappointing equity returns.

So what is the ‘New Normal’ like in the water industry?

Customers are focusing on outcomes not services or products significantly changing spending behavior

Financial crises, fear of double dip recession and Government spending cut backs are driving a more risk adverse climate and a constant need to reduce costs

Customer expectations are steadily increasing

The net effect is a constant desire to do more for less. This is creating a major headache for suppliers in the water sector.

How to deal with this headache will be the theme of blog posts this week.

Yorkshire partnership to achieve excellent bathing beaches

2010-12-10T12:22:00.000Z

Photo source: Yorkshire Water

Yorkshire Water are one of the first to aim to achieve the new “excellent” standard coming into force in the 2015 revised Bathing Water Directive. As part of the AMP5 settlement Yorkshire Water has secured £119 million to help fund the work to upgrade its wastewater treatment facilities on the East coast.

Yorkshire Water have recognize that to achieve its aims it is vital to work in partnership with other organistions including the National Farmers Union and Defra as well as councils. Tackling bathing water quality is not easy given the impact of diffuse pollution as well as sewage discharges. Its vital to ensure investment is targeted where it will have the biggest impact and this means taking a holistic approach and being prepared to work with other stakeholders. Partnership working is absolutely key to ensuring the real problems are identified and Yorkshire should be applauded for taking the lead on this.

Full speed ahead on anaerobic digestion partnership

2010-12-07T10:13:00.001Z

Photo source: Berrys

The Government is moving rapidly ahead to increase energy from waste through anaerobic digestion (AD). It is working to a remarkably tight timescale publishing its plans last week and with a deadline to respond to the invitation to work with Government on the strategy of 12^th December. This clearly shows that the coalitions business orientated approach of having clear deliverables and prioritising effort to meet its structural reform plans is working.

The use of AD technology is well understood in the water sector, where companies like Severn Trent have used AD for many years. Similarly in Europe AD is a well used technology for generating renewable energy on farms where the feedstocks are usually animal manures and energy crops.

The key to further growth is in getting the economics right so that it becomes an attractive investment and the necessary finance is opened up. Rightly the Government has identified the need to focus on commercializing the markets for input feedstock and digestate use in order to facilitate commercialization. The partnership approach proposed between Government and industry to identify the actions needed to allow the AD industry to flourish and identify the blockers is to be applauded.

Water companies win right to keep pollution secret

2010-11-29T09:53:00.000Z

Photo source: Sunday Times

In an important tribunal ruling this last week the water companies won their appeal that they are exempt from the environmental information regulations on sewage and pollution. This means they don’t have to disclose details of pollution incidents in their region.

The right to know or the right to keep private information is a challenging and difficult area for the water companies. It revolves around the public’s perception of whether the water companies are truly private companies or managing water on behalf of the state. It also sits uneasily with the Corporate Responsibility Statements of the water companies.

The root issue is the continuing problems with unsatisfactory intermittent discharges (CSO’s). There is no doubt that the UK’s aging sewage network is increasing overloaded and needs massive investment to reduce the frequency of spillage of untreated sewage into water courses and the sea. But its an area the water companies would rather move slowly on given the huge investment implications and impact on customer bills. Lined up against them are powerful voices such as the Sunday Times with its water rats campaign and the BBC Panorama programme. Driving this is the rapid growth in water contact sports like surfing and the increasing number of influential opinion makers participating in water sports.

Lessons from other industries suggest that trying to prevent disclosure of information is not a tenable long term position. Better to start an informed debate now about what can be done, what it would cost and how much we can afford to spend.

Further consolidation in water sector

2010-11-26T12:09:00.001Z

Photo source: Paul Hipwell

Biwater Holdings has announced that it has agreed the sale of its subsidiary Biwater Services to MWH Contractors. This follows on from the consolidation into one group, Ovivo, of Emico Water Technologies, Enviroquip and Christ Water Technology.

Given the tight margins and depressed volume of work further consolidation amongst suppliers looks inevitable. The real concern for the water industry is how to stimulate R & D. The water companies are looking to suppliers to innovate yet spending by suppliers on R & D is declining. It is only the French water conglomerates like Veolia who still spend significantly on research.

What innovation that is coming has mostly been developed in other industry sectors. The challenge for the water industry is to find a way to encourage more innovation, this must mean rewarding suppliers and creating an environment where risk taking is encouraged (no innovation is without risk). Neither is likely to happen.

Wastewater National Policy Statements consultation

2010-11-22T12:22:00.000Z

Photo source: Thames Water Abbey Mills discharge

Consultation has started on the National Policy Statements (NPS) for wastewater. This document sets out the criteria with which the Infrastructure Planning Commission and its successor the Major Infrastructure Planning Unit (MIPU) will use to judge whether major wastewater projects should be approved. As this blog predicted the NPS specifically covers the Thames Tideway Tunnel and Deepham Sewage Treatment Works.

