REG - Water Services Auth - Ofwat sets out record £88 billion upgrade

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11/07/2024 08:15

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RNS Number : 0003W  Water Services Regulation Authority  11 July 2024

PRESS RELEASE - IMMEDIATE

 

Ofwat sets out record £88 billion upgrade to deliver cleaner rivers and seas,
and better services for customers

 

·    Investment of £10bn to tackle storm overflows with a target to
reduce spills from storm overflows by 44% from levels in 2021

·    Customer bills proposed to increase on average by £19 a year over
the next five years - a third less than the bill increase requested by
companies

·    New initiative to ring fence investment funding with a claw back
guarantee which will ensure money not spent on investment is returned to
customers

·    Companies to double support available for customers in need of a
helping hand

 

Ofwat has today proposed allowing a spending package of £88bn by water
companies.

£35bn of the expenditure reflects the investment needed to reduce pollution,
improve customer service, river and bathing water quality, and deliver greater
resilience to the impact of climate change. This is more than a trebling of
the level of investment in the 2020 to 2025 period.

 

The total expenditure proposed is £16bn lower than in companies' business
plans. This reflects Ofwat's analysis of those plans, removing or reducing
costs where expenditure is insufficiently justified, inefficient or for
activity for which companies have already been funded; customers will not pay
twice.

 

The average bill increase for water and wastewater companies will be £19 a
year over five years (£94 in total), excluding inflation. Companies' business
plans proposed increases averaging £144 over five years. Ofwat's
interventions have reduced the level of bill increases proposed by companies.
For example, Thames Water's proposed increase of £191 by 2030 has been
reduced to £99; Severn Trent's proposed increase of £144 has been reduced to
£93.

 

Companies have been required to prepare for the future by setting their plans
in the context of a 25-year delivery strategy. These proposals include the
work of the regulators' joint team RAPID, which is helping to accelerate the
delivery of £17bn of new water assets including 6 reservoirs, some of which
are part of the wider programme of major projects; in total 9 new reservoirs
are proposed.

 

The overall investment programme will deliver improvements in the environment,
strengthen the resilience of water supplies and improve day-to-day customer
service.

 

Protecting the environment

·    Reducing the number of spills from storm overflows by 44% (compared
with 2021 levels) by spending £10bn and upgrading 2,500 storm overflows; this
includes the 21% reduction which Ofwat has required companies to deliver by
2025 at their own expense

·    Today's announcement builds on Ofwat's approval in 2023 of £2.2bn of
accelerated investment to make an early start on delivering improvements and
drive down spills from storm overflows.

·    £1.4bn of investment on storm overflows to be delivered through
catchment- and nature-based solutions

·    Improving river water quality by investing £6bn including
improvements at over 1500 wastewater treatment works - with around 880
removing more phosphorus

·    8 new performance targets for companies including reducing spills
from storm overflows, reducing operational greenhouse gas emissions and
improving biodiversity

·    Failure to meet these performance commitment results in an automatic
penalty for companies

 

Securing supplies

·    £6bn for securing water supplies including progressing 9 new
reservoirs and 7 large-scale water transfer schemes

·    Requiring companies to replace around 8,000 km of water mains pipes -
a 400% increase compared with the current 5-year period

·    Targetting companies to reduce leakage by a further 13%

·    Launching a £100m Water Efficiency Fund

 

Day-to-day delivery for customers

·    Tougher targets on internal and external sewer flooding, reducing
sewer flooding in homes by 13%

·    Higher standards set for assessing companies' customer service
through comparing water companies with other sectors

 

The cost of this investment will initially be funded by shareholders or
through borrowing, with these costs then recovered through customers' bills in
this 5-year period and beyond. Ofwat has proposed a rate of return of 3.72%.
This is above the level set for 2020 to 2025, reflecting increases in the cost
of finance and the need to ensure the sector can raise the finance necessary
to fund such a significant programme of investment.

 

David Black, Chief Executive, Ofwat said:

 

"Customers want to see radical change in the way water companies care for the
environment.

 

"Our draft decisions on company plans approve a tripling of investment to make
sustained improvement to customer service and the environment at a fair price
for customers.

 

"These proposals aim to deliver a 44% reduction in spills from storm overflows
compared to levels in 2021. We expect all companies to embrace innovation and
go further and faster to reduce spills wherever possible.

 

"Today's announcement also increases the resilience of our water supplies to
the impact of climate change and will reduce how much water is taken from
rivers by enabling a range of long-term water supply projects, which includes
plans for 9 reservoirs.

