Urban Waste Water Directive now completed in the UK

Photo courtesy of Southern Water Services

March 2013 marks an important milestone, with the commissioning of the Brighton and Hove wastewater treatment works all UK cities with more than 15000 pe will have secondary treatment. In Northern Ireland there is only one site left to complete namely Ballycastle, where plans are progressing. 

To mark the milestone DEFRA has published a review of waste water treatment in the UK. 

The situation in Europe is not so positive especially with the southern European countries where significant investment is still required despite the passing of the 2005 deadline!

The water companies currently collected about 96% of all wastewater generated the remaining 4% is mainly from very small rural communities or individual properties which will typically have private wastewater treatment plant or cess pits.

There are two main areas left where significant further investment will be required, sensitive areas and combined sewer overflows or as they are now often called unsatisfactory intermittent discharges (UIDs).

In 2011 the UK designated a further 68 sensitive areas bringing the total to nearly 600. Typically this will require water companies to install tertiary treatment. In addition the demands of the Water Framework Directive often required enhanced secondary treatment or tertiary treatment.  To meet the requirements for the new sensitive areas alone a further £40m of capital investment is likely to be required in the next regulatory period starting 2014. The deadline for completion is 2018.

The second major area is UIDs, here the wet summer has exacerbated problems and major investment will undoubtedly be needed – this will be covered in a subsequent blog.

It is a major achievement to have met the main requirements of the Urban Waste Water Directive and the total bill is likely to have been about £8 billion.   

Future price limits for UK water utilities

There is much to be welcomed in Ofwat’s “Future Price Limits - statement of principles". Certainly focussing incentives carefully to deliver desired outcomes and reducing and removing regulation will be welcomed. But is there still too much emphasis on the Regulated Capital Value (RCV)?

RCV measures the money invested in the water business and the water company’s shareholders get a guaranteed return for the investment made. It’s a nice simple and easy method for the regulator. But is it in the best interest of customers? The big problem is that it encourages water companies to invest in capital solutions not revenue. So innovative ideas like managing the water catchment better to prevent pollutants entering the water course rather than paying to remove them get penalised as often they involve no significant capital expenditure.

Ofwat have looked at the issue of Capex bias and recognised there may be a problem. There is a natural tendency to want to engineer and build things – finding the right balance between Opex and Capex is not easy.   

Will social water tariffs make a difference?

The Government has announced today that water companies will be allowed to reduce water bills for those unable to pay – the so called “social tariff” This will be paid for by cross subsidy from other water customers.

On the face of it, it is an imaginative idea to solve the problem of escalating bad debts. This is already adding over 1% to customer’s bills. The Government is proposing that water companies must ensure that the increase in bills is kept to a level that customers find acceptable perhaps around 1.5%. If the introduction of social tariffs helps to significantly reduce bad debts then it is an excellent idea.

But will it actually work? There is a significant problem. At the moment local citizen’s advice offices are advising those in debt to pay their water bills last – after they have cleared all other bills. This is because there is nothing a water company can do (except plead) if a customer says they cant afford to pay. The result is that many ‘poor’ customers are choosing to pay their Sky bill but not their water bill – is that fair? Unlike other utilities cutting off the water supply is not allowed. So bad debts for the water companies have been escalating rapidly.

It would have been better for the government to suggest a much larger social tariff discount but then to back this up by restoring the right to cut off the water supply.  That is more likely to be perceived as fair to all customers.

Future Price Limits

Photo: Southern Water

A major change in the way the water industry is regulated is underway. Ofwat in its Future Price Limits – statement of principals maps out the intended changes. The biggest changes are the move to setting outcomes and not outputs with the outcomes set in conjunction with customers. The rational is to encourage water companies to innovate and outperform.

But has Ofwat gone far enough? Several key constraints of the current system will remain. Regulated Capital Value stays as a vital determinant and the regulatory period stays as five years. This means that two of the biggest concerns of the current system are likely to remain, the inherent bias towards capital solutions and the adverse impact on the industry of the drop in investment at the end of each regulatory period.