The last Government brought in a totally new ‘fast track’ planning process for major infrastructure projects (2008 Planning Act), and the National Policy Statements are an important element of this process. The Government has made clear that they envisage a seemless transition from the IPC to the MIPU and that the NPS will still apply.

The consultation process announced by DEFRA is an important opportunity to comment on whether the NPS are fit for purpose and provide an adequate framework for the IPC to judge whether major wastewater projects should be approved. The concern has to be that interested groups will not appreciate how important these documents are and that once agreed then the rules are effectively set in stone and can’t easily be altered.

Managing risk of water supply failure

2010-11-15T10:41:00.000Z

Photo source: Ofwat

Extreme weather events such as the 2007 Gloucestershire floods led to the flooding of many water and sewerage assets and left 350 000 consumers without water supplies for 16 days. It brought into sharp relief the threat to our normal way of life that extreme weather events pose. Since then there has been significant investment in ‘resilience’ reducing the risk of service disruption.

Ofwat’s latest focus report on resilience is to be welcomed. Its central argument is that risk should be looked at not in terms of asset failure but on the effect on service to people. Taking a customer based approach has to be right. Who cares if a critical pump fails provided the water supply can still be maintained from another source?

Organic wastewater to energy

2010-11-12T10:29:00.000Z

Photo source: Thames Water

There is a quiet revolution going on in the water industry. The advent of carbon credits, feed in tarrifs and a sustainable approach is changing the economics and stimulating the rapid growth in energy from wastewater plants.

Two announcements this week highlight the change. Thames Water are now exporting biogas (methane) from its Didcot sewage works into the gas network. While in Yorkshire an Archimedes screw and an ABB motor and variable speed drive operating as a generator is enabling electricity to be generated from the hydraulic head available.

Neither of these examples are using revolutionary technology – Archimedes screws date back to the Romans. What has changed is the mindset. Thinking holistically about the potential energy generation as well as the wastewater process is the key. It requires a multidisciplinary approach and thinking of wastewater as a resource, full of potential energy, bioenergy and biomaterial.

Organic wastewater to energy

2010-11-12T10:28:00.000Z

Photo source: Thames Water

Neither of these examples are using revolutionary technology – Archimedes screws date back to the Romans. What has change is the mindset. Thinking holistically about the potential energy generation as well as the wastewater process is the key. It requires a multidisciplinary approach and thinking of wastewater as a resource, full of potential energy, bioenergy and biomaterial.

Sustainable Water - ensuring it is affordable

2010-11-08T20:18:00.000Z

Photo source: Ofwat

Water is something that is free but you still have to pay for it and its something everybody needs every day but no-one can chose where or who to get it from. That’s the view of George Day Ofwat Director of future charging and it is the dilemma facing Ofwat as it develops its strategy for future water charging.

The facts are stark. For over 20% of Southern Water’s customers the water bill takes over 3% of their household income. Yet Southern Water is about to implement its Universal Metering Programme that will see water bills go up by over £100 for 50% of its customers. How will this help affordability, especially in these tough economic times? This is likely to be very difficult to sell to customers. The water industry needs to think like a business and be very clear on what benefit customers will see for this increase in their bills.

With the Universal metering programme there is a real risk that customers will be cynical about the motivation for metering and whether it really is in their best interest. What clear benefits will customers see for the extra £100? Southern Water will need to do an exceptional job in selling the benefits if it is not to create a customer backlash and problems for all in the industry.

Water leakage targets missed

2010-11-01T14:55:00.000Z

Photo source: Thames Water

News from Ofwat that more than a quarter of all water companies failed to meet their leakage targets last year will add to the pressure to improve performance. Yorkshire under performed by a massive 7.3 % and Southern and Northumbrian also missed their targets.

Ofwat is threatening tough action to force compliance. There is no doubt that last years hard winter made the situation much more difficult. However hitting leakage targets is also becoming more difficult for several reasons especially:

o The use of more plastic pipework
o An increasing 24/7 lifestyle and multi occupancy houses
o The aging water distribution network

All the trends are going the wrong way on leakage and meeting the every tighter leakage targets is becoming significantly more difficult. Water companies are trying new technologies but are not keeping pace with a toughening climate.

Sustainable Water- will it lead to a smaller Ofwat?

2010-10-21T17:05:00.000+01:00

The Sustainable Water review that Ofwat is currently undertaking is looking at how regulation needs to change to reflect the major change affecting the industry and ensure a sustainable long term business. Ofwat is currently looking at price regulation and its impact on maintaining financial stability, especially the vital importance of reputation to water companies, as well as social sustainability and environmental sustainability.

