Adapting to climate change in the water sector

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. 

UK water utilities robust financial results

Photo courtesy Thames Water

Investors are seeing how their investment in the UK water utilities fared in the year ended 31 March 2010. Despite the recession and the worst winter weather for thirty years most are showing a strong and robust performance rewarding investors.

Anglian Water performed particularly strongly with underlying operating profit rising by an impressive 6.2 % to £463 million on increased turnover of £1100 million also up 6 %. Pennon’s results were even more impressive driven by a strong performance in the group’s waste division, Viridor. Operating profit at Viridor rose by 15%, against a more typical for the sector rise of 2.6% at Pennon’s South West Water division. On the back of Viridor’s strong performance and robust outlook (they are preferred bidder on two major waste contracts in Oxfordshire and Exeter) Pennon’s management are committed to real annual dividend growth of 4% from 2010/11 until at least 2014/15.

AMP5 will undoubtedly be challenging with the UK water utilities committed to ongoing massive investment (e.g £2 billion at Anglian Water for tough challenges of climate change and population growth). But equally its apparent why the water sector continues to be very attractive to investors especially pension and infrastructure funds looking for secure and attractive returns for very low risk.