Does showering really save water?

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

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

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

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

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

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

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?