The challenge: keeping the taps running and water bills affordable

This post is written by Alex Townsend, economic advisor, Adaptation, Committee on Climate Change. It first appeared on the CCC blog.

Green Alliance launched a report on Wednesday 12 February to promote greater water efficiency as a way to reduce water bills, particularly the benefits for low income households. Water bills are set to fall slightly in the next five years.  Over a longer time period, climate change and population growth will put upwards pressure on bills if appropriate action is not taken. Managing water demand, and adopting more flexible approaches to improving resilience, will help maintain affordable bills and secure water supplies over a longer period.

Better regulation
Important and positive changes have been made to the water industry by the regulator, Ofwat.  These should help reduce the potential for rising bills by allowing water companies more flexibility in how services are provided.  As part of the latest five-yearly price review (PR14), Ofwat has changed the system of penalties and rewards so that water companies are encouraged to deliver important outcomes to customers for least cost.  Previously Ofwat tried to make sure certain agreed projects and outputs were delivered, even if companies found better and cheaper ways to meet customers’ needs.

The new regulatory system also removes the bias towards investing in big capital projects, treating operational (ongoing) and capital investment on a more even basis.  This should further encourage creative thinking, and solutions that deliver a range of outcomes and benefits.  For example, previously if a sewer was under capacity and causing flooding a water company might favour a capital-intensive solution such as installing bigger pipes.  Now water companies have greater flexibility to, for example, introduce Sustainable Drainage Systems (SuDS) to slow down and reduce the amount of rainwater entering the sewer network.  SuDS involving natural features, such as ponds and swales, also improve water and air quality, and counter the urban heat island effect.  As a result we will hopefully see more water company investment in SuDS and other, less capital intensive, solutions as companies seek to meet their commitment to reduce the number of properties flooded by wastewater from sewers by a third by 2020.

Positive signs on demand management
There are also some positive signs on demand management that have emerged from the water industry as part of the price review process:

  • Consumption per person has fallen from a high of 155 litres per person per day (l/p/d) in 2003-04 to around 140 l/p/d. In PR14, 13 of 18 companies have made commitments to reduce consumption per person through water efficiency programmes. In total, this will save 215 million litres per day by 2020, roughly equivalent to a fall of 4 l/p/d.
  • The number of customers with water meters is increasing at a rate of 2% per year. By 2020 around 61% of households are projected to have a water meter. Metering will ensure households pay a price for water that reflects the amount that they use.
  • Leakage losses from pipes have remained relatively stable at around a fifth of total public water supply. Companies have made modest commitments to reduce leakage by 158 million litres per day by 2020, equivalent to a 5% fall relative to current levels of leakage. This represents an increase in ambition relative to commitments made in the previous price review.
  • All but two companies have committed to not increase abstraction over the next five years. Less abstraction means less damage to freshwater habitats. Currently, around 13% of rivers are thought to be failing to meet good ecological status under the Water Framework Directive due to pressures from over-abstraction.

Customer consultation is key
However, any regulatory regime also creates its own risks.  The welcome focus on outcomes can make it more difficult to understand how these commitments are being delivered.  If water companies are not consulting effectively with their customers they may still default to capital intensive solutions to deliver the required outcomes (e.g. large sewers instead of SuDS).  Ofwat has a crucial role under the new regime to ensure companies’ consultation with their customers is meaningful and that customers understand the full consequences when they express their preferences.

It will also be important for Ofwat to evaluate how well the regime has worked as PR14 draws to a close.  That requires some thinking now about the basis for such an evaluation.  Ofwat can then ensure it is collecting the required information to allow a proper evaluation in time for the next review.

The evaluation might want to consider, in part, whether the positive commitments made in water companies’ five-year business plans are translating into greater ambition over the longer-term.  We compared the latest round of long-term (25 year) plans with those published in 2009.  That shows there has been no noticeable shift towards more water efficiency and demand-side measures. As the Green Alliance report points out, there may be opportunities for greater roll-out of water efficiency that are yet to be fully exploited. This could help to manage the pressures on customer bills, whilst also making water supplies more resilient to future changes in climate.

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