 

"Let me be very clear to water companies. We will be closely scrutinising the
delivery of their plans and will hold them to account to deliver real
improvements to the environment and for customers and on their investment
programmes."

 

PR24 at a glance

 

Overview

Every five years Ofwat is required to set the price, investment and service
package for water companies in England and Wales. Today's proposals are part
of the 2024 Price Review (PR24) and cover the period from 1 April 2025 to 31
March 2030.

 

Investment

As with previous price reviews the level of the investment programme is
principally driven by environmental requirements, set out through the
statutory planning processes led by the Environment Agency, Natural Resources
Wales, and the UK and Welsh Governments.

 

This has led to companies' proposed total expenditure increasing by £29bn -
this is split between a £5bn increase in the core costs for running their
business and a £24bn increase in expenditure to meet requirements set by
Governments and for other environmental improvements.

 

Part of Ofwat's role as the economic regulator is to scrutinise companies'
cost proposals, to ensure they deliver efficiently; this has led to a £16bn
reduction. The reductions have applied to proposals where additional
expenditure allowances have not been justified, including where customers are
being asked to pay twice, or where proposed costs do not reflect efficient
delivery. Where companies can provide additional evidence to justify their
proposals it will be considered by Ofwat ahead of final decisions.

 

The increase in the scale of investment will challenge companies' capacity to
deliver. It is encouraging that over the past 18 months many companies have
strengthened their relationships with key suppliers to enable the step-up in
activity that will be needed. Ofwat is putting in place additional processes
for Thames Water and Southern Water which face some of the greatest delivery
challenges; approval for parts of their funding will be phased over time,
linking it to progress on delivering their investment plans.

 

Ofwat has established new approaches for large schemes to ensure that
investments of over £100m are delivered as efficiently as possible, improving
value for customers and outcomes for the environment. 21 large schemes in
today's proposals will be delivered by these new approaches, enabling capital
and operational cost savings as well as a reduction in financing costs, while
maintaining quality.

 

In addition to these large schemes Ofwat has a programme of 18 major projects
ranging from reservoirs to water transfers and treatment works. These projects
will attract around £26 billion pounds of new investment to the sector over
the next 5 - 15 years through innovative competitive delivery models. Third
parties will compete to design, build and in some cases operate and maintain
this essential infrastructure, driving best value for money for customers. To
qualify for these models major projects are over £200 million and distinct
from the rest of the company networks.

 

This builds on the experience from the £4.5bn Thames Tideway super sewer,
which is currently being commissioned. This is showing how the use of
competitive models for delivery and innovation in finance arrangements helps
deliver better outcomes for customers and the environment.

 

The increased allowance for companies' base expenditure reflects measures
including: increased expenditure in maintaining long term asset health by
increasing the rate of mains replacement; accommodating population growth
including by increasing capacity at sewage treatment works; and the effect of
higher energy costs.

 

Bills

The increase in investment will lead to an increase in customer bills. Ofwat
is committed to fair bills for current and future customers:

 

·    Bill increases will not cover work for which companies have already
been funded - customers will not pay twice.

·    Costs have been challenged to reflect efficient delivery of
investment, while continuing to ensure that companies can deliver their
statutory requirements and the sector can attract the investment it needs.

·    Investment funding will be ring fenced with a claw back guarantee
which will ensure money not spent on investment is returned to customers.

 

The average bill increase for water and wastewater companies for the five
years from 1 April 2025 is £94 (21%), around £19 per year.

 

Ofwat welcomes commitments from a number of companies to increase
substantially the level of support given to customers who need a helping hand.
Overall, nearly £500 million is going to be made available for the five-year
period.

 

A breakdown of bill changes by company is provided at the end of this
statement.

 

Delivering improved performance

PR24 also sets performance targets which companies are expected to achieve,
with rewards or penalties for outperformance or underperformance. There are 8
new environmental targets including:

 

·    Reducing spills from storm overflows for companies in England to an
average of 16 spills per year by 2029.

·    Cutting the number of serious pollution incidents to zero.

·    Reducing operational greenhouse gas emissions by 13.8%.

 

 

A fair return for investors

Investment in the water sector is financed up front by investors and repaid by
customers over time. Companies will therefore need to access additional debt
and equity to support the investment programme. Since 2021 over £4.6bn of
equity has been raised by the sector; business plans identified a further new
equity funding requirement of £7bn by 2030. Some water companies will need to
take further steps to strengthen their financial resilience and Ofwat has
required further assurance about their financial resilience in 2025-30 and
beyond

 

Ofwat has set the allowed rate of return for companies at 3.72%, reflecting a
cost of equity of 4.8% and debt at 2.84% and underpinned by a gearing ratio of
55%. At these levels, and taking account of the overall balance of risk and
return in these proposals, Ofwat is satisfied that an efficient company can
finance its functions.

