Future direction in the water industry

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. 

Water White Paper

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?

Ofwat review backs slimmer regulation

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.    

Water White paper delayed further

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.

Adapting to climate change in the water industry

Photograph source: Thames Water

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

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

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

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

Water White paper delayed till autumn

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

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

Water meters to become compulsory?

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.

Full speed ahead on anaerobic digestion partnership

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.

Reform of water industry still under discussion

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.

River water quality at highest ever level

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

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.  

Gray review of Ofwat

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.

Climate change: opportunity or threat

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.

Action needed on water charges

Photo: Walker Review 

The Walker Review on charging for water raises some important questions and challenges for the water industry. Anna Walker said in her conclusions: “while the regulatory regime in the water industry has served customers well over the last twenty years, we now face considerable new challenges”. She went on to say: The biggest issue is the mismatch between how we value water now and how we will need to do so in future”. 

The Walker Review strongly challenges whether the current system of charging is fair. Two particular issues are the high level of charges in the South West, 43% higher than other areas and the high levels of debt.  The report questions why debt in the water industry should be three times higher than in the energy sector, although water bills are a third of energy bills suggesting that something is fundamentally wrong.

The issue of fairness addressed in the Walker Review is crucial to customer’s perception of the water industry. The industry depends on the support of customers to enable future investment. Government and regulators need to find the time and courage to tackle the issues raised in the Walker report soon before they escalate and become bigger and more expensive still. 

Bathing Water quality improves

Photo: Defra

The quality of English and Welsh bathing waters improved in 2009. Results just published by Defra show that 98.6 per cent of beaches meet the mandatory standard up by 2% from last year. The pass rate at the more stringent EC guideline standard was over 10% better at 82.2%.

The improvement was partially the result of the average rainfall in 2009, which contrasted with exceptionally wet weather in 2008, which caused pollution from run off and more frequent use of combined sewer overflows.

Ofwat has allowed £220m of expenditure in the Final Determination to improve sewage works and unsatisfactory overflows affecting bathing beaches. However recent experience on the Flyde Coast has shown that tackling bathing water quality isn’t a simple issue partly due to all the various diffuse sources of pollution.

While the improvement in bathing water quality is welcomed, looking forward bathing waters are likely to become an even more emotive issue over the next couple of years. New standards, that set even more ambitious targets, come into force in 2015. Before that, in 2012, Councils are required to display much more visible and informative signage at bathing beaches. That fact, combined with more people holidaying in the UK, is likely to increase the pressure to improve and ensure bathing water quality remains a high profile area.