With external pressures on Ofwat, like the move to smaller government and less regulation and the David Gray review, Ofwat is proposing to take a more risk based approach to regulation. This has to be a sensible move. Its clear the burden of data reporting is getting excessive, for example the June return guidance has gone from about 65 pages to 800! A risk based approach would mean Ofwat only focusing in depth on the vital areas and in others regulating with a light touch.

Directors from the water companies made it clear yesterday that they support the steady evolution from input based regulation through output based regulation (where we are now) to outcome based regulation. They see this as giving more room to water companies to manage their business and focus on what is really important to stakeholders. The difficult bit is defining the outcomes we all want from the water sector in terms that are not so broad as to be meaningless. A move to a risk based approach with clear prioritisation reflects what every good business does and has to be a step in the right direction.

Otters back in rivers

2010-10-18T15:47:00.000+01:00

Photo source: Environment Agency

Otters, which almost most disappeared from England’s rivers in the 1970’s are making a welcome return. They are now found in every region of England except Kent. This is due to the ban on harmful pesticides put in place in the 1970’s and also a significant improvement in river water quality.

This excellent news is to be welcomed and comes at the same time as the River Thames has won a prestigious international award for outstanding achievement in river management and restoration.

However Joe Public may find it hard to understand why Thames Water is at the same time seeking to gain support for the vast Thames Tideway Tunnel project and will need to raise bills substantially to cover the cost. Good news stories are to be welcomed but there is a tricky balancing act to ensure the public is kept on side.

Phosphate recovery first for Thames Water

2010-10-15T10:46:00.000+01:00

Photo source: Thames Water

It’s a common theme in the water sector that people are trying to do more with less. Reduce costs, increase efficiency, reduce energy use, recover resources. To succeed a different mindset is needed.

This is about costs. Just looking at phosphate recovery as a way to manufacture fertiliser wont work as it will inevitably have a much higher cost base. Nor will it be economic as a way to reduce the cost of struvite build up on pipework . But combine the two and you have a winning proposition.

This is what is happening at Thames Water ‘s Slough wastewater treatment works where Phosphorus is to be extracted from sewage on a commercial basis for the first time in the UK. The new £2million facility, from Canadian company Ostara, meets several goals. Its estimated it will save £130k to £200k a year in chemical dosing, bring in an income stream from selling the fertiliser produced and help Thames Water meet environmental regulations on nutrient levels in waste water.

To succeed in this area you need to know two markets. The wastewater treatment market and possible cost savings and environmental requirements and the market for the product being produced. It is vital to simultaneously build an outlet and channels to market for the product being produced.

A thirst for innovation

2010-10-08T17:44:00.000+01:00

After the Tata Nano car comes the Tata Swach, a ground breaking water purifier that seeks to address the problem of waterborne disease at a cost that makes it available to “have-nots”.

Safe drinking water is a basic human need. The World Health Organisation estimates that a child dies of a waterborne disease every 15 seconds. The vision for the Tata Swatch is to make water purification available for all - not just the rich.

Developed by Tata Chemicals, the innovative domestic appliance not only takes advantage of nanotechnology but also offers a creative use for a common byproduct from rice production. The Tata Group have found a way to enhance the action of the rice husk ash by adding nano particles of silver, a well established biocide. The filter unit incorporates a clever patented fuse that shuts off the water supply before the Swach becomes exhausted.

The Swach is a commercial product but its development was also driven by Tata’s strong commitment to corporate responsibility says Sabeleel Nandy, Tata Chemicals head of water purification.

This is a brilliant example of chemical expertise being combined with innovative product design to satisfy a basic human need. Exactly the sort of innovation we need to see a lot more of in the water industry.

Strong performance by water companies

2010-10-05T11:07:00.000+01:00

Photo source: Ofwat

The annual report by Ofwat on the financial performance and expenditure of the water companies in England and Wales shows they performed strongly in 2009-10. The companies operating profits rose to £3.5 billion an increase of 7% on the back of higher revenues. The companies overall return on capital was up at 7.2%.

Investment was £4 billion higher than assumed in the 2004 price limits but down 14.9 % from the peak in 2008-09.

The strong performance and figures so close to predictions underlines why the sector is so popular with infrastructure investment funds and pension companies. However in the current harsh economic performance customers may start to question whether they are getting value.

The 2010-2015 final determination means that sound, predictable performance will continue. Harold Macmillan, the former UK Prime Minister when asked about “his greatest worries” famously replied, “events , dear boy, events”. Its extreme weather events that are most likely to cause an upset in the industry and put it back under the spotlight.

Reform of water industry still under discussion

2010-09-27T19:12:00.000+01:00

Photo source Paul Hipwell: Axbridge reservoir

The Coalition Government has confirmed a white paper will be published in June 2011 on reform of the water industry to ensure more efficient use of water and to protect poorer households. It is seeking to enhance competition and improve conservation in the water industry.

