PR24 business plans: initial analysis and response

Last Monday, water companies announced £96bn of investment for 2025-30, nearly double the £51bn allowed in AMP7. Below is a selection of early analyses and response so far. (Full analyses of all business plans will feature in the November issue of THE WATER REPORT:

S&P Global Ratings: bills and finance

There is a huge range in the proposed bill increases – from 10.5% for SES Water to 66% for Southern Water – to fund a level of investment that will outstrip the aggregated regulatory capital value of the sector today (£94bn as of March 2023), according to analysis from S&P Global Ratings (see chart by S&P Financiial Services). Total expenditure proposed by companies ranges from £0.4bn for SES Water to £18.7bn for Thames.

S&P went on to note regulatory gearing will rise in most cases as expenditure will be predominantly debt financed. Its note, Water investments in England and Wales poised to nearly double over 2025-2030, observed: “This is despite the availability of fresh equity in a handful of cases and even though some companies have received shareholder support to shore up financial resilience in the current price control period.

“In the case of Thames Water and Northumbrian Water, shareholder contributions will depend on the final regulatory determination and the cost of equity set in the final weighted average cost of capital (WACC). We note that, as per the appointee WACC from Ofwat's final methodology, the equity premium of 154 basis points was lower than the previous final determination of 205 basis points for PR19.”

S&P added that three-quarters of its ratings in the water sector already have a negative outlook or are on CreditWatch with negative implications, driven principally by inflationary pressure on costs.

Baringa: expenditure analysis

Analysis by Baringa’s water regulation team highlighted £60bn of the £96bn totex is earmarked for base costs, a 13% increase in modelled base costs. The remaining £36bn is for enhancement, 3.5 times higher than the PR19 allowed enhancement expenditure. Half (£18bn) of the enhancement spend proposed is for WINEP schemes – this primarily driven by phosphorus removal and storm overflow discharge reduction investment.

Baringa said the average bill increase for water

over AMP8 would be £18 (9% up on the average 2024-25 bill) and the average bill increase for wastewater would be £85 (36% up on the average 2024-25 bill), plus that substantial price rises would continue through AMP9.

Rivers campaigners: mixed reaction

The PR24 business plans have received a mixed response from rivers groups.

The increased focus on environmental investment was welcomed by The Rivers Trust, with an added call for a greater emphasis on nature-based solutions. Chief executive Mark Lloyd commented: “Whilst this is a welcome financial boost for the water environment after years of chronic underinvestment, public trust in water companies is at an all-time low. Customers will be asked to pay higher bills for these improvements, so the water industry and Ofwat must ensure that this customer money is spent transparently, responsibly, and cost-effectively.”

Others, including Windrush WASP, Surfers Against Sewage and Feargal Sharkey, have criticised the plans, arguing shareholders/companies should make amends for past ‘failures’ rather than customers. SAS tweeted: “Water companies want bills to increase by £156 a year by 2030 to pay for upgrades and reduce sewage discharges. So, they massively underinvest for years, destroy the environment, pay out huge dividends, and now want us to pay to clean up their mess.”

Writing in City AM, Sharkey argued: “The water companies confirm annually to Ofwat they have the money necessary to meet their legal obligations. The question we need to ask is what happened to all the money? Where is it gone? Who’s got it – and when do we get a refund?”

Sharkey has also tweeted that Thames “should be allowed to fail” if its survival is dependent on fines being capped and shareholder returns being boosted.

Water UK: “false claims” on storm plans

Water UK has hit back at two principal “false claims” that it said have been circulating online since the PR24 plans were published:

1. Water companies have been given all of the funding needed to meet their legal obligations to build and maintain sewage systems. Therefore, water companies’ proposal to triple investment to reduce the activation of combined sewer overflows should be rejected.

Citing a September 2023 High Court judgement, Water UK set out that the new ambition “goes further than the legal obligations on companies. See Paragraph 169 where the High Court rules that, ‘The Plan goes further than the 1994 Regulations [which governs the operation of sewers].’ As the plan goes beyond existing legal obligations, new funding is required to deliver it.

”2. Combined sewage overflows should only be activated in exceptional circumstances.

“False. The High Court confirmed in September 2023 that in addition to exceptional circumstances – that is, after unusually heavy rain – the law permits overflows to operate when it's technically too difficult or too expensive for them not to. See Paragraph 69 of the judgment.The UK Government has confirmed this too. This is the legal position. Water and sewerage companies in England and Wales believe we should reduce the operation of combined sewer overflows beyond the legal minimum.”

CCW: customers need more help

CCW welcomed the investment in improved service and environmental enhancement the plans promise, but highlighted the impact on struggling households of higher water bills. Chief executive Mike Keil urged: “Investment on this scale must come hand-in-hand with fairer and more consistent support for the nearly one in four households who say they are already struggling to pay their water bill. We also want to see evidence in these plans that more water companies are putting their hand in their own pocket to fund a step change in financial support for struggling customers.”