Expert analysis of the UK water sector
January 2025
Issue 111
This website includes excerpts from the latest edition of THE UK WATER REPORT.
Full coverage is available only in the print and digital editions of the magazine. SUBSCRIBE HERE
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Time to celebrate?
Ofwat has approved a bumper £104bn investment package – the industry is happier, but far from in party spirit. THE UK WATER REPORT listened to informed industry stakeholders for their take.
There was a collective sigh of relief from the sector on 19 December, when Ofwat’s final determinations (FDs) for PR24 appeared considerably less bah humbug than its July drafts (DDs).
But having now had the Christmas period to digest the detail, how is the settlement looking to the industry, and what advice will management give to boards as they meet this month to decide what to do next?
First up, there is appreciation of the significant amount Ofwat moved between draft and final. In particular, cost allowances were substantially increased, and late interventions made to better balance the outcomes package.
At the FD press conference on 19 December, Ofwat’s chief executive David Black confessed to being somewhat surprised by the backlash against the DD, and to have taken it into account, including cries of downside skew. Beyond that, senior director for the price review Chris Walters detailed four specific areas of movement.
Ofwat’s corrections have been well received by the industry. Some have questioned, though, how the regulator could have been so far off in the first place.”
Do the sums add up?
Verity Mitchell on how investors might be looking
at the final determinations.
Ofwat has improved many aspects of PR24 in its final determinations (FDs), but there remain areas of challenge, not least
to deliver the step up in investment required to improve environmental outcomes. There have been positive movements upwards on allowed returns, some easing of performance requirements and extra allowances for totex and certain costs that exceed normal inflationary expectations. These allowances for power and business rates, and network reinforcement costs to facilitate economic growth, have mitigated some of the £8bn of what Ofwat called "unjustified costs”.
As is normal in price reviews, extra expenditure has been allowed for schemes where additional information on customer benefits have been provided. Compared with previous price reviews, Ofwat has also had to include investment mandated by other government agencies which has pushed the totex even higher since the draft determinations (DDs).
A drain on resources
Leakage is a water resources problem now – and Ofwat is planning a reporting shake-up to get fit for 2050.
In 1999, the Annual Leakage Conference’s first year, two US social psychologists published their findings of a behaviour pattern whereby people with limited competence in a particular area overestimate their abilities.
Opening his talk at the 25th conference, innovation manager at SES Water, Jeremy Heath, referred to this – the Dunning-Kruger effect – in the context of the UK public’s understanding of the task of addressing leakage. Heath cited Dunning-Kruger to explain the population’s grasp of the issue: “This is why people look at leakage and ask: ‘how hard can it be? Why does the industry struggle – surely it’s simple?’”
But another facet of the Dunning-Kruger effect is that when people improve their knowledge in a subject, their confidence grows steeply but hits a slump when the full extent of the challenge is revealed to them. Heath said the water industry has itself reached that stage: “We are at that point in this industry… how much more we need to understand about our buried infrastructure; about how our customers use water; about the under registration of our meters; and about material science in play.”
This is why people look at leakage and ask: ‘how hard can it be? Why does the industry struggle – surely it’s simple?’ ”
Jeremy Heath, SES Water
Bathing water blues
David Lloyd Owen looks at the mixed narrative from 2024’s bathing water data.
We are now entering the most challenging period the water sector has encountered since its privatisation 35 years ago. The PR24 final determinations and the 2024 combined sewer overflow data (due in the next two to three months) will set the mood music for real (and perhaps existential) change in 2025-30. Against that backdrop, the 2024 bathing water testing data for England and Wales does not make for easy reading.
Data for England
The Environment Agency (EA) declined to test England’s bathing waters in 2020 due to Covid-19 concerns, despite this not being the case in Wales and indeed, in all of the remaining 27 EU
countries. This was a pity, as quite a lot of useful comparative context has been lost as a result. That perhaps is a reflection of just how low the EA was at that time in terms of being able to deal with areas such as this, even where lost or uncollected data mattered.