 

Thames Water

Ofwat has allowed Thames Water £16.9bn to invest on improving services for
customers and the environment. Around 20% of the £16.9bn funding (worth more
than £3bn) is conditional on the company demonstrating it is ready and able
to effectively deploy investment or that the investment will be effectively
and efficiently targeted. This is in addition to the price review process that
will see customers' money clawed back if investment is not delivered.

Given concerns about the performance of the company, Ofwat is imposing a
Turnaround Oversight Regime on the company. This will include:

·      a requirement to provide a 'delivery action plan' which sets out
the actions the company proposes to take to expand its delivery capacity. The
company must report on its progress regularly, subject to review and
additional scrutiny by an independent third-party assurance provider;

·      a requirement for the company to fully re-evaluate its plans for
transformation in order to demonstrate how it will deliver the necessary step
change in operational performance

·      a requirement for the company to provide a financial resilience
plan in response to the draft determinations. We will continue to monitor and
engage with the company on its financial resilience.

In addition, we are considering appointing an Independent Monitor to monitor
and report on the company's progress, including against its transformation
plan. The Independent Monitor would report back to us and be entitled to full
access to company information.

Next steps

Today's announcement sets out Ofwat's draft decisions based on its review of
company business plans.

 

These draft decisions are open for consultation and responses are welcome from
customers, stakeholders and water companies. The deadline for consultation
responses is 12 noon on 28 August 2024.

 

Ofwat expects to publish its final decisions on 19 December 2024. If companies
do not agree with the final decisions, they have two months from the date of
publication to ask for an appeal to the Competition and Markets Authority.

 

A consultation has also been published today on a proposed modification to
companies' licences. This would allow Ofwat to delay final determinations
until January 2025 if necessary due to unforeseen circumstances.

 

 

Notes

 

1.   Ofwat has today published a suite of PR24 documents and tables
(https://www.ofwat.gov.uk/regulated-companies/price-review/2024-price-review/draft-determinations/)
. These include a sector overview, detailed documents setting out our approach
and an overview of the proposals for each company.

 

2.   Ofwat is holding two 'Your water, your say' meetings for customers and
stakeholders to question senior executives of Ofwat on the draft decisions.
These virtual meetings will take place on 23 July (for English companies) and
24 July for Welsh companies. Attendees are invited to register
(https://www.ofwat.gov.uk/regulated-companies/price-review/2024-price-review/your-water-your-say/)
for the meetings in advance

 

3.   Water and wastewater companies - average bills for 2024-25 and 2029-30

 

 Water and wastewater companies            2024-25 (£)   2029-30 (£)   Change, 2029-30 vs 2024-25 (£)
 Anglian Water                             491           557           +66
 Dŵr Cymru                                 466           603           +137
 Hafren Dyfrdwy                            396           524           +128
 Northumbrian Water                        415           460           +45
 Severn Trent Water                        403           496           +93
 Southern Water                            420           603           +183
 South West Water                          497           561           +64
 Thames Water                              436           535           +99
 United Utilities                          442           536           +94
 Wessex Water                              508           497           -12
 Yorkshire Water                           430           537           +107
 Water and wastewater companies - average  441           535           +94

All figures before inflation. Companies proposed changes to bills, as
submitted in their business plans is available here
(https://www.ofwat.gov.uk/regulated-companies/price-review/2024-price-review/business-plans/key-facts-and-data-from-water-company-plans/)
. We propose to apply a delivery mechanism for Southern Water and Thames Water
so that customers will not pay until we have greater clarity on the timing and
profile of these companies' plans. If the mechanism is triggered, this would
increase average 2029-30 bills by a further £16 and £5, respectively.

4.   Water-only companies - average bills for 2024-25 and 2029-30

 Water-only companies    2024-25 (£)   2029-30 (£)   Change, 2029-30 vs 2024-25 (£)
 Affinity Water          192           203           +11
 Portsmouth Water        114           135           +21
 South East Water        230           248           +18
 South Staffs Water      161           183           +22
 SES Water               221           187           -34
 Water-only companies -  191           204           +12

 average

 

All figures before inflation. The bills shown for each water-only company do
not include the cost of wastewater services. These are provided by the water
and wastewater company which serves its area.

 

5.   Ofwat has also published today an information note
(https://www.ofwat.gov.uk/publication/information-note-on-thames-waters-draft-determination/)
in relation to Thames Water.

 

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