As part of the major structural reform of Government underway Defra has published its departmental priorities aimed at reducing costs and achieving the reforms set out in the Coalition Agreement. The objectives include:

· Help to enhance the environment and biodiversity to improve quality of life.

· Support a strong and sustainable green economy, resilient to climate change

Having clear objectives is good business practice and Defra should be applauded for making its vision clear. The question now is now quickly will these high level objectives translate into action on the ground?

The debate on competition in the water sector at the recent market reform meeting chaired by Defra focused on a paper from Ofwat on the issues surrounding separating out retail from water operations and asset management. There was no mention of water conservation, efficient use of water or how to support poorer households. To be fair this paper would have been produced before Defra’s new objectives had been published. It will be fascinating to observe but equally very important for the future of the industry to see whether in light of these new objectives from Defra the approach towards competition radically changes as the new high level objectives imply.

Thames Tunnel goes to IPC

2010-09-21T11:50:00.000+01:00

Photo source: Thames Water

The decision announced this week that the Thames Tunnel will be referred to The Infrastructure Planning Commission (IPC) is perhaps surprising. The 2008 Planning Act does not list sewers as nationally significant infrastructure projects so it has needed a decision by a Minister to ensure its covered.

Referring the planning application to the IPC has obvious benefits to the Government as it provides a fast track way of making decisions and keeps Ministers one step removed. It will require the National Policy Statement for wastewater, (due to be issued in draft this autumn) to be revised to provide guidance for sewer projects.

The involvement of the IPC may not make it any easier for Thames Water to gain planning permission. The 2008 Planning Act requires applicants to demonstrate that they have considered and consulted on alternatives. It also gives power to local councils to judge whether the applicants consultation process has been adequate.

This is likely to prove controversial as many local councils are opposed to the huge cost of the tunnel scheme and are already saying that Thames Water has not adequately looked at alternatives. So the involvement of the IPC may actually slow down the tunnel project and lead to considerable further debate on the best way forward.

Brown flag condemns blue flag beaches

2010-09-17T16:48:00.000+01:00

Photo source: Surfers against sewage

Clean water campaigners Surfers Against Sewage are celebrating after Keep Britain Tidy committed to installing warning systems informing the public after sewage discharges at blue flag beaches. This comes after sustained publicity in the National Press and BBC Panamora about the impact of Combined Sewer Overflows on bathing water quality and SAS planting brown flags on failing blue flag beaches.

The decision does clearly illustrate the power of publicity. When next year the public start seeing warning signs about sewage spills at some of Britain’s most popular and picturesque beaches its inevitable that there will be a further outcry.

Combined sewer overflows have long been a contentious issue and a legacy from our decaying and overloaded sewerage infrastructure. It is an issue on which the water companies cannot win. If nothing is done they will be castigated but tackling the issue will require further massive investment and lead to higher bills.

There has been million's spent on improvements but public concern has only increased. The publicity campaign that Thames Water are starting on the tideway tunnel may ironically only increase the pressure. There is no easy answer but putting off investment will only make matters worse. The Ofwat final determination does allow some expenditure but less than water companies had asked for and much less than will be required to tackle all the blue flag beaches. Its inevitable that the public pressure will eventually lead to increased investment it would be better to act now and put the industry in a better light.

River water quality at highest ever level

2010-09-13T11:11:00.001+01:00

Photo source: www.sewta.org

At first sight the figures released by Defra showing that English river water quality is at an all time high level of 73% meeting the good standard should be welcomed. Certainly there has been major improvement over the last 20 years – as there should be given the massive capital investment by the water companies.

Over the next five years the water industry in England and Wales will invest a further 4 billion pounds in raising river water quality. But can we be confident that this will make a difference?

Over the last five years or so there has been virtually no change in river water quality according to Defra despite the huge investment. Under the Water Frame Work Directive new monitoring schemes are now in place. The first 2009 results on “Good Environmental Status (GES)“ will be published next month.

A target has been set by Defra of all rivers meeting the GES target by 2015. Given that only 25% meet the standard in 2008 this sounds highly ambitious. The key will be to ensure the planned £4 billion investment is carefully focused on schemes that will make a real difference – not just squandered on more studies.

Environment Secretary Caroline Spelman supports Thames tunnel plans

2010-09-09T11:04:00.001+01:00

Photo source: Thames Water Vauxhall combined sewer overflow

Environment Secretary Caroline Spelman has this week given her support to Thames Water’s plans for a tunnel to reduce the huge amount of raw sewage discharged into the River Thames. Thames Water estimates that the proposed tunnel will cost £3.6bn which could result in bill increases of around £60-£65 per year for Thames Water customers.

Getting planning approval may not be as easy or straightforward as Thames Water might hope. With the 2008 Planning Act a new ‘fast track’ process was introduced for all major infrastructure projects with approval by the Infrastructure Planning Commission. The Government has announced that the IPC will be replaced with a new Major Infrastructure Planning Unit but this wont happen until late 2011 at the earliest as new legislation is required and the approval process is likely to remain very similar with the exception that Ministers will have the final say.