Better data for better decisions
Rob Passmore champions the multiple benefits of collaborative and holistic river health monitoring, as we move forward with catchment-based governance.
Unless it flies in the face of widespread expert consensus, one of the key recommendations likely to emerge from the Government’s independent review of the water sector is for a reorganisation around catchment-based governance.
Improving the health of rivers is a national priority, and multiple initiatives for change have championed broadly consistent
suggestions as to how we might get there. The fundamental thrust is we would get more bang for our buck if highly prescribed, single-sector outputs (such as nutrient-stripping and sewage spill reduction by the water industry) could be replaced by multi-sector, whole system outcomes based on the particular needs of each catchment.
Making any such transition will be tough, with many currently pondering what an appropriate governance and regulatory framework could look like. But one thing is certain: we need better quality, more holistic and more transparent information about what is going on in our rivers, before anyone can really make robust decisions about how to improve them.
Market messages for the Cunliffe Commission
MOSL dedicated its December CEO Forum to exploring what retail market participants want to change.
The Independent Water Commission’s (IWC) review of the water sector has been billed as a once in a generation opportunity for change. Every man, woman and dog – from those with long held bugbears to those with passionate new interests – will very likely want to make a submission when the call for evidence comes later this month. With such a broad range of objectives in focus, Sir Jon Cunliffe and his team could be forgiven for not thinking much about the non-household market.
But MOSL doesn’t intend to let that happen. Its December CEO Forum, which was deliberately “shorter and sharper” on the back of feedback, chair Anne Heal said, dedicated most of the time to an open discussion on what the market wants from the Cunliffe Review. Members of the review secretariat and Defra team were in attendance, to listen and share.
Every man, woman and dog... will very likely want to make a submission when the call for evidence comes later this month.”
Average wholesale charges to rise by 42% by 2030
PR24 FDs also take growth into account in the business demand reduction target, and split meter upgrades by type in the Price Control Deliverable.
Wholesale charges for business customers will on average increase by 42% before inflation between 2025 and 2030, under Ofwat’s final determination (FD) for PR24. While household bills will rise on average by 36%, Ofwat said the average increase in the wholesale charge element of household bills was 41%, so commercial and domestic rises are on par.
Missing a drip
CCW highlights the untapped potential for business water saving.
Over half (57%) of English and Welsh businesses have not taken any steps to save water, CCW’s latest non-household tracking survey Testing the waters has found. The two main reasons cited by inactive respondents were there is nothing they could do to cut consumption (42%) and limited incentive due to low bills (22%).
Larger businesses are more likely to be engaging in water saving than smaller businesses, but the differences are less marked than might be expected, ranging from 42% to 51%. The research suggested much more was possible. 35% of businesses expressed an interest in learning how to make water savings, rising to almost 60% of the largest businesses.
will keep you on top of the threats and opportunities emerging from retail and upstream competition.
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CONTENTS
January 2025 - full contents of the magazine
REPORT PR24 FDs: summary of decisions and industry feedback.
ANALYSIS PR24 FDs: investor perspectives.
REPORT Planning to be overhauled to support the Government’s growth mission.
REPORT Thames’ dividend fine and liquidity latest.
INTERVIEW Rob Passmore, Additive Catchments.
INDUSTRY COMMENT Cunliffe Commission: opportunities for nature, regulation and governance.
REPORT Leakage reporting to be overhauled to be fit for 2050.
ANALYSIS Bathing water blues.
INDUSTRY COMMENT Sponge cities urgently needed.
INDUSTRY COMMENT 2025 metering predictions.
NEWS REVIEW EA to axe catchment nutrient balancing.
INDUSTRY COMMENT UK success at Stockholm World
Water Week.
REPORT PR24: outcomes for the business customers and the retail market.
REPORT MOSL CEO Forum discusses non-household market asks of the Cunliffe Review.
REPORT Credit accrual and meter read code changes.
REPORT CCW spies untapped potential for business water savings.
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