PN 08/15 Ofwat plans to open market for water and energy from waste

  • Removing barriers to market for energy from wastewater solids could help reduce bills
  • £1 billion of potential benefits through better allocation of water resources
  • Call for companies to better understand priorities of customers
  • Move to use of more legitimate consumer price index (CPI) in setting price controls

Ofwat today announced that if the water sector in England and Wales is to meet future challenges and to deepen trust and confidence, the sector will need to change.

In its initial proposals for how it will get a better deal for customers, the environment and wider society from 2020, it aims to build on its established approach to setting prices. This reflects the approach it took at its 2014 price controls, which put the onus on companies focusing on their customers and resulted in a five per cent real terms drop in bills combined with big service improvements.

Yet changes will be needed if the sector is to meet future challenges, such as stretched water resources, dealing with environmental water quality problems, and customers who are struggling to afford their bill.2 Ofwat’s proposals include measures to get companies to source water and use sewage sludge more efficiently, while gaining a richer understanding of their customers’ priorities.

In the last two decades little progress has been made in effective water trading, which involves moving water, often using rivers and aquifers, across company boundaries, from where it is plentiful to where it is scarce.3 By overhauling how information on supplies is shared, and maintaining pressure on companies to use the most efficient source, Ofwat aims to kick start a water trading market. Better allocation of water could help keep bills down and better protect the environment. The unrealised benefits are estimated at around £1billion.

Ofwat also wants to encourage better use of resources in how the sector harnesses energy from waste. Treating wastewater produces sludge, which is being used to create gas. This can be used for energy generation supplied to water companies themselves and fed into the grid, and to fertilise fields. Ofwat wants to remove regulatory red tape to open up the market for sludge and encourage innovation. The savings made would keep bills down and help meet our energy needs sustainably.

In 2013, companies talked to around a quarter of a million people in developing their investment plans. Companies now need to build on this so they have ongoing conversations that achieve a deeper understanding of customers’ short and long term priorities, as well as working with them to help create more affordable services. This could include working together to reduce water usage or stopping fats and oils being poured into sinks, which clog up sewers and cost everyone money.

Cathryn Ross, Ofwat Chief Executive said:

“In 2014 our approach to setting price limits helped drive service up and bills down. We need to build on that, but with big challenges ahead we need to make changes to avoid customers getting a raw deal.

“Our job is to keep companies on their toes so that customers are protected. Companies have told us that they have already made all the easier efficiencies. That’s why we want to open up new a frontier for efficiencies.

“Supplies are already stretched in areas where the population is rising. We want to kick start water trading where this will help keep bills down and stop us taking too much water from our rivers. We also want to deregulate to free up scope for companies to make better use of sewage sludge to help meet their own, and the country’s energy needs.

“If we can encourage companies to innovate, and to truly understand what customers want now and in the future, we will be in a strong position to maintain trust and confidence in this vital public service.”

Ofwat also proposes changing the measure of inflation it uses to set bills and financial returns. Currently Ofwat uses the RPI (retail price index), yet it is increasingly discredited as a reliable measure of inflation.4 Ofwat plans a gradual move to the more legitimate CPI (consumer price index).This will help maintain customer trust and confidence, and could reduce bill volatility.

Ofwat also today published, after consultation in the summer, its views on how the sector should approach the major challenge of delivering resilient systems and services and how its regulation will encourage companies to do this, in line with its new statutory duty. This includes companies understanding how they can withstand current and future shocks, as well as anticipating and responding to long term trends. And in creating resilient services it is vital that companies gain a clear view of customers’ long term priorities.

Ofwat’s consultation announced today closes on 10 February 2016. By the end of 2017 it will have confirmed its final approach to how it will set price limits between 2020 and 2025. It will then set final price limits by December 2019.


Notes for Editors

  1. The Water Services Regulation Authority (Ofwat) is the economic regulator of water and sewerage companies in England and Wales. Its role is to help the sector build trust and confidence with customers and wider society. It exercises its powers in a way that it judges will protect the interests of consumers, promote value and safeguard future resilient water and sewerage services by allowing efficient companies to carry out their functions properly, and finance them.
  2. In the summer, Ofwat set out its views on the dealing with future water challenges. Ofwat identified four major challenges: stretched water resources, environmental water quality, developing resilience and tackling affordability. Last week Ofwat published new research showing that unpaid water bills are an increasing problem in England and Wales. Even though more than seven out of ten customers think their bills good value for money, £2.2billion unpaid revenue is now outstanding.
  3. The amount of water traded since the early 1990s has remained fairly stable at around four to five per cent of water put into the system.
  4. Since 2003 the Government has used the consumer price index (CPI) as the basis for inflation targeting, and since March 2013 the retail price index (RPI) has no longer been an official government statistic. Furthermore, in January 2015 an independent report by Paul Johnson recommended that: “Government and regulators should work towards ending the use of the RPI as soon as practicable,” reflecting serious concerns regarding the robustness of RPI.
  5. Media enquiries to Ofwat Press Office on:
    Benedict Fisher 0121 644 7642 / [email protected]
    Simon Markall 0121 644 7696 / [email protected]