The legislation requires extensive public consultation with local authorities being given the say on whether they think consultation has been adequate. The experience in the South West with the Hinkley nucleur project is interesting. There initially all the local councils welcomed EDF’s plans as they saw the new nucleur reactor bringing many jobs and significant ‘planning gain’. Now as the consultation by EDF comes to a close they have managed to loose the support of local councils as the forecast planning gains have become derisory – just £1m from a £10 billon plus project and the disruption to local communities more evident.

Thames Water will have a more difficult job. Local councils are opposed to the tunnel from the outset and local residents are unlikely to be supportive of a big increase in bills when most will see no obvious benefit. It will require very careful management of the consultation process if support for the plans is to be won.

Water utilities successfully raise finance

2010-09-03T10:57:00.000+01:00

Thames Water has this week raised another £300 million of debt on the bond market. This follows the £550 million it raised in mid-July. The issue attracted a lot of interest and was placed at 250 basis points over the 4% 2022 Gilt. Some had their allocations cut back. The aggregate proceeds are nearly 10% of Thames regulatory capital value and push the net debt to RCV value close to the 85% maximum stipulated by rating agencies.

United Utilities has also announced that Legal and General plc have upped their sharing holding to 4.23%. This news confirms that despite early fears over the “tough” Ofwat Final Determination actually the water sector remains highly attractive to investors.

Gray review of Ofwat

2010-09-01T12:56:00.000+01:00

Photo source: Defra

The announcement that Defra has appointed David Gray to review whether Ofwat is continuing to offer value for money should be welcomed.

Its clear given the monopolistic structure of the water industry that some form of regulation is essential and Ofwat has certainly played an essential role in the transformation of the water industry since privatisation. But is it really necessary to have almost identical separate regulators in Scotland and Northern Ireland or is this dictated by national politics?

There is overlap between the functions of Ofgem and Ofwat and many would argue that Ofwat is getting excessively complicated. There is a question over whether Ofwat, with its insistence on a five year regulatory cycle’ is neglecting the damage being done to the supplier base by the peaks and troughs in workload. The chance to stand back and review whether Ofwat could be more efficient is absolutely essential otherwise quangos just keep growing to satisfy their own agendas.

Slow growth in water competition

2010-08-26T14:18:00.001+01:00

There has been a slow but steady growth in inset appointments. A number of new entrants have emerged including companies like SSE Water owned by the major utility company Scottish and Southern Energy and Avon Valley Water owned by Biwater.

Mostly the inset appointments have been for new housing developments, in Ofwat jargon "unserved" areas, although there appointment has still proved contentious. Typically the new water suppliers are offering their customers a 5 % discount over the Water plc's bulk rates. For developers a number of benefits are offered such as easy adoption of the new foul and surface water sewers and help with investment costs.

New entrants to the market are to be welcomed as they will stimulate new ideas and services for customers. But with the drop in new house building and slow rate of new appointments it will be a very long time before these new competitors are a serious force in the water market place

Negative impact of AMP cycle on water sector

2010-08-11T11:57:00.000+01:00

Photo source: De Nora
There has always been a lot of concern by suppliers to the water utilities about the negative impact of the 5 year AMP investment cycle. Now hard figures obtained by British Water have quantified the impact on employment in the water industry. The effect of the downturn in work at the end of AMP4 has been more severe than many had realised. The British Water figures suggest the number employed have dropped by about 45%. The latest official estimate of the numbers employed in the water sector supply chain is 90 000 (EU Skills survey 2004). This suggest that a staggering 40 000 jobs may have been lost.

This loss of experienced people will have a major negative impact on the water industry. Many will have sought other employment or retired early meaning that they will be lost to the industry. There is also the considerable cost of making experienced staff redundant. All this comes at a time when water companies are facing huge challenges to become more efficient, and to find clever ways to deliver the capital programme outputs mandated by Ofwat. When the inevitable upturn in work that the £22 billion AMP5 investment programme will require finally arrives at sooner or later this skill shortage will impact on the capability of suppliers to deliver.

It is hard to be critical of individual water companies who have only acted in their own best interest. However economists have long recognised that the action of individuals can be damaging to the group – that’s one of the fundamental reasons for regulation. Suppliers calls for concerted group action across the water sector have largely been ignored, perhaps because its been hard to quantify the impact.

The British Water is to be congratulated on providing hard evidence of the damage the downturn is causing. But to make the case more robust it needs all suppliers to the water sector to take part in the survey. If your company has not already done so please complete the survey at British Water Survey

The water sector is likely to feel the consequences of this latest downturn for years to come. While it is too late to avoid the damaging impact of this latest downturn action it is not too late to act before the next cycle in 2015.

