10th Dec 2015 08:16
LONDON (Alliance News) - UK water regulator Ofwat Thursday proposed opening up a wastewater to energy market and a water trading market to unlock at least GBP1.00 billion of unrealised benefits as it tries to get companies to make better use of their resources.
Ofwat said the industry in England and Wales must change in order to meet future challenges as the regulator also set out plans to change the measure of inflation used to set bills and placed further pressure on companies and their engagement with their customers.
The latest proposals from the regulator follow on from changes back in 2014, when Ofwat cracked down on price controls and customer satisfaction in the industry, that lead to UK bills falling 5% in real terms combined with "big service improvements," it said.
Ofwat Chief Executive Cathryn Ross 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."
"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. 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," said the regulator.
Ofwat wants water companies in the UK to work closer together as it believes it can make better use of the country's water resources, in turn lowering household bills, and to use wastewater more effectively.
The regulator said the industry had made "little progress" in establishing an effective water trading system over the last 20 years, which involves moving water around the country from where it is plentiful from where it is scarce using rivers, aquifers and other methods.
Ofwat wants companies to overhaul the way they share the information about the supply of water whilst maintaining pressure on companies to source their water from the most efficient source.
As a result, the regulator said it plans to "kick start" a water trading market which will better allocate the country's water resources and improve the environmental impact of the industry. Overall, it expects that to lead to GBP1.00 billion of benefits, it said.
The use of waste and wastewater is also on Ofwat's agenda, as it tries to encourage water companies to use the sludge produced from wastewater to create gas to power their operations or feed into the national grid. Ofwat plans to "remove regulatory red tape" to open up the wastewater to energy market.
"The savings made would keep bills down and help meet our energy needs sustainably," said Ofwat.
"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," said Ross.
Much like Ofgem, the UK power regulator, Ofwat also looks set to crack down on customer service in the industry and said companies need to "achieve a deeper understanding of customers' short and long term priorities, as well as working with them to help create more affordable services."
It wants companies to work with customers to reduce water usage and to prevent fat and oil being poured into sinks which hampers the water network, costing everyone money.
In another important move, Ofwat said it wants to change the measure of inflation used to set bills and the financial returns of water companies. Currently, the retail price index (RPI) is used but the regulator said this is becoming "increasingly discredited" as a reliable measure of inflation.
As a result, it wants to make a "gradual move" to the "more legitimate" consumer price index (CPI), which it believes will "help maintain customer trust and confidence" and "reduce bill volatility".
In terms of London-listed water companies, there are FTSE 100-listed Severn Trent PLC and United Utilities PLC, alongside FTSE 250-listed Pennon Group PLC, which owns South West Water. SSE PLC also owns SSE Water whilst United Utilities PLC also has a water segment.
The proposals set out today are part of a consultation period, which will close on February 10, 2016. Ofwat is hoping to have confirmed its final changes by the end of 2017, which will also include how it will set price limits for the period between 2020 and 2025, with the final price determinations being put formally into place before the end of 2019.
Pennon shares were down 0.9% to 830.50 pence per share on Thursday morning whilst Severn Trent shares were trading down 0.7% to 2,139.0p. SSE shares were trading flat at 1,441.0p and United Utilities was down 0.5% to 940.0p.
By Joshua Warner; [email protected]; @JoshAlliance
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SSEPennonSevern TrentUnited Utilities