Ofwat states that: “While we were reviewing our price setting tools, many stakeholders told us that the way we treat capex and opex separately has become complex and burdensome. We have also heard that our approach may create perverse incentives, ranging from a bias towards capex to a rigid, technical and inflexible approach from companies that are driven by the detailed mechanisms we use. Others have perceived that our overall approach may encourage ‘gaming’ or ‘padding’ of business plans by companies that may consider it in their interest to inflate costs in their original submission.

But while Ofwat propose to move to a total expenditure model as the way forward they then qualify the statement by suggesting that a lot more work is needed to work out how it can actually be done and that it might not be possible to implement it in the next regulatory period!

Its clear that the water sector remains highly attractive to investors, what is not clear is whether Ofwat has got the balance right between the need to sustain investment while delivering an affordable service. With the harsh economic environment – it is likely pressure from customers to rebalance the equation will increase.   

Drought - what drought?

Photo source: Southern Water Peacehaven WWTW

Despite the current rain, we are going to be short of water this summer as underground water levels remain at record lows. Despite appearances England is not a wet country, we get less rain per head than Sudan. Yes annual rainfall is much higher but not when our high population density is taken into account.

There is not a simple answer. Water is far too cheap and heavy to justify long distance trunk mains from say Scotland or the River Severn. But it is certain more must be done. The obvious place to start is demand – why in Britain do only a third of homes have meters when all our industrial competitors (except Ireland) all have meters? Houses that have meters use on average 15% less water. 

Why do we still accept 25% leakage almost the same as 25 years ago? Leakage at Thames Water is over 25% while in Paris and New York it is 10% and Singapore only 5%.

We also need to get better at sharing water locally. The driest county Kent has six water companies. The Environment Agency has suggested that the water companies could save half a billion pounds by installing a few linking pipes between their systems. Forget a national grid, install a Kent grid instead.

Water companies want to saddle customers with very expensive new reservoirs. Yet our track record of building reservoirs in the right place is not good, just look at Kelder, its water remains under used. We need to move away from the unhelpful bias in the regulatory system towards capital cost schemes rather than reducing operating costs. This needs leadership at Ministerial level with a real willingness to accept that water problems, drought or floods will only get worse and decisive action is needed. 

Urban Waste Water Directive still driving investment in water infrastructure

Photo source: Southern Water

Despite the fact the Urban Waste Water Directive  (UWWD) was supposed to have been implemented by 2000 it is still driving major investment across Europe. In the UK virtually all schemes are now complete except London. The UWWD is one of the factors forcing the investment in the Thames Tideway Tunnel.

There are similar very major schemes in Europe especially a huge scheme in central Paris as well as schemes in Italy and Spain.

Despite the current harsh economic climate there is continuing pressure from  the EU to enforce current legislation, with both Belgium and Luxembourg subject to fines. The EU is also seeking to foster integration of water and other policies especially the common agricultural policy. Consultation is currently open on several directives that could have significant financial impacts.

Topically the EU is talking about a European standard on drought management and water efficiency. This could help to drive European wide standards for water saving equipment and fittings, which could be useful.  Although the UK stance will be that it prefers to manage drought issues not the EU. 

Bathing Water Standards - trouble ahead

Photo: Courtesy of Southern Water- their new treatment works at Brighton

The story over the last two decades has been one of steadily improving bathing water quality largely as a result of the massive investment by the water companies in coastal sewage treatment. Now the situation is about to change.

For the last few years bathing water quality has plateaued. In 2015 the new Bathing Water Directive comes into force. This changes the classification of water quality – if the proposed standards came into force today, 10% of English waters would fail. In addition the blue flag status will move to excellent water quality in 2013.

The other change which will have a big impact is that from this year information on water quality and sources of pollution will have to be displayed at all bathing waters and in 2016 classification symbols will also have to be displayed. This sounds like an innocuous change but the impact is likely to be very significant. When major beaches have to display a clear sign saying water quality is not fit for bathing the public relations consequences are likely to be severe. 

Further improving bathing water quality is likely to be expensive. The frequency of spills from combined sewer overflows will have to be reduced further and action will be needed on diffuse sources of pollution as well.