London flooding risk

2010-08-10T18:58:00.002+01:00

Photo courtesy: Thames Water

Climate change will bring increased risks of flooding in London – but how well prepared is the capital to deal with it?

The London Assembly’s Environment Committee has launched a new investigation to find out.

The Committee will focus its review on the flooding risks that most often affect the largest number of Londoners - surface water and river flooding – mapping the risks and assessing challenges.

No agency has overall responsibility for flood risk, so the investigation will review how all the relevant bodies – Environment Agency, local authorities and the GLA - are working together. The Committee will also look at the Mayor’s role.

The report from this committee is not due out till the end of the year but it is safe to predict that the report will be critical of the way the key bodies work together. That was one of the key concerns of the Pitt Review. It is absolutely vital that if the problems of flooding are to be tackled effectively there is clear leadership and a co-ordinated approach – it is far too easy for cash strapped organisations to assume someone else will handle the issues. So news that the Government has announced a £2million boost to funding to help local authorities deal with flood risk assessment is a small step in the right direction but a lot more action is needed.

All Party Parliamentary Group on Sewers and Sewerage reformed

2010-08-05T16:59:00.001+01:00

News that the All Party Parliamentary Group on Sewers and Sewerage is to be reformed will come as welcome news to the water industry. Its first meeting is likely to be in the Autumn after the group is re-registered in September.

At the same time the Environment Minister Richard Benyon has announced that Defra is planning two consultations this autumn. One is to establish national standards on sustainable drainage and the other is to review the transfer of ownership of private sewers to water companies. These two areas were key recommendations in the Pitt Review. Potentially they both have big implications for the water industry and could herald welcome new investment. Establishing ownership standards for SUDs is essential to enable their adoption by water companies or local authorities and would remove one of the biggest impediments to their widespread use.

Climate change: opportunity or threat

2010-08-05T16:55:00.000+01:00

Photo source : Paul Hipwell

UK businesses need to be ready to face the risks and benefit from the opportunities that climate change could bring, Environment Secretary Caroline Spelman said in a major keynote speech today.

“We know that some level of change is now unavoidable and it is the responsibility of us all to think about what a changing climate will mean for our health, our businesses and our way of life. By planning for the adaptation we need now we can ensure that the UK is best placed to meet the challenges of climate change head-on.

“A warmer climate will bring both opportunities and challenges for businesses of all sizes. I want to ensure that UK businesses are well placed to take advantage of the new opportunities that arise as well as ensuring they are ready for the difficulties that higher temperatures and more adverse weather could mean for their staff and working practices.”

It is ironic that the news came just days after the UK Statistics Authority released the latest national statistics on Land Use Change in England. In a worrying trend it shows that house building on flood plains has actually increased over the last year. In 2009 the statistics show that 11 per cent of dwellings were built within areas of high flood risk (an increase from 9 per cent in 2008). Clearly the messages on climate change risk are not getting through.

This is a worrying trend for the water industry. It will inevitably lead to more incidents of flooding and that will increase yet further the pressure on the water industry to tackle flood risk issues. On the positive side it will also increase the political pressure to allow higher capital spending by the water industry. The Environment Secretary is also right to highlight the potential business opportunities that climate change will generate. Farsighted companies will be investing now in these opportunities.

2010 has driest 6 months for 80 years

2010-07-27T17:45:00.000+01:00

The Met Office has confirmed that the first half of the year were the driest first six months of any year since 1929. So now of course its started to rain!

Official figures released show that January to June had average rainfall of 356.8mm, making this period the second driest for 100 years. In 1929 275.7mm of rain was recorded in the first six months of the year.

The Met Office said the drier conditions have been caused by a lack of Atlantic weather systems, which usually cross the UK bringing bands of rain, especially to western regions.

Its ironic that one of the worst hit regions, the North West saw the worst flooding in Cumbria just last autumn. It is statistically unsound to try to extrapolate a long term trend from short term events like this but the gut feeling has to be that we are experiencing more extreme weather conditions. If you have not read already Nassim Taleb’s excellent book on Black Swans (the impact of the highly improbable) – it would be worth adding to your holiday reading list.

Water competition threat recedes

2010-07-23T11:15:00.000+01:00

Photo source: Ofwat

Ofwat is to take a step to step approach to introducing competition into the water sector the regulator confirmed at its briefing to the City of London earlier this week. Readers of this blog wont be surprised by this news - it was predicted back in March. It confirms that the medium-term risk to financeability that some analysts had feared has reduced.

“At this stage , we are focusing on those areas of the value chain that are least asset-intensive, and where there will be little impact on investors’ confidence or the cost of capital,” said Ofwat Chief Executive Regina Finn.

This pragmatic approach is to be welcomed. There is no appetite from consumers for competition although value for money is key. The current disparity in water bills across the country is becoming an increasingly sensitive issue especially in the South West.

In the next step Ofwat will be building on the ideas in the Cave review and looking at the potential for upstream water reform in particular water abstraction licensing. The underlying problem for the regulator is that there is no actual value for water, the price consumers pay reflects what has been done to get water to the tap but not the value of water itself. Given the very high fixed costs and low marginal cost this is unsolvable. It is only in areas like water supply where marginal costs can help inform decisions. The marginal cost of developing new water supplies varies dramatically across the country from almost zero in areas of surplus water to over 100p /m3 in water stressed areas. Focusing on valuing water better in these areas can help the industry to make better decisions and take a sustainable approach.

Increasing competition for biodegradable waste

2010-07-19T10:03:00.001+01:00

Photo source: www.boston.com/bostonglobe/regional_editions/globe_west/west/pile%20of%

Competition for biodegradable waste is starting to increase. In June this year, it was announced that INEOS Bio had received an offer of a £7.3m grant towards £52m construction costs for the first commercial plant in Europe using its advanced BioEnergy Process Technology. According to Ineos Bio, 'The plant, to be located at the INEOS Seal Sands site in the Tees Valley, is designed to produce 24,000 tonnes per year (30 million litres) of carbon-neutral road transport fuel and generate more than 3MW of clean electricity for export from over 100,000 tonnes per year of biodegradable household and commercial waste. This would provide the biofuel requirement of around 250,000 vehicles per year running on E10* and the electricity needs of 6000 households.'

The process takes domestic waste, converts it into gases and then uses an anaerobic fermentation step to convert the gases into bio-ethanol. My understanding is that the process is highly efficient and has relatively low costs, meaning that this type of facility could be installed in any large population centre and provide an effective means of energy production, whilst eliminating costly landfill or waste incineration.

This move is to be welcomed but it does mean more competition for the anaerobic digesters being installed in the water industry. If this project is successful, which I expect to be the case, one can foresee the value of easily biodegradable waste is likely to increase and this will need to be factored into the economics.

White Paper on future of water industry announced

2010-07-16T10:41:00.000+01:00

The announcement by Richard Benyon, Minister at DEFRA that the Government will produce a water white paper in Summer 2011 should be welcomed. A clear long term vision for the sector is absolutely vital with the increasing challenges of climate change, population growth and rising expectations.

Affordability of water has become a political issue (don’t make the mistake of underrating it), as highlighted by the Walker report. Its particularly vital in the South West where it is reaching a political crescendo. This also impacts on the contentious issue of water metering and the costs inherent in the massive investment required for the Thames Tideway project. Those who think that competition is likely to be the salvation are likely to be disappointed. Richard Benyon makes clear that the Cave review is integral to the process but there is no suggestion that the industry will be restructured just some tinkering around large water users and abstraction.

The other major issue is diffuse water pollution. The relatively easy point sources have largely been tackled. Now with the Water Framework Directive the emphasis is moving to the much more difficult diffuse pollution sources. This will require major investment. With the transformation in the number of people surfing (and all year round) and campaigns by papers like the Sunday Times the pressure to improve will only increase.

Central to resolving all these issues is clear political direction. The water industry needs to grasp the opportunity presented by the development of the White paper to get involved in the debate and shape the future of the industry.

Innovation essential for water industry to meet AMP5 targets

2010-07-12T16:48:00.000+01:00

Photo source: Thames Water

Thames Water’s Interim Asset Director, Piers Clark stressed at an industry meeting last week the vital importance of innovation to the water companies if they are to achieve their targets to reduce costs while meeting the outputs over this current AMP period (2010-2015). The challenge highlighted was for the water industry to develop the capacity to mitigate extreme events while delivering services in a sustainable way and providing a cost efficient service.

News that total expenditure by the UK water companies on R & D is only £20m out of annual expenditure of about £8 billion – that’s less than 0.25% does not bode well. Further virtually none of this money is spent on true research instead its all development activity with many water company R & D departments acting as gatekeepers for the introduction of new ideas.

With, for example, Ofwat appointing an innovation manager and clear board level pronouncements there is starting to be recognition of the importance of innovation. However the universal view of suppliers listening to Thames Water last week was that there is a huge gap between the desire by water companies to be innovative and the reality on the ground.

As this blog highlighted back in March a real transformation is urgently needed. The water companies need to start by really valuing innovation and being prepared to ensure suppliers are adequately rewarded to encourage the development of new approaches.

Environment Agency’s approach to tackling diffuse water pollution not working

2010-07-12T16:07:00.002+01:00

Photo source: www.nsw.org.au

A report issued this week by the National Audit Office claims that the Environment Agency’s approach to tackling diffuse water pollution has not proved value for money and worse that the annual expenditure of £8m has had little impact.

With only 26% of rivers and lakes meeting the required water standards set out in the European Water Framework Directive there is a lot to be done to tackle this complex problem. If the European Commission does not agree a lower target the UK could be exposed to considerable financial penalties if the 2027 deadline can not be met.

Identifying diffuse pollution sources is undoubtedly difficult and does require good detective work. New technology like Envrogene’s DNA tracing service can cost effectively pinpoint the source. But with the majority of farmers considering their activity has no impact on diffuse pollution its clear there is a long way to go. A more proactive stance is needed with hard detective work up front to identify the culprits. Much more innovation and good engineering practice is needed if a real difference is to be made.

United Utilities warns of hosepipe bans

2010-06-28T10:34:00.000+01:00

Photo source: Thames Water

With excellent timing Ofwat have just released an informative report summarising the position on water leakage reduction. Only last week United Utilities formally applied for a drought order and news of impending hosepipe bans is bound to raise the pressure to reduce water leakage.

Thames Water in conjunction with Swindon Council have launched an imaginative water saving scheme aimed at encouraging customers to reduce usage. They are even offering free visits for an engineer to survey customer’s homes and install water saving devices. But will this really reduce water usage? So far just 41 people have signed up to the Swindon initiative hardly enough to transform usage.

When the payback period for installing a water butt can be measured in years, economic incentives alone, in the view of this blog wont change consumption. Many customers wont accept water saving ideas that impact on their personal freedom and consumer experience. Will the current strategy of installing more meters really reduce water usage to the best in class in Europe?

In some European countries the building regulations stipulate that new houses must collect and store rainwater for use in grey water applications. Measures like this have little or no impact on consumer’s experience and alongside work to encourage consumers to use water wisely could help to make a real difference.

Mixed news for Bristol Water on Competition Commission ruling

2010-06-25T16:33:00.000+01:00

Photo source: Bristol Water

Bristol Water will be disappointed by the Competition Commission (CC) provisional ruling. They failed to convince the Competition Commission that Bristol Water needs a much higher tarriff than Ofwat allowed in last November’s Final determination.

The CC ruled that Bristol Water should be allowed to increase bills by 2.3 % (after inflation) up to 2014/15. This is higher than Ofwat’s original determination of 1.7% but much less than the 6% that Bristol Water sought.

Bristol Water was the only water company to appeal to the CC. While the CC did agree that Bristol Water should be allowed some additional money to replace water mains and reduce leakage it rejected the other major projects that Bristol Water had proposed. Worse, it also reduced the cost of capital allowed from the 5.5% proposed by Ofwat to 5% (Bristol Water sought an unrealistic 6.7%). This is not surprising given the lower cost of capital agreed for other utilities by Ofgem.

The blog highlighted the risk that the cost of capital might be reduced in its article back in January. This ruling, if confirmed, will certainly deter future appeals. Water companies are in a privileged position compared to most companies in being monopolies with their income totally protected. The water companies need to focus on delivery and not get distracted.

OFT probes ownership of water companies

2010-06-22T12:11:00.000+01:00

Photo source: Paul Hipwell

The Office of Fair Trading has announced a stock-take of ownership and control across economic infrastructure including water. Its aims are sensible to:

Map ownership and control of the infrastructure
Assess how ownership affects outcomes for consumers

In the water sector there has been major change in the ownership structure since privatisation. Generally the investment by infrastructure funds such as J P Morgan or the Canadian Pension Investment Board has brought stable long term ownership to the sector and should be welcomed.

From a consumers viewpoint there are two main concerns. Firstly the various covenants associated with the debt provision do restrict the freedom of the regulator to dramatically change the regulatory structure of the sector making the introduction of the recommendations in the Cave review very difficult to achieve in practice. Secondly, its clear the water sector has been highly attractive to investors and that the stable returns of around 11% for negligible risk are excellent. The question is: are customers having to pay too high a price?

SME's luke warm towards competition in water sector

2010-06-17T14:08:00.000+01:00

Photo source: HM Government

In a report published today and commissioned by CCWater SME’s are luke warm towards the benefit of competition in the water sector. The main reason for switching would, not surprisingly, be financial considerations. However savings would need to be over 10% to persuade over 50% to switch.

General awareness in SME’s about water competition is very low and most are satisfied with their current supplier. The Cave review made a number of recommendations about how competition could be developed in ten water industry, including the suggestion that the threshold at which business users are able to switch supplier should be reduced from 50ML to 5 ML a year.

The appetite for competition appears to have diminished significantly. The new Government in their Programme for Government have said: “We will examine the conclusions of the Cave and Walker Reviews, and reform the water industry to ensure more efficient use of water and the protection of poorer households”. That combined with all the negative comment on the benefits of competition in the electricity sector has taken away the incentive to change. The water sector should stop worrying about competition and instead focus on delivering the best possible service at the